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, 50999-51015 [2018-21904]
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Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices
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.
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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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As part of this proposed rule change,
current IM–1002–2, Status of Persons
Serving in the Armed Forces of the
United States; IM–1002–3, Failure to
Register Personnel; 1021, Registration of
Principals; 1022, Categories of Principal
Registration; IM–1022–2, Limited
Principal-General Securities Sales
Supervisor; 1031, Registration
Requirements, sections (a)–(e); 1032,
Categories of Representative
Registration; 1060, Persons Exempt from
Registration; 9 1070, Qualification
Examinations and Waiver of
Requirements; 1080, Confidentiality of
Examinations; 1120, Continuing
Education Requirements; and Chapter II,
Section 2, Requirements for Options
Participation, Subsections (g) and (h),
are proposed to be deleted. Rule 1140,
Electronic Filing Rules, is proposed to
be amended and relocated. A number of
other rules are proposed to be amended
with conforming changes, or relocated
in view of the foregoing amendments.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 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 BX’s affiliated
exchanges in order to facilitate
compliance with membership,
registration and qualification regulatory
requirements by members of two or
more of those affiliated exchanges.12 In
algorithmic trading strategies, or who are
responsible for the day-to-day supervision or
direction of such activities.
9 Provisions currently found in Rule 1060(b) are
being amended and relocated to new Rule 2040, as
discussed below.
10 Conforming amendments are proposed to Rules
0120, Definitions; 1001, FINRA Regulatory
Contract, 1011, Definitions, 1050, Research
Analysts; 3010, Supervision; 7003, Regulatory,
Registration and Processing Fees; IM–9216,
Violations Appropriate for Disposition Under Plan
Pursuant to SEC Rule 19d–1(c)(2); and 9630,
Appeal. In the Exchange’s Options Rules,
amendments are proposed to Chapter XI, Section 2,
Registration of Options Principals and Section 3,
Registration of Representatives.
11 The proposed 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; and
Rule 1250, Electronic Filing Requirements for
Uniform Forms.
12 The Exchange’s five affiliated exchanges, The
Nasdaq Stock Market LLC (‘‘Nasdaq’’) Nasdaq PHLX
LLC (‘‘PHLX’’), Nasdaq ISE, LLC (‘‘ISE’’), Nasdaq
GEMX, LLC (‘‘GEMX’’), and Nasdaq MRX, LLC
(‘‘MRX’’) (together with BX, the ‘‘Nasdaq Affiliated
Exchanges’’) are also submitting proposed rule
changes to adopt the 1200 Series of rules. See SR–
NASDAQ–2018–078, SR–Phlx–2018–61, SR–ISE–
2018–82, SR–GEMX–2018–33, and SR–MRX–2018–
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the new 1200 Series 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 on April 1,
2019.
Proposed Rules
A. Registration Requirements (Proposed
Rule 1210)
Exchange Rules 1021(a) and 1031(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 1022 and 1032.14 The Exchange is
proposing to consolidate and streamline
provisions of Exchange Rules 1021(a)
and 1031(a) and to adopt them as
Exchange Rule 1210, subject to several
changes.15
31. The Exchange recently added a shell structure
to its rulebook with the purpose of improving
efficiency and readability and to align its rules more
closely to those of the other Nasdaq Affiliated
Exchanges. See Securities Exchange Act Release No.
82174 (November 29, 2017), 82 FR 57492
(December 5, 2017) (SR–BX–2017–054). Ultimately,
the Exchange intends to submit another proposed
rule change to transfer the 1200 Series of rules into
the new shell structure. (The Exchange notes that
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.’’) [sic]
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 In addition, IM–1002–3 provides that the
failure to register an individual as a registered
representative may be deemed to be conduct
inconsistent with just and equitable principles of
trade and may be sufficient cause for appropriate
disciplinary action. As explained below the
Exchange proposes to delete IM–1002–3 as
superfluous.
15 Rule 1031, Registration Requirements, contains
certain sections that are not affected by this
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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 1021(a) and
1031(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 Exchange 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. This latter
provision is a consolidation of similar
provisions in the registration categories
under the current Exchange rules.
Further, the Exchange is proposing to
delete Exchange IM–1002–3 because it
is superfluous. The failure to register a
representative as required under current
Exchange Rule 1031(a) is in fact a
violation of Exchange rules.
B. Minimum Number of Registered
Principals (Proposed Rule 1210.01)
Rule 1021(e)(1) currently requires that
a member, except a sole proprietorship,
proposed rule change. However, due to the overall
organizational restructuring of the registration rules,
those sections (current Rules 1031(c), (d) and (e))
are being relocated with nonsubstantive
amendments to new Supplementary Material .12,
Application for Registration and Jurisdiction, to
proposed Rule 1210, Registration Requirements.
These relocated provisions govern the process for
applying for registration and amending the
registration application, as well as for notifying the
Exchange of termination of a member’s association
with a person registered with the Exchange. The
Exchange proposes to adopt Rule 1210,
Supplemental Material .12, into the 1200 Series in
order to have uniform processes and requirements
in this area across the Nasdaq Affiliated Exchanges.
This relocated language is unique to the Exchange—
the FINRA Rule Changes do not contain a
counterpart Rule 1210 Supplementary Material .12.
The Exchange anticipates amending Rule 1031(f) in
a future proposed rule change.
16 Miami International Securities Exchange LLC
(‘‘MIAX’’) Rule 203(a) and 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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have a minimum of two registered
principals with respect to each aspect of
the member’s investment banking and
securities business pursuant to the
applicable provisions of Rule 1022,
provided however that a proprietary
trading firm with 25 or fewer registered
representatives shall only be required to
have one registered principal. This
requirement applies to applicants for
membership and existing members.
Exchange Rule 1021(e)(2) also provides
that, pursuant to the Exchange’s Rule
9600 Series, the Exchange may waive
the principal requirements of Rule
1021(e)(1) in situations that indicate
conclusively that only one person
associated with an applicant for
membership should be required to
register as a principal. Rule 1021(e)(3)
provides that an applicant for
membership, if the nature of its business
so requires, must also have at least one
person qualified for registration under
Rule 1022(b) as a Financial and
Operations Principal.17
The Exchange is proposing to adopt
Rule 1021(e) as Rule 1210.01, subject to
the following changes. The Exchange
proposes to provide firms that limit the
scope of their business with greater
flexibility to satisfy 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.18
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. Currently, a sole
proprietor member (without any other
associated persons) is not subject to the
two-principal requirement because such
member is operating as a one-person
firm. Given that one-person firms may
be organized in legal forms other than
a sole proprietorship (such as a singleperson limited liability company),
proposed Exchange Rule 1210.01
provides that any member with only one
associated person is excluded from the
17 Exchange Rule 1022(b) as well as other
Exchange rules currently refer to categories of
limited principal registration as ‘‘Limited
Principal—’’ followed by the name of the
registration category. In this proposed rule change
and in the proposed rules, the Exchange will no
longer employ the term ‘‘Limited Principal—’’ in
identifying various principal registration categories.
No substantive change is intended; shortening the
names of the various principals simply improves
readability of the rules.
18 The principal registration categories are
described in greater detail below.
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two principal requirement. In addition,
proposed Rule 1210.01 clarifies that
existing members as well as new
applicants may request a waiver of the
two-principal requirement. 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.19
C. Permissive Registrations (Proposed
Rule 1210.02)
Rules 1021(a) and 1031(a) currently
permit a member to register or maintain
the registration(s) as a representative or
principal of an individual performing
legal, compliance, internal audit, backoffice operations or similar
responsibilities for the member. Rule
1031(a) also permits a member to
register or maintain the registration as a
representative of an individual
performing administrative support
functions for registered persons. In
addition, Rules 1021(a) and 1031(a)
permit a member to register or maintain
the registration(s) as a representative or
principal of an individual engaged in
the investment banking or securities
business of a foreign securities affiliate
or subsidiary of the member.
The Exchange is proposing to
consolidate these provisions under 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
19 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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51001
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.20 With respect to an
20 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
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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.21
D. Qualification Examinations and
Waivers of Examinations (Proposed
Rule 1210.03)
Rules 1021(a) and 1031(a) currently
set forth general requirements that an
individual pass an appropriate
qualification examination before his or
her registration as a representative or
principal can become effective. The
Exchange is proposing to consolidate
these provisions and adopt them as 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
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
refers generally to the supervision rules rather than
identifying them by number.
21 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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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.22 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 under the
remaining 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
22 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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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.23 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.24
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
23 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.
24 As discussed below, the Exchange is proposing
a four-year expiration period for the SIE.
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specialized knowledge examinations for
the same day, provided the individual is
able to reserve space at one of FINRA’s
designated testing centers.
Finally, paragraph (d) of Rule 1070
currently permits the Exchange, in
exceptional cases and where good cause
is shown, to waive the applicable
qualification examination and accept
other standards as evidence of an
applicant’s qualifications for
registration. The Exchange is proposing
to transfer the provisions of Rule
1070(d) into proposed Rule 1210.03
with changes which track FINRA Rule
1210.03.25 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)
Exchange Rule 1021(d) provides that
a person who is currently registered
with a member as a representative and
whose duties are changed by the
member so as to require registration as
a principal may function as a principal
for up to 90 calendar days before he or
she is required to pass the appropriate
qualification examination for principal.
In addition, it allows a formerly
registered representative who is
required to register as a principal to
function as a principal without passing
the appropriate principal qualification
examination for up to 90 calendar days,
provided the person first satisfies all
applicable prerequisite requirements. A
person who has never been registered
does not qualify for this exception. This
provision applies to a person associated
with a member 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. It also
applies to a person associated with an
Exchange member who was not required
to register with the Exchange as a
principal prior to the adoption of Rule
1021 by the Exchange.
25 Rules 1070(a), (b) and (c) provide general
information relating to the examination process.
The Exchange is proposing to delete these
provisions given that they relate to the
administration of the examination program rather
than rule requirements.
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The Exchange is proposing to adopt
Rule 1021(d) as Rule 1210.04, subject to
the following 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. 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.26 The Exchange is
not conserving in Rule 1210.04 the
language that this provision applies to
persons associated with a member of
another registered national securities
exchange or association who are
required to register as principals under
Exchange rules but who are not required
to be so registered under the rules of the
other exchange or association. Similarly,
it is not conserving the language
concerning individuals not required to
register as principal prior to adoption of
the rule. The Exchange believes this
language is superfluous, as the
applicability to various individuals of
proposed Rule 1210.04 speaks for itself
and requires no elaboration.27 Proposed
Rule 1210.04 would increase the Rule
1021(d)’s 90 day period to 120 days, to
provide additional flexibility for
representatives functioning as
principals for a limited period of time.
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
26 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.
27 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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51003
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 qualifications
examination, FINRA’s Sanction
Guidelines recommend a bar.28
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
principles of trade, such as Exchange
Rule 2110.29 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 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
28 See
SR–FINRA–2017–007, pp. 26–27.
to Exchange Rule 2110, a member, in
the conduct of its business, shall observe high
standards of commercial honor and just and
equitable principles of trade. FINRA Rule 1210.05
cites FINRA Rule 2010, which is a comparable rule.
29 Pursuant
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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.30
G. Waiting Periods for Retaking a Failed
Examination (Proposed Rule 1210.06)
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Rule 1070(e) currently sets forth
waiting periods for retaking failed
examinations. The rule provides that a
person who fails a qualification
examination would be permitted to
retake the examination after either a
period of 30 calendar days has elapsed
from the date of the prior examination
or the next administration of an
examination administered on a monthly
basis. However, if the person fails an
examination three or more times in
succession, he or she would be
prohibited from retaking the
examination either until a period of 180
calendar days has elapsed from the date
of his or her last attempt to pass the
examination or until the sixth
subsequent administration of an
examination administered on a monthly
basis. The Exchange is proposing to
adopt Rule 1070(e) as Rule 1210.06,
with the following changes.
Proposed Rule 1210.06 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. The proposed rule deletes
the reference to examinations
administered on a monthly basis
because examinations are no longer
administered in such a manner.
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.31
30 In view of proposed Rule 1210.05, the
Exchange is proposing to delete Rule 1080 which
is largely duplicative. 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.
31 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
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H. CE Requirements (Proposed Rule
1210.07)
Pursuant to current Rule 1120, the CE
requirements applicable to registered
persons consist of a Regulatory
Element 32 and a Firm Element.33 The
Regulatory Element applies to registered
persons and must be completed within
prescribed time frames.34 For purposes
of the Regulatory Element, a ‘‘registered
person’’ is defined in the current rule as
any person registered with the Exchange
as a representative or principal.35 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’s securities
sales, trading and investment banking
activities, and the immediate
supervisors of such persons.36
The Exchange proposes to delete Rule
1120 and to replace it with Rule 1240,
Continuing Education Requirements.
The Exchange believes that all
registered persons, 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. Therefore, the Exchange is
proposing Rule 1210.07, to clarify that
all registered persons, including those
who solely maintain a permissive
registration, are required to satisfy the
to individuals who are not associated persons of
members.
32 See Rule 1120(a).
33 See Rule 1120(b).
34 Pursuant to Rule 1120(a), each registered
person is required to complete the Regulatory
Element initially within 120 days after the person’s
second registration anniversary date and, thereafter,
within 120 days after every third registration
anniversary date. Unless otherwise determined by
the Exchange, a registered person who has not
completed the Regulatory Element program within
the prescribed time frames will have their
registrations deemed inactive until such time as the
requirements of the program have been satisfied.
Any person whose registration has been deemed
inactive under Rule 1120(a) must cease all activities
as a registered person and is prohibited from
performing any duties and functioning in any
capacity requiring registration. A registration that is
inactive for a period of two years will be
administratively terminated. A person whose
registration is so terminated may reactivate the
registration only by reapplying for registration and
meeting the qualification requirements of the
applicable provisions of the Exchange’s rules. The
Exchange may, upon application and a showing of
good cause, allow for additional time for a
registered person to satisfy the program
requirements.
35 See Rule 1120(a)(5).
36 See Rule 1120(b)(1).
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Regulatory Element, as specified in
proposed Rule 1240. 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 also provides
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.
I. Lapse of Registration and Expiration
of SIE (Proposed Rule 1210.08)
Rule 1021(c) currently states that any
person whose registration has been
revoked pursuant to Rule 8310 37 or
whose most recent registration as a
principal has been terminated for a
period of 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 1022.
Pursuant to Rule 1031(b), any person
whose registration has been revoked
pursuant to Rule 8310 or whose most
recent registration as a representative or
principal has been terminated for a
period of 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
representatives appropriate to the
category of registration as specified in
Rule 1032. The two years are calculated
from the termination date stated on the
individual’s Form U5 (Uniform
Termination Notice for Securities
Industry Registration) and the date the
Exchange receives a new application for
registration.
The Exchange is proposing to
consolidate the requirements of Rules
1021(c) and 1031(b) and adopt them as
Rule 1210.08. Proposed Rule 1210.08
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.
37 Under Rule 8310(a)(3), the Exchange may
impose one or more sanctions on a member or
person associated with a member for each violation
of the federal securities laws, rules or regulations
thereunder, or Exchange rules, including
suspending the membership of a member or
suspending the registration of a person associated
with a member for a definite period or a period
contingent on the performance of a particular act.
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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
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 process whereby
individuals who would be working for
a financial services industry affiliate of
a member 38 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.39 The purpose of the FSA
38 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.
39 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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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.40 An
individual would have to satisfy these
preconditions only for purposes of his
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 41 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.42
40 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.
41 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.
42 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.
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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 proposed Rule 1240
(currently Rule 1120, Continuing
Education).
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,43 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
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.
43 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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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.44 An individual
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.
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K. Status of Persons Serving in the
Armed Forces of the United States
(Proposed Rule 1210.10)
IM–1002–2(a) and (b) currently
provide specific relief to registered
persons serving in the Armed Forces of
the United States. Among other things,
these rules permit a registered person of
a member who volunteers for or is
called into active duty in the Armed
Forces of the United States to be
registered in an inactive status and
remain eligible to receive ongoing
transaction-related compensation. IM–
1002–2(c) also includes specific
provisions regarding the deferment of
the lapse of registration requirements in
Exchange Rules 1021(c) and 1031(b) for
formerly registered persons serving in
the Armed Forces of the United States.
The Exchange is proposing to adopt
IM–1002–2 as Rule 1210.10 with the
44 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 FSAeligible 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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following 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.45
L. Impermissible Registrations
(Proposed Rule 1210.11)
Rules 1021(a) and 1031(a) currently
prohibit a member from maintaining a
representative or principal registration
with the Exchange for any person who
is no longer active in the member’s
investment banking or securities
business, who is no longer functioning
as a representative or principal as
defined under the rules or where the
sole purpose is to avoid the
requalification requirement applicable
to persons who have not been registered
for two or more years. These rules also
prohibit a member from applying for the
registration of a person as representative
or principal where the member 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.
In light of proposed Rule 1210.02, the
Exchange is proposing to delete these
provisions 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 1210.46
M. Registration Categories (Proposed
Rule 1220)
The Exchange is proposing to
integrate the various registration
45 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 conserves
language from existing 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.
46 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 Exchange Rule
1031.
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categories and related definitions under
the Exchange’s rules into a single rule,
Rule 1220, subject to the changes
described below.47
1. Definition of Principal (Proposed
Rule 1220(a)(1))
Rule 1021(b) currently defines the
term ‘‘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’s
investment banking or securities
business, such as supervision,
solicitation, conduct of business or the
training of persons associated with a
member for any of these functions. The
Exchange is proposing to streamline and
adopt Rule 1021(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. The proposed rule 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))
Rule 1022(a)(1) currently requires that
an associated person who meets the
definition of ‘‘principal’’ under Rule
1021 and each person designated as
Chief Compliance Officer (‘‘CCO’’) on
Schedule A of the member’s Form BD
47 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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(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 Rule 1022. Further, the rule
does not preclude individuals registered
in a limited principal category from
registering as General Securities
Principals. Rule 1022(a)(1) also includes
transitioning and grandfathering
provisions for CCO’s.
Rule 1022(a)(1) provides that a person
seeking to register as a General
Securities Principal must satisfy the
General Securities Representative
prerequisite registration. Rule 1022(a)(3)
includes a grandfathering provision for
persons who were registered as
principals before the adoption of the
General Securities Principal registration
category. Rule 1022(a)(4) provides that
an associated person registered solely as
a General Securities Principal is not
qualified to function as a Financial and
Operations Principal, General Securities
Sales Supervisor or Securities Trader
Principal unless the General Securities
Principal is also registered in these
other categories.
The Exchange is proposing to
streamline the provisions of Rule
1022(a) and adopt them as Rule
1220(a)(2) with the following changes.
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, subject
to the following exceptions. The
proposed rule provides 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.48
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
48 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.
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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 shall be required to register as a
General Securities Sales Supervisor or
as a Registered Options Principal.49
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.50
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).51
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
49 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).
50 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.
51 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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General Securities Principals because it
is superfluous.52
3. Compliance Official (Proposed Rule
1220(a)(3))
The Exchange is proposing to adopt
Rule 1022(a)(1)’s CCO registration
requirement as Rule 1220(a)(3), subject
to the following changes.
Specifically, proposed Rule 1220(a)(3)
provides 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 shall, prior to or
concurrent with such registration, 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, proposed Rule
1220(a)(3) provides 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
52 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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registering as Securities Trader
Compliance Officers would be required
to first become registered pursuant to
paragraph (b)(4) as a Securities Trader,
and to pass the Compliance Official
qualification exam.53
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4. Financial and Operations Principal,
[sic] (Proposed Rule 1220(a)(4))
Rule 1022(b)(1) currently provides
that every member 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
performs [sic] the duties described in
Rule 1022(b)(2).54 Each person
associated with a member who performs
such duties is required to register as a
Limited Principal—Financial and
Operations with the Exchange and pass
an appropriate qualification
examination before such registration
may become effective. A person
registered solely as a Limited
Principal—Financial and Operations is
not qualified to function in a principal
capacity with responsibility over any
area of business activity not described
in 1022(b)(2).
Financial and Operations Principals
are not subject to a prerequisite
representative registration, but they
must pass the Financial and Operations
Principal examination.
The Exchange is proposing to move
the provisions in Rules 1022(b)
regarding Financial and Operations
Principals to Rule 1220(a)(4)(A),
substituting the word ‘‘and’’ for the
53 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.
54 These 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’s books and records from which such
reports are derived; (E) supervision and/or
performance of the member’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’s back office
operations; or (G) any other matter involving the
financial and operational management of the
member.
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current word ‘‘or’’ found in Rule
1022(b)(2)(F) in order to conform to
FINRA Rule 1220(a)(4)(A) in describing
the duties of a Financial and Operations
Principal.55
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 1022(h) requires each
person associated with a member who is
included within the definition of
principal and who will have
supervisory responsibility over the
securities trading activities described in
Rule 1032(b) to register 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 1032(b) and pass the
General Securities Principal
qualification examination. A person
who is qualified and registered as a
Securities Trader Principal under Rule
1022(h) may only have supervisory
responsibility over the Securities Trader
activities specified in Rule 1032(b),
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 may
not supervise the trading activities
described in Rule 1032(b) unless such
person has also become qualified and
registered as a Securities Trader under
55 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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Rule 1032(b) by passing the Securities
Trader qualification examination and
registering as a Securities Trader
Principal.
The Exchange is proposing to delete
Rule 1022(h) and to adopt in its place
Rule 1220(a)(7), Securities Trader
Principal. Similar to the current rule,
proposed Rule 1220(a)(7) requires that a
principal responsible for supervising the
securities trading activities specified in
proposed Rule 1220(b)(4) 56 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.
8. Registered Options Principal
(Proposed Rules 1220(a)(8))
Chapter II, Section 2(g) of the
rulebook currently requires that
members engaged in security futures or
options transactions with public
customers have at least one Registered
Options and Security Futures Principal.
It also provides that every person
engaged in the supervision of options
and security futures sales practices shall
be registered as a Registered Options
and Security Futures Principal and pass
the appropriate qualification
examination for Registered Options and
Security Futures Principal, or an
equivalent examination acceptable to
the Exchange. Further, each person
required to register and qualify as a
Registered Options and Security Futures
Principal must, prior to or concurrent
with such registration, be or become
qualified pursuant to the Rule 1030
Series, as either a General Securities
Representative or a Limited
Representative—Corporate Securities
and a Registered Options and Security
Futures Representative. The rule
provides that a person registered solely
as a Registered Options and Security
Futures Principal is not qualified to
function in a principal capacity with
responsibility over any area of business
activity not prescribed in Chapter II,
Section 2(g). Chapter II, Section 2(g)(5)
provides that any person who is
registered as a Registered Options and
Security Futures Principal, or who
becomes registered as a Registered
Options and Security Futures Principal
before a revised examination that
includes security futures products is
offered, must complete a firm-element
continuing education program that
addresses security futures and a
56 Proposed Rule 1220(b)(4), discussed below,
provides for representative-level registration in the
‘‘Securities Trader’’ category.
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principal’s responsibilities for security
futures before such person can
supervise security futures activities.
Finally, Chapter II, Section 2 of the
Exchange’s options rules further
requires that members that have one
Registered Options Principal promptly
notify the Exchange and agree to
specified conditions if such person is
terminated, resigns, becomes
incapacitated or is otherwise unable to
perform his or her duties.
The Exchange is proposing to adopt
Chapter II, Section (2)(g) as Rule
1220(a)(8), Registered Options Principal,
with certain changes. The registration
category would now be titled Registered
Options Principal, rather than
Registered Options and Security Futures
Principal.57 All references to a revised
examination that includes security
futures products would be deleted.
Instead, Rule 1220(b), Supplementary
Material .02 will simply provide 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, as
applicable, 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.58
Proposed Rule 1220(a)(8) provides
that a General Securities Sales
Supervisor may also supervise options
activities. Rule 1220(b), Supplementary
Material .02 regarding security futures
activities will apply to General
Securities Sales Supervisors as well as
to Registered Options Principals.59
Further, as discussed below, the
Exchange is proposing to eliminate the
Options Representative and Corporate
Securities Representative registration
categories. In conjunction with these
changes, the Exchange is proposing to
eliminate registration as an Options
Representative from the prerequisite
choices in the current rule.
57 FINRA has also shortened references to
‘‘Registered Options and Security Futures
Principal’’ in its rulebook to ‘‘Registered Options
Principal’’. See Securities Exchange Act Release No.
58932 (November 12, 2008), 73 FR 69696
(November 19, 2008) (SR–FINRA–2008–032).
58 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
case, the Exchange does not currently offer security
futures products for trading.
59 Rule 1220(b), Supplementary Material .02
regarding security futures activities will also apply
to General Securities Representatives and to
Options Representatives.
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Consequently, a person registering as a
Registered Options Principal under
proposed Rule 1220(a)(8) would be
required to satisfy the General Securities
Representative prerequisite
registration.60
Finally, the Exchange is proposing to
adopt the Chapter II, Section 2
provisions regarding the loss of a sole
Registered Options Principal with nonsubstantive changes as Supplementary
Material .03 of Rule 1220.61
9. Government Securities Principal
(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)
Pursuant to Exchange Rule 1022(g),
each associated person of a member
who is included within the definition of
‘‘principal’’ in Rule 1021 may register as
a Limited Principal—General Securities
Sales Supervisor, instead of separately
registering in multiple principal
60 Proposed Rule 1220(a)(8) differs from FINRA
Rule 1220(a)(8) in that it omits certain references to
other specific FINRA rules.
61 Chapter XI, Doing Business with the Public, at
Section 2(a) provides that no order entry firm
(‘‘OEF’’) shall be approved to transact options
business with the public until those associated
persons who are designated as Options Principals
have been approved by and registered with the
Exchange. Persons engaged in the management and
supervision of the OEF’s business pertaining to
options contracts must be designated as Options
Principals and shall have responsibility for the
overall oversight of the OEF’s options related
activities on the Exchange. Similarly, Chapter XI,
Sections 3(a) and (b) provide [sic] that no OEF shall
be approved to transact business with the public
until those persons associated with it who are
designated representatives have been approved by
and registered with the Exchange, and also that
persons who perform duties for the OEF which are
customarily performed by sales representatives or
branch office managers shall be designated as
representatives of the OEF. The foregoing
provisions of Chapter XI are specific to conducting
an options business with the public and are not
proposed to be amended in this proposed rule
change, other than to add a customer protection
requirement, similar to existing Phlx Rule 1024.08
and existing ISE Rule 602(d), that a person
accepting orders from non-member customers
(unless such customer is a broker-dealer registered
with the Commission) is required to register with
the Exchange and to be qualified by passing the
General Securities Registered Representative
Examination (Series 7). However, Chapter XI,
Sections 2(b) and (c) and Section 3(c) also contain
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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51009
registration categories,62 if the
individual’s supervisory responsibilities
are limited solely to securities sales
activities. A person registering as a
Limited Principal—General Securities
Sales Supervisor must satisfy the
General Securities Representative
prerequisite registration and pass the
General Securities Sales Supervisor
examinations.63 Moreover, a General
Securities Sales Supervisor is precluded
from performing any 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 Exchange Rule 2210; (4)
supervision of the custody of firm or
customer funds or securities for
purposes of SEC Rule 15c3–3; or (5)
supervision of overall compliance with
financial responsibility rules. Current
IM–1022–2 explains the purpose of the
General Securities Sales Supervisor
registration category.
The Exchange is proposing to adopt
Rule 1022(g) and IM–1022–2 as Rules
1220(a)(10) and 1220.04, respectively.64
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.
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 registration
category or the Direct Participation
62 For instance, a principal supervising the sale of
corporate securities and options must be registered
as a General Securities Principal and a Registered
Options Principal, unless the principal is registered
as a General Securities Sales Supervisor.
63 An individual may also register as a General
Securities Sales Supervisor bypassing [sic] a
combination of other principal-level examinations.
64 The Exchange is not proposing to carry over
into proposed Rule 1220(a)(10) the current Rule
1022(g)(2)(C)(iii) 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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Programs Principal registration category.
The Exchange is therefore reserving
Rules 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 therefore
reserving Rule 1220(a)(13), retaining the
caption solely to facilitate comparison
with FINRA’s rules.
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13. Supervisory Analyst (Rule
1220(a)(14))
The Exchange does not recognize the
Supervisory Analyst registration
category and is therefore 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))
Rule 1011(k) currently defines the
term ‘‘representative’’ as 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 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 are designated as
representatives. Rule 1011(k) further
states that, as provided in Rule 1031, all
representatives of members are required
to be registered with the Exchange, and
that representatives that are so
registered are referred to as registered
representatives.
The Exchange now proposes to adopt
a definition of ‘‘representative’’ in
proposed Rule 1220(b)(1). Current Rule
1011, Definitions, Section (k) would be
amended by deleting the existing
definition of representative, and
replacing it with a cross reference to the
new definition of representative in 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. Unlike the
current Rule 1011(k) ‘‘representative’’
definition, the new Rule 1220(b)(1)
definition would be confined to
associated persons of Exchange
members (rather than to associated
persons of broker dealers generally) who
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are engaged in the member’s securities
business (and not also in the member’s
investment banking business).
15. General Securities Representative
(Proposed Rule 1220(b)(2))
Rule 1032(a) currently requires that
an associated person who meets the
definition of ‘‘representative’’ under
Rule 1011 register as a General
Securities Representative. A person
registering as a General Securities
Representative must pass the General
Securities Representative examination.
The rule, however, provides that a
representative is not required to register
as a General Securities Representative if
the person’s activities are so limited as
to qualify such person as a Securities
Trader. Further, the rule does not
preclude individuals registered in a
limited representative category such as
Securities Trader from registering as
General Securities Representatives.
Similar to the proposed changes to the
General Securities Principal registration
category, the Exchange is proposing to
more clearly set forth the obligation to
register as a General Securities
Representative. Specifically, 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, except that if
a representative’s activities include the
functions of a Securities Trader, as
specified in this Rule, 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.65
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
65 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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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. Finally, the Exchange
is proposing to delete the provision that
persons eligible for registration in other
representative categories are not
precluded from registering as General
Securities Representatives because it is
superfluous.
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 Contracts Products
Representative, Direct Participation
Programs Representative and Private
Securities Offerings Representative. The
Exchange has not adopted these
registration categories for its associated
persons. The Exchange is reserving
Rules 1220(b)(3)—Operations
Professional, and related Rule 1220.05;
1220(b)(5)—Investment Banking
Representative, 1220(b)(6)—Research
Analyst; Investment Company and
Variable Contracts Products
Representative—Proposed Rule
1220(b)(7); 1220(b)(8)—Direct
Participation Programs Representative;
and 1220(b)(9)—Private Securities
Offerings Representative, retaining the
captions, solely to facilitate comparison
with FINRA’s rules.
Securities Trader—Proposed Rule
1220(b)(4). Pursuant to current
Exchange Rule 1032(f), each associated
person of a member who is included
within the definition of ‘‘representative’’
in Rule 1101 is required to register 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.66 The rule provides an
66 Proposed Rule 1220(b)(4)(A) differs from
FINRA Rule 1220(b)(4)(A) in that it applies to
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exception from the registration
requirement for any associated person of
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 the member. Individuals
registering as Securities Traders must
pass the Securities Trader examination.
Finally, the rule provides that registered
Securities Traders are not qualified to
function in any other registration
category, unless he or she is also
qualified and registered in such other
registration category.
The Exchange now proposes to amend
the rule, and adopt it as proposed Rule
1220(b)(4). As amended, the Rule would
require individuals registering as
Securities Traders to pass the SIE as
well as the Securities Trader
qualification exam, and it would be
expanded to refer not just to foreign
currency options, but to the trading of
options generally.
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.67
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
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.
67 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.68
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,
wash sales, failure to mark orders as
‘‘short’’ or perform proper short sale
‘‘locates,’’ 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
68 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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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 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, pass the SIE and the
Securities Trader qualification
examination.
17. Eliminated Registration Categories
(Proposed Rule 1220.06)
Consistent with the FINRA Rule
Changes, the Exchange is proposing to
eliminate from its rules the Options
Representative category that FINRA is
eliminating effective October 1, 2018.69
69 Chapter II, Section 2(h) of the Exchange’s
rulebook provides that each person associated with
a member who is included within the definition of
a representative as defined in Rule 1031 may
register with BX as a Limited Representative—
Options and Security Futures if: (A) Such person’s
activities in the investment banking or securities
business of the member involve the solicitation or
sale of option or security futures contracts,
including option contracts on government securities
as that term is defined in Section 3(a)(42)(D) of the
Act, for the account of a broker, dealer or public
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Proposed Rule 1220.06, which is
proposed to be adopted on a uniform
basis by the Nasdaq Affiliated
Exchanges, 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 the Exchange
(such as the Options Representative
category) 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.70
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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
customer; and (B) such person passes an
appropriate qualification examination for Limited
Representative—Options and Security Futures. It
also provides that each person seeking to register
and qualify as a Limited Representative—Options
and Security Futures must, concurrent with or
before such registration may become effective,
become registered with BX or another SRO as either
as a Limited Representative—Corporate Securities
or Limited Representative—Government Securities.
The Limited Representative—Options and Security
Futures registration category is the same as the
Options Representative category. The Exchange has
very few registrants in this category, and none in
the Corporate Securities or Limited
Representative—Government Securities categories
(for which there is no provision in the Exchange’s
rules).
70 See Nasdaq Rule 1042. 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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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)
Rule 1060(a) currently provides that
the following persons associated with a
member are not required to register:
(1) persons associated with a member
whose functions are solely and
exclusively clerical or ministerial;
(2) persons associated with a member
who are not actively engaged in the
investment banking or securities
business;
(3) persons associated with a member
whose functions are related solely and
exclusively to the member’s need for
nominal corporate officers or for capital
participation;
(4) persons associated with a member
whose functions are related solely and
exclusively to: (A) Effecting transactions
on the floor of another national
securities exchange and who are
registered as floor members with such
exchange; (B) transactions in municipal
securities; (C) transactions in
commodities; (D) transactions in
security futures, provided that any such
person is registered with FINRA or a
registered futures association; or (E)
transactions in variable contracts and
insurance premium funding programs
and other contracts issued by an
insurance company; (F) transactions in
direct participation programs; (G)
Reserved; (H) transactions in
government securities; or (I) 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; and
(5) persons associated with a member
that are not citizens, nationals, or
residents of the United States or any of
its territories or possessions and that
will conduct all of their securities
activities in areas outside the
jurisdiction of the United States and
will not engage in any securities
activities with or for any citizen,
national or resident of the United States.
Rule 1060(a) is not meant to provide
an exclusive or exhaustive list of
exemptions from registration.
Associated persons may otherwise be
exempt from registration based on their
activities and functions.
The Exchange is proposing to adopt
Rule 1060(a) as Rule 1230 subject to the
following changes. As noted above, Rule
1060(a) exempts from registration those
associated persons who are not actively
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engaged in the investment banking or
securities business. Rule 1060(a) 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.71
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 investment banking or
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 1060(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.72 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.73
71 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.
72 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.
73 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
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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.
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O. Changes to CE Requirements
(Proposed Rule 1240)
As described above, current Rule 1120
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
Exchange is proposing to delete Rule
1120 and replace it with Rule 1240.
Proposed Rule 1240 would differ from
current Rule 1120 in a number of
respects, discussed below.74
1. Regulatory Element
The Exchange is proposing to replace
the term ‘‘registered person’’ under
current Rule 1120(a) 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
October 1, 2018, and the Exchange has never
recognized it.
74 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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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.
The Exchange is also proposing to
remove the requirements currently
found in Rule 1120(a)(1) prescribing the
specific Regulatory Elements
administered by FINRA that are
required for General Securities
Representatives, Securities Traders or
persons registered in a supervisory
capacity, so that Rule 1240(a)(1) will
conform more closely to the FINRA
counterpart rule which does not identify
specific Regulatory Element
requirements for particular categories of
registrant.
Nasdaq Rule 1140 which is a more
comprehensive version of existing BX
Rule 1140.
Current BX Rule 1140 requires
registration forms to be filed through an
electronic process or such other process
as the Exchange may prescribe to the
Central Registration Depository. The
rule includes supervisory requirements
related to the submission of electronic
filings, as well as Form U4 manual
signature requirements. It also requires
applicants’ fingerprint cards to be
submitted by members, includes Form
U5 filing requirements, and permits a
member to employ a third party to file
required forms electronically on its
behalf.
Proposed Rule 1250 reorganizes and
enhances the content of current BX Rule
1140. It would provide that all forms
required to be filed under the
Exchange’s registration rules, including
the Rule 1200 series, must be filed
through an electronic process or such
other process as the Exchange may
prescribe to the Central Registration
Depository. It would provide for the
electronic filing of Form U4
amendments in a number of cases
without the individual’s manual
signature, subject to certain safeguards
and procedures, and would permit the
delegation of filing functions by
supervisors (again, subject to certain
safeguards). Additionally, Rule 1250,
Supplementary Material .02 would state
clearly that members remain responsible
for complying with the requirements of
the rule even if forms are filed
electronically by a third party pursuant
to an agreement. Finally, it would
establish a number of recordkeeping
requirements related to electronic
registration filings.
Rule 1250, as part of the uniform 1200
Series, will consolidate Form U4 and U5
electronic filing requirements in a single
location, across the Nasdaq Affiliated
Exchanges.
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.
Q. Other Rules
P. Electronic Filing Rules
Existing BX Rule 1140, Electronic
Filing Rules, is proposed to be amended
and relocated as Rule 1250, Electronic
Requirements for Uniform Forms.
Proposed Rule 1250 is based on existing
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The Exchange is deleting Rule 1060,
Persons Exempt from Registration, as
explained above. Rule 1060(b) however,
contains provisions dealing with
Nonregistered Foreign ‘‘Finders’’ and is
simply being relocated with
nonsubstantive changes to new Rule
2040.75 The remaining rules identified
above under ‘‘Overview’’ which are to
be amended in this proposed rule
change but are not further discussed
herein simply update citations and/or
75 The FINRA counterpart to current Rule 1060(b)
occupies a similar location in the FINRA rulebook.
See FINRA Rule 2040(c), Nonregistered Foreign
Finders.
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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,76 in general, and furthers the
objectives of Section 6(b)(5) of the Act,77
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
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
76 15
77 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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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
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
Exchange rules to maintain appropriate
parallelism with corresponding
Exchange rules, in order to prevent
unnecessary regulatory burdens and
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.
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
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 to registration of
developers of algorithmic trading
strategies in particular, 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
E:\FR\FM\10OCN1.SGM
10OCN1
Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices
19(b)(3)(A) of the Act 78 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) 79 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.80 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, 2018.81
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–
BX–2018–047 on the subject line.
All submissions should refer to File
Number SR–BX–2018–047. 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
business days between the hours of
10:00 a.m. and 3:00 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–BX–2018–047 and should
be submitted on or before October 31,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.82
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–21904 Filed 10–9–18; 8:45 am]
BILLING CODE 8011–01–P
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
79 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84355; File No. SR–
NASDAQ–2018–066]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Align
Existing Investigatory and Disciplinary
Processes and Related Rules With the
Investigatory and Disciplinary
Processes and Related Rules of
Nasdaq PHLX LLC
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 24, 2018, The Nasdaq Stock
Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II, below, which Items have
been 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 align its
existing investigatory and disciplinary
processes and related rules with the
investigatory and disciplinary processes
and related rules of Nasdaq PHLX LLC
(‘‘Phlx’’) [sic]
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaq.cchwallstreet.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
78 15
amozie on DSK3GDR082PROD with NOTICES1
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6)(iii).
80 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.
81 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).
51015
1 15
82 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00132
Fmt 4703
Sfmt 4703
2 17
E:\FR\FM\10OCN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
10OCN1
Agencies
[Federal Register Volume 83, Number 196 (Wednesday, October 10, 2018)]
[Notices]
[Pages 50999-51015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21904]
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SECURITIES AND EXCHANGE COMMISSION
[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.
---------------------------------------------------------------------------
\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://nasdaqbx.cchwallstreet.com/, at the principal office
of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
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.
---------------------------------------------------------------------------
\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.
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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 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.
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\6\ 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.
\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.
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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\
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\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 algorithmic trading
strategies, or who are responsible for the day-to-day supervision or
direction of such activities.
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[[Page 51000]]
As part of this proposed rule change, current IM-1002-2, Status of
Persons Serving in the Armed Forces of the United States; IM-1002-3,
Failure to Register Personnel; 1021, Registration of Principals; 1022,
Categories of Principal Registration; IM-1022-2, Limited Principal-
General Securities Sales Supervisor; 1031, Registration Requirements,
sections (a)-(e); 1032, Categories of Representative Registration;
1060, Persons Exempt from Registration; \9\ 1070, Qualification
Examinations and Waiver of Requirements; 1080, Confidentiality of
Examinations; 1120, Continuing Education Requirements; and Chapter II,
Section 2, Requirements for Options Participation, Subsections (g) and
(h), are proposed to be deleted. Rule 1140, Electronic Filing Rules, is
proposed to be amended and relocated. A number of other rules are
proposed to be amended with conforming changes, or relocated in view of
the foregoing amendments.\10\
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\9\ Provisions currently found in Rule 1060(b) are being amended
and relocated to new Rule 2040, as discussed below.
\10\ Conforming amendments are proposed to Rules 0120,
Definitions; 1001, FINRA Regulatory Contract, 1011, Definitions,
1050, Research Analysts; 3010, Supervision; 7003, Regulatory,
Registration and Processing Fees; IM-9216, Violations Appropriate
for Disposition Under Plan Pursuant to SEC Rule 19d-1(c)(2); and
9630, Appeal. In the Exchange's Options Rules, amendments are
proposed to Chapter XI, Section 2, Registration of Options
Principals and Section 3, Registration of Representatives.
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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 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 BX's affiliated
exchanges in order to facilitate compliance with membership,
registration and qualification regulatory requirements by members of
two or more of those affiliated exchanges.\12\ In the new 1200 Series
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 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; and Rule 1250, Electronic Filing
Requirements for Uniform Forms.
\12\ The Exchange's five affiliated exchanges, The Nasdaq Stock
Market LLC (``Nasdaq'') Nasdaq PHLX LLC (``PHLX''), Nasdaq ISE, LLC
(``ISE''), Nasdaq GEMX, LLC (``GEMX''), and Nasdaq MRX, LLC
(``MRX'') (together with BX, the ``Nasdaq Affiliated Exchanges'')
are also submitting proposed rule changes to adopt the 1200 Series
of rules. See SR-NASDAQ-2018-078, SR-Phlx-2018-61, 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 more closely to
those of the other Nasdaq Affiliated Exchanges. See Securities
Exchange Act Release No. 82174 (November 29, 2017), 82 FR 57492
(December 5, 2017) (SR-BX-2017-054). Ultimately, the Exchange
intends to submit another proposed rule change to transfer the 1200
Series of rules into the new shell structure. (The Exchange notes
that 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.'') [sic]
\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 on April
1, 2019.
Proposed Rules
A. Registration Requirements (Proposed Rule 1210)
Exchange Rules 1021(a) and 1031(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 1022 and
1032.\14\ The Exchange is proposing to consolidate and streamline
provisions of Exchange Rules 1021(a) and 1031(a) and to adopt them as
Exchange Rule 1210, subject to several changes.\15\
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\14\ In addition, IM-1002-3 provides that the failure to
register an individual as a registered representative may be deemed
to be conduct inconsistent with just and equitable principles of
trade and may be sufficient cause for appropriate disciplinary
action. As explained below the Exchange proposes to delete IM-1002-3
as superfluous.
\15\ Rule 1031, Registration Requirements, contains certain
sections that are not affected by this proposed rule change.
However, due to the overall organizational restructuring of the
registration rules, those sections (current Rules 1031(c), (d) and
(e)) are being relocated with nonsubstantive amendments to new
Supplementary Material .12, Application for Registration and
Jurisdiction, to proposed Rule 1210, Registration Requirements.
These relocated provisions govern the process for applying for
registration and amending the registration application, as well as
for notifying the Exchange of termination of a member's association
with a person registered with the Exchange. The Exchange proposes to
adopt Rule 1210, Supplemental Material .12, into the 1200 Series in
order to have uniform processes and requirements in this area across
the Nasdaq Affiliated Exchanges. This relocated language is unique
to the Exchange--the FINRA Rule Changes do not contain a counterpart
Rule 1210 Supplementary Material .12. The Exchange anticipates
amending Rule 1031(f) in a future proposed rule change.
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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 1021(a) and 1031(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 Exchange 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. This latter provision is a
consolidation of similar provisions in the registration categories
under the current Exchange rules.
---------------------------------------------------------------------------
\16\ Miami International Securities Exchange LLC (``MIAX'') Rule
203(a) and 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.
---------------------------------------------------------------------------
Further, the Exchange is proposing to delete Exchange IM-1002-3
because it is superfluous. The failure to register a representative as
required under current Exchange Rule 1031(a) is in fact a violation of
Exchange rules.
B. Minimum Number of Registered Principals (Proposed Rule 1210.01)
Rule 1021(e)(1) currently requires that a member, except a sole
proprietorship,
[[Page 51001]]
have a minimum of two registered principals with respect to each aspect
of the member's investment banking and securities business pursuant to
the applicable provisions of Rule 1022, provided however that a
proprietary trading firm with 25 or fewer registered representatives
shall only be required to have one registered principal. This
requirement applies to applicants for membership and existing members.
Exchange Rule 1021(e)(2) also provides that, pursuant to the Exchange's
Rule 9600 Series, the Exchange may waive the principal requirements of
Rule 1021(e)(1) in situations that indicate conclusively that only one
person associated with an applicant for membership should be required
to register as a principal. Rule 1021(e)(3) provides that an applicant
for membership, if the nature of its business so requires, must also
have at least one person qualified for registration under Rule 1022(b)
as a Financial and Operations Principal.\17\
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\17\ Exchange Rule 1022(b) as well as other Exchange rules
currently refer to categories of limited principal registration as
``Limited Principal--'' followed by the name of the registration
category. In this proposed rule change and in the proposed rules,
the Exchange will no longer employ the term ``Limited Principal--''
in identifying various principal registration categories. No
substantive change is intended; shortening the names of the various
principals simply improves readability of the rules.
---------------------------------------------------------------------------
The Exchange is proposing to adopt Rule 1021(e) as Rule 1210.01,
subject to the following changes. The Exchange proposes to provide
firms that limit the scope of their business with greater flexibility
to satisfy 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.\18\ 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. Currently, a sole
proprietor member (without any other associated persons) is not subject
to the two-principal requirement because such member is operating as a
one-person firm. Given that one-person firms may be organized in legal
forms other than a sole proprietorship (such as a single-person limited
liability company), proposed Exchange Rule 1210.01 provides that any
member with only one associated person is excluded from the two
principal requirement. In addition, proposed Rule 1210.01 clarifies
that existing members as well as new applicants may request a waiver of
the two-principal requirement. 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.\19\
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\18\ The principal registration categories are described in
greater detail below.
\19\ 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)
Rules 1021(a) and 1031(a) currently permit a member to register or
maintain the registration(s) as a representative or principal of an
individual performing legal, compliance, internal audit, back-office
operations or similar responsibilities for the member. Rule 1031(a)
also permits a member to register or maintain the registration as a
representative of an individual performing administrative support
functions for registered persons. In addition, Rules 1021(a) and
1031(a) permit a member to register or maintain the registration(s) as
a representative or principal of an individual engaged in the
investment banking or securities business of a foreign securities
affiliate or subsidiary of the member.
The Exchange is proposing to consolidate these provisions under
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.\20\ With respect
to an
[[Page 51002]]
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.\21\
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\20\ 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.
\21\ 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)
Rules 1021(a) and 1031(a) currently set forth general requirements
that an individual pass an appropriate qualification examination before
his or her registration as a representative or principal can become
effective. The Exchange is proposing to consolidate these provisions
and adopt them as 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 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.\22\ 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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\22\ 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 under the remaining 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.\23\ 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.\24\
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\23\ 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.
\24\ 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
[[Page 51003]]
specialized knowledge examinations for the same day, provided the
individual is able to reserve space at one of FINRA's designated
testing centers.
Finally, paragraph (d) of Rule 1070 currently permits the Exchange,
in exceptional cases and where good cause is shown, to waive the
applicable qualification examination and accept other standards as
evidence of an applicant's qualifications for registration. The
Exchange is proposing to transfer the provisions of Rule 1070(d) into
proposed Rule 1210.03 with changes which track FINRA Rule 1210.03.\25\
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.
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\25\ Rules 1070(a), (b) and (c) provide general information
relating to the examination process. The Exchange is proposing to
delete these provisions given that they relate to the administration
of the examination program rather than rule requirements.
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E. Requirements for Registered Persons Functioning as Principals for a
Limited Period (Proposed Rule 1210.04)
Exchange Rule 1021(d) provides that a person who is currently
registered with a member as a representative and whose duties are
changed by the member so as to require registration as a principal may
function as a principal for up to 90 calendar days before he or she is
required to pass the appropriate qualification examination for
principal. In addition, it allows a formerly registered representative
who is required to register as a principal to function as a principal
without passing the appropriate principal qualification examination for
up to 90 calendar days, provided the person first satisfies all
applicable prerequisite requirements. A person who has never been
registered does not qualify for this exception. This provision applies
to a person associated with a member 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. It also applies to a person associated with an Exchange
member who was not required to register with the Exchange as a
principal prior to the adoption of Rule 1021 by the Exchange.
The Exchange is proposing to adopt Rule 1021(d) as Rule 1210.04,
subject to the following 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. 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.\26\ The
Exchange is not conserving in Rule 1210.04 the language that this
provision applies to persons associated with a member of another
registered national securities exchange or association who are required
to register as principals under Exchange rules but who are not required
to be so registered under the rules of the other exchange or
association. Similarly, it is not conserving the language concerning
individuals not required to register as principal prior to adoption of
the rule. The Exchange believes this language is superfluous, as the
applicability to various individuals of proposed Rule 1210.04 speaks
for itself and requires no elaboration.\27\ Proposed Rule 1210.04 would
increase the Rule 1021(d)'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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\26\ 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.
\27\ 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 qualifications examination, FINRA's Sanction Guidelines recommend a
bar.\28\
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\28\ 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 2110.\29\ 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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\29\ Pursuant to Exchange Rule 2110, a member, in the conduct of
its business, shall observe high standards of commercial honor and
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 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
[[Page 51004]]
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.\30\
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\30\ In view of proposed Rule 1210.05, the Exchange is proposing
to delete Rule 1080 which is largely duplicative. 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)
Rule 1070(e) currently sets forth waiting periods for retaking
failed examinations. The rule provides that a person who fails a
qualification examination would be permitted to retake the examination
after either a period of 30 calendar days has elapsed from the date of
the prior examination or the next administration of an examination
administered on a monthly basis. However, if the person fails an
examination three or more times in succession, he or she would be
prohibited from retaking the examination either until a period of 180
calendar days has elapsed from the date of his or her last attempt to
pass the examination or until the sixth subsequent administration of an
examination administered on a monthly basis. The Exchange is proposing
to adopt Rule 1070(e) as Rule 1210.06, with the following changes.
Proposed Rule 1210.06 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. The
proposed rule deletes the reference to examinations administered on a
monthly basis because examinations are no longer administered in such a
manner.
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.\31\
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\31\ 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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H. CE Requirements (Proposed Rule 1210.07)
Pursuant to current Rule 1120, the CE requirements applicable to
registered persons consist of a Regulatory Element \32\ and a Firm
Element.\33\ The Regulatory Element applies to registered persons and
must be completed within prescribed time frames.\34\ For purposes of
the Regulatory Element, a ``registered person'' is defined in the
current rule as any person registered with the Exchange as a
representative or principal.\35\ 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's securities sales, trading and investment banking
activities, and the immediate supervisors of such persons.\36\
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\32\ See Rule 1120(a).
\33\ See Rule 1120(b).
\34\ Pursuant to Rule 1120(a), each registered person is
required to complete the Regulatory Element initially within 120
days after the person's second registration anniversary date and,
thereafter, within 120 days after every third registration
anniversary date. Unless otherwise determined by the Exchange, a
registered person who has not completed the Regulatory Element
program within the prescribed time frames will have their
registrations deemed inactive until such time as the requirements of
the program have been satisfied. Any person whose registration has
been deemed inactive under Rule 1120(a) must cease all activities as
a registered person and is prohibited from performing any duties and
functioning in any capacity requiring registration. A registration
that is inactive for a period of two years will be administratively
terminated. A person whose registration is so terminated may
reactivate the registration only by reapplying for registration and
meeting the qualification requirements of the applicable provisions
of the Exchange's rules. The Exchange may, upon application and a
showing of good cause, allow for additional time for a registered
person to satisfy the program requirements.
\35\ See Rule 1120(a)(5).
\36\ See Rule 1120(b)(1).
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The Exchange proposes to delete Rule 1120 and to replace it with
Rule 1240, Continuing Education Requirements. The Exchange believes
that all registered persons, 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. Therefore,
the Exchange is proposing Rule 1210.07, to clarify that all registered
persons, including those who solely maintain a permissive registration,
are required to satisfy the Regulatory Element, as specified in
proposed Rule 1240. 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 also
provides 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.
I. Lapse of Registration and Expiration of SIE (Proposed Rule 1210.08)
Rule 1021(c) currently states that any person whose registration
has been revoked pursuant to Rule 8310 \37\ or whose most recent
registration as a principal has been terminated for a period of 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 1022. Pursuant to Rule 1031(b), any person whose registration has
been revoked pursuant to Rule 8310 or whose most recent registration as
a representative or principal has been terminated for a period of 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 representatives appropriate to the category of registration as
specified in Rule 1032. The two years are calculated from the
termination date stated on the individual's Form U5 (Uniform
Termination Notice for Securities Industry Registration) and the date
the Exchange receives a new application for registration.
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\37\ Under Rule 8310(a)(3), the Exchange may impose one or more
sanctions on a member or person associated with a member for each
violation of the federal securities laws, rules or regulations
thereunder, or Exchange rules, including suspending the membership
of a member or suspending the registration of a person associated
with a member for a definite period or a period contingent on the
performance of a particular act.
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The Exchange is proposing to consolidate the requirements of Rules
1021(c) and 1031(b) and adopt them as Rule 1210.08. Proposed Rule
1210.08 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.
[[Page 51005]]
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
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 process whereby
individuals who would be working for a financial services industry
affiliate of a member \38\ 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.\39\ 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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\38\ 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.
\39\ 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.\40\ 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 \41\ 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.\42\
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\40\ 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.
\41\ 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.
\42\ 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 proposed Rule 1240 (currently Rule
1120, Continuing Education).
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,\43\ 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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\43\ 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
[[Page 51006]]
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.\44\ An
individual 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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\44\ 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)
IM-1002-2(a) and (b) currently provide specific relief to
registered persons serving in the Armed Forces of the United States.
Among other things, these rules permit a registered person of a member
who volunteers for or is called into active duty in the Armed Forces of
the United States to be registered in an inactive status and remain
eligible to receive ongoing transaction-related compensation. IM-1002-
2(c) also includes specific provisions regarding the deferment of the
lapse of registration requirements in Exchange Rules 1021(c) and
1031(b) for formerly registered persons serving in the Armed Forces of
the United States.
The Exchange is proposing to adopt IM-1002-2 as Rule 1210.10 with
the following 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.\45\
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\45\ 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 conserves language from existing 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)
Rules 1021(a) and 1031(a) currently prohibit a member from
maintaining a representative or principal registration with the
Exchange for any person who is no longer active in the member's
investment banking or securities business, who is no longer functioning
as a representative or principal as defined under the rules or where
the sole purpose is to avoid the requalification requirement applicable
to persons who have not been registered for two or more years. These
rules also prohibit a member from applying for the registration of a
person as representative or principal where the member 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.
In light of proposed Rule 1210.02, the Exchange is proposing to
delete these provisions 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.\46\
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\46\ 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 Exchange Rule 1031.
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M. Registration Categories (Proposed Rule 1220)
The Exchange is proposing to integrate the various registration
categories and related definitions under the Exchange's rules into a
single rule, Rule 1220, subject to the changes described below.\47\
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\47\ 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))
Rule 1021(b) currently defines the term ``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's investment banking or securities business,
such as supervision, solicitation, conduct of business or the training
of persons associated with a member for any of these functions. The
Exchange is proposing to streamline and adopt Rule 1021(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. The proposed rule 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))
Rule 1022(a)(1) currently requires that an associated person who
meets the definition of ``principal'' under Rule 1021 and each person
designated as Chief Compliance Officer (``CCO'') on Schedule A of the
member's Form BD
[[Page 51007]]
(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 Rule 1022. Further, the
rule does not preclude individuals registered in a limited principal
category from registering as General Securities Principals. Rule
1022(a)(1) also includes transitioning and grandfathering provisions
for CCO's.
Rule 1022(a)(1) provides that a person seeking to register as a
General Securities Principal must satisfy the General Securities
Representative prerequisite registration. Rule 1022(a)(3) includes a
grandfathering provision for persons who were registered as principals
before the adoption of the General Securities Principal registration
category. Rule 1022(a)(4) provides that an associated person registered
solely as a General Securities Principal is not qualified to function
as a Financial and Operations Principal, General Securities Sales
Supervisor or Securities Trader Principal unless the General Securities
Principal is also registered in these other categories.
The Exchange is proposing to streamline the provisions of Rule
1022(a) and adopt them as Rule 1220(a)(2) with the following changes.
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, subject to the following exceptions. The proposed
rule provides 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.\48\ 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 shall be required to register as a
General Securities Sales Supervisor or as a Registered Options
Principal.\49\
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\48\ 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.
\49\ 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).
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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.\50\ 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).\51\
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\50\ 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.
\51\ 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.\52\
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\52\ 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))
The Exchange is proposing to adopt Rule 1022(a)(1)'s CCO
registration requirement as Rule 1220(a)(3), subject to the following
changes.
Specifically, proposed Rule 1220(a)(3) provides 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 shall,
prior to or concurrent with such registration, 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, proposed Rule 1220(a)(3) provides 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
[[Page 51008]]
registering as Securities Trader Compliance Officers would be required
to first become registered pursuant to paragraph (b)(4) as a Securities
Trader, and to pass the Compliance Official qualification exam.\53\
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\53\ 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, [sic] (Proposed Rule 1220(a)(4))
Rule 1022(b)(1) currently provides that every member 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 performs [sic] the duties described in
Rule 1022(b)(2).\54\ Each person associated with a member who performs
such duties is required to register as a Limited Principal--Financial
and Operations with the Exchange and pass an appropriate qualification
examination before such registration may become effective. A person
registered solely as a Limited Principal--Financial and Operations is
not qualified to function in a principal capacity with responsibility
over any area of business activity not described in 1022(b)(2).
---------------------------------------------------------------------------
\54\ These 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's books and records from which such
reports are derived; (E) supervision and/or performance of the
member'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's back
office operations; or (G) any other matter involving the financial
and operational management of the member.
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Financial and Operations Principals are not subject to a
prerequisite representative registration, but they must pass the
Financial and Operations Principal examination.
The Exchange is proposing to move the provisions in Rules 1022(b)
regarding Financial and Operations Principals to Rule 1220(a)(4)(A),
substituting the word ``and'' for the current word ``or'' found in Rule
1022(b)(2)(F) in order to conform to FINRA Rule 1220(a)(4)(A) in
describing the duties of a Financial and Operations Principal.\55\
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\55\ 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 1022(h) requires each person associated with a member
who is included within the definition of principal and who will have
supervisory responsibility over the securities trading activities
described in Rule 1032(b) to register 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 1032(b) and pass the General Securities Principal
qualification examination. A person who is qualified and registered as
a Securities Trader Principal under Rule 1022(h) may only have
supervisory responsibility over the Securities Trader activities
specified in Rule 1032(b), 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 may not supervise the trading activities described in Rule
1032(b) unless such person has also become qualified and registered as
a Securities Trader under Rule 1032(b) by passing the Securities Trader
qualification examination and registering as a Securities Trader
Principal.
The Exchange is proposing to delete Rule 1022(h) and to adopt in
its place Rule 1220(a)(7), Securities Trader Principal. Similar to the
current rule, proposed Rule 1220(a)(7) requires that a principal
responsible for supervising the securities trading activities specified
in proposed Rule 1220(b)(4) \56\ 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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\56\ Proposed Rule 1220(b)(4), discussed below, provides for
representative-level registration in the ``Securities Trader''
category.
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8. Registered Options Principal (Proposed Rules 1220(a)(8))
Chapter II, Section 2(g) of the rulebook currently requires that
members engaged in security futures or options transactions with public
customers have at least one Registered Options and Security Futures
Principal. It also provides that every person engaged in the
supervision of options and security futures sales practices shall be
registered as a Registered Options and Security Futures Principal and
pass the appropriate qualification examination for Registered Options
and Security Futures Principal, or an equivalent examination acceptable
to the Exchange. Further, each person required to register and qualify
as a Registered Options and Security Futures Principal must, prior to
or concurrent with such registration, be or become qualified pursuant
to the Rule 1030 Series, as either a General Securities Representative
or a Limited Representative--Corporate Securities and a Registered
Options and Security Futures Representative. The rule provides that a
person registered solely as a Registered Options and Security Futures
Principal is not qualified to function in a principal capacity with
responsibility over any area of business activity not prescribed in
Chapter II, Section 2(g). Chapter II, Section 2(g)(5) provides that any
person who is registered as a Registered Options and Security Futures
Principal, or who becomes registered as a Registered Options and
Security Futures Principal before a revised examination that includes
security futures products is offered, must complete a firm-element
continuing education program that addresses security futures and a
[[Page 51009]]
principal's responsibilities for security futures before such person
can supervise security futures activities. Finally, Chapter II, Section
2 of the Exchange's options rules further requires that members that
have one Registered Options Principal promptly notify the Exchange and
agree to specified conditions if such person is terminated, resigns,
becomes incapacitated or is otherwise unable to perform his or her
duties.
The Exchange is proposing to adopt Chapter II, Section (2)(g) as
Rule 1220(a)(8), Registered Options Principal, with certain changes.
The registration category would now be titled Registered Options
Principal, rather than Registered Options and Security Futures
Principal.\57\ All references to a revised examination that includes
security futures products would be deleted. Instead, Rule 1220(b),
Supplementary Material .02 will simply provide 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, as applicable, 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.\58\
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\57\ FINRA has also shortened references to ``Registered Options
and Security Futures Principal'' in its rulebook to ``Registered
Options Principal''. See Securities Exchange Act Release No. 58932
(November 12, 2008), 73 FR 69696 (November 19, 2008) (SR-FINRA-2008-
032).
\58\ 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 case, the Exchange does not
currently offer security futures products for trading.
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Proposed Rule 1220(a)(8) provides that a General Securities Sales
Supervisor may also supervise options activities. Rule 1220(b),
Supplementary Material .02 regarding security futures activities will
apply to General Securities Sales Supervisors as well as to Registered
Options Principals.\59\
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\59\ Rule 1220(b), Supplementary Material .02 regarding security
futures activities will also apply to General Securities
Representatives and to Options Representatives.
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Further, as discussed below, the Exchange is proposing to eliminate
the Options Representative and Corporate Securities Representative
registration categories. In conjunction with these changes, the
Exchange is proposing to eliminate registration as an Options
Representative from the prerequisite choices in the current rule.
Consequently, a person registering as a Registered Options Principal
under proposed Rule 1220(a)(8) would be required to satisfy the General
Securities Representative prerequisite registration.\60\
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\60\ 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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Finally, the Exchange is proposing to adopt the Chapter II, Section
2 provisions regarding the loss of a sole Registered Options Principal
with non-substantive changes as Supplementary Material .03 of Rule
1220.\61\
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\61\ Chapter XI, Doing Business with the Public, at Section 2(a)
provides that no order entry firm (``OEF'') shall be approved to
transact options business with the public until those associated
persons who are designated as Options Principals have been approved
by and registered with the Exchange. Persons engaged in the
management and supervision of the OEF's business pertaining to
options contracts must be designated as Options Principals and shall
have responsibility for the overall oversight of the OEF's options
related activities on the Exchange. Similarly, Chapter XI, Sections
3(a) and (b) provide [sic] that no OEF shall be approved to transact
business with the public until those persons associated with it who
are designated representatives have been approved by and registered
with the Exchange, and also that persons who perform duties for the
OEF which are customarily performed by sales representatives or
branch office managers shall be designated as representatives of the
OEF. The foregoing provisions of Chapter XI are specific to
conducting an options business with the public and are not proposed
to be amended in this proposed rule change, other than to add a
customer protection requirement, similar to existing Phlx Rule
1024.08 and existing ISE Rule 602(d), that a person accepting orders
from non-member customers (unless such customer is a broker-dealer
registered with the Commission) is required to register with the
Exchange and to be qualified by passing the General Securities
Registered Representative Examination (Series 7). However, Chapter
XI, Sections 2(b) and (c) and Section 3(c) also contain 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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9. Government Securities Principal (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)
Pursuant to Exchange Rule 1022(g), each associated person of a
member who is included within the definition of ``principal'' in Rule
1021 may register as a Limited Principal--General Securities Sales
Supervisor, instead of separately registering in multiple principal
registration categories,\62\ if the individual's supervisory
responsibilities are limited solely to securities sales activities. A
person registering as a Limited Principal--General Securities Sales
Supervisor must satisfy the General Securities Representative
prerequisite registration and pass the General Securities Sales
Supervisor examinations.\63\ Moreover, a General Securities Sales
Supervisor is precluded from performing any 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 Exchange Rule 2210;
(4) supervision of the custody of firm or customer funds or securities
for purposes of SEC Rule 15c3-3; or (5) supervision of overall
compliance with financial responsibility rules. Current IM-1022-2
explains the purpose of the General Securities Sales Supervisor
registration category.
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\62\ For instance, a principal supervising the sale of corporate
securities and options must be registered as a General Securities
Principal and a Registered Options Principal, unless the principal
is registered as a General Securities Sales Supervisor.
\63\ An individual may also register as a General Securities
Sales Supervisor bypassing [sic] a combination of other principal-
level examinations.
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The Exchange is proposing to adopt Rule 1022(g) and IM-1022-2 as
Rules 1220(a)(10) and 1220.04, respectively.\64\ 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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\64\ The Exchange is not proposing to carry over into proposed
Rule 1220(a)(10) the current Rule 1022(g)(2)(C)(iii) 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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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 registration category or the Direct
Participation
[[Page 51010]]
Programs Principal registration category. The Exchange is therefore
reserving Rules 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 therefore reserving Rule
1220(a)(13), retaining the caption solely to facilitate comparison with
FINRA's rules.
13. Supervisory Analyst (Rule 1220(a)(14))
The Exchange does not recognize the Supervisory Analyst
registration category and is therefore 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))
Rule 1011(k) currently defines the term ``representative'' as 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 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 are designated as representatives.
Rule 1011(k) further states that, as provided in Rule 1031, all
representatives of members are required to be registered with the
Exchange, and that representatives that are so registered are referred
to as registered representatives.
The Exchange now proposes to adopt a definition of
``representative'' in proposed Rule 1220(b)(1). Current Rule 1011,
Definitions, Section (k) would be amended by deleting the existing
definition of representative, and replacing it with a cross reference
to the new definition of representative in 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. Unlike the current Rule 1011(k) ``representative''
definition, the new Rule 1220(b)(1) definition would be confined to
associated persons of Exchange members (rather than to associated
persons of broker dealers generally) who are engaged in the member's
securities business (and not also in the member's investment banking
business).
15. General Securities Representative (Proposed Rule 1220(b)(2))
Rule 1032(a) currently requires that an associated person who meets
the definition of ``representative'' under Rule 1011 register as a
General Securities Representative. A person registering as a General
Securities Representative must pass the General Securities
Representative examination. The rule, however, provides that a
representative is not required to register as a General Securities
Representative if the person's activities are so limited as to qualify
such person as a Securities Trader. Further, the rule does not preclude
individuals registered in a limited representative category such as
Securities Trader from registering as General Securities
Representatives.
Similar to the proposed changes to the General Securities Principal
registration category, the Exchange is proposing to more clearly set
forth the obligation to register as a General Securities
Representative. Specifically, 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,
except that if a representative's activities include the functions of a
Securities Trader, as specified in this Rule, 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.\65\
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\65\ 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. Finally, the Exchange is proposing to delete the
provision that persons eligible for registration in other
representative categories are not precluded from registering as General
Securities Representatives because it is superfluous.
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 Contracts Products
Representative, Direct Participation Programs Representative and
Private Securities Offerings Representative. The Exchange has not
adopted these registration categories for its associated persons. The
Exchange is reserving Rules 1220(b)(3)--Operations Professional, and
related Rule 1220.05; 1220(b)(5)--Investment Banking Representative,
1220(b)(6)--Research Analyst; Investment Company and Variable Contracts
Products Representative--Proposed Rule 1220(b)(7); 1220(b)(8)--Direct
Participation Programs Representative; and 1220(b)(9)--Private
Securities Offerings Representative, retaining the captions, solely to
facilitate comparison with FINRA's rules.
Securities Trader--Proposed Rule 1220(b)(4). Pursuant to current
Exchange Rule 1032(f), each associated person of a member who is
included within the definition of ``representative'' in Rule 1101 is
required to register 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.\66\ The rule provides an
[[Page 51011]]
exception from the registration requirement for any associated person
of 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 the member. Individuals registering
as Securities Traders must pass the Securities Trader examination.
Finally, the rule provides that registered Securities Traders are 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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\66\ 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.
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The Exchange now proposes to amend the rule, and adopt it as
proposed Rule 1220(b)(4). As amended, the Rule would require
individuals registering as Securities Traders to pass the SIE as well
as the Securities Trader qualification exam, and it would be expanded
to refer not just to foreign currency options, but to the trading of
options generally.
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.\67\
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\67\ 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.\68\
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\68\ 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, wash sales,
failure to mark orders as ``short'' or perform proper short sale
``locates,'' 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, pass the SIE
and the Securities Trader qualification examination.
17. Eliminated Registration Categories (Proposed Rule 1220.06)
Consistent with the FINRA Rule Changes, the Exchange is proposing
to eliminate from its rules the Options Representative category that
FINRA is eliminating effective October 1, 2018.\69\
[[Page 51012]]
Proposed Rule 1220.06, which is proposed to be adopted on a uniform
basis by the Nasdaq Affiliated Exchanges, 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 the
Exchange (such as the Options Representative category) 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.\70\
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\69\ Chapter II, Section 2(h) of the Exchange's rulebook
provides that each person associated with a member who is included
within the definition of a representative as defined in Rule 1031
may register with BX as a Limited Representative--Options and
Security Futures if: (A) Such person's activities in the investment
banking or securities business of the member involve the
solicitation or sale of option or security futures contracts,
including option contracts on government securities as that term is
defined in Section 3(a)(42)(D) of the Act, for the account of a
broker, dealer or public customer; and (B) such person passes an
appropriate qualification examination for Limited Representative--
Options and Security Futures. It also provides that each person
seeking to register and qualify as a Limited Representative--Options
and Security Futures must, concurrent with or before such
registration may become effective, become registered with BX or
another SRO as either as a Limited Representative--Corporate
Securities or Limited Representative--Government Securities. The
Limited Representative--Options and Security Futures registration
category is the same as the Options Representative category. The
Exchange has very few registrants in this category, and none in the
Corporate Securities or Limited Representative--Government
Securities categories (for which there is no provision in the
Exchange's rules).
\70\ See Nasdaq Rule 1042. 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)
Rule 1060(a) currently provides that the following persons
associated with a member are not required to register:
(1) persons associated with a member whose functions are solely and
exclusively clerical or ministerial;
(2) persons associated with a member who are not actively engaged
in the investment banking or securities business;
(3) persons associated with a member whose functions are related
solely and exclusively to the member's need for nominal corporate
officers or for capital participation;
(4) persons associated with a member whose functions are related
solely and exclusively to: (A) Effecting transactions on the floor of
another national securities exchange and who are registered as floor
members with such exchange; (B) transactions in municipal securities;
(C) transactions in commodities; (D) transactions in security futures,
provided that any such person is registered with FINRA or a registered
futures association; or (E) transactions in variable contracts and
insurance premium funding programs and other contracts issued by an
insurance company; (F) transactions in direct participation programs;
(G) Reserved; (H) transactions in government securities; or (I)
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;
and
(5) persons associated with a member that are not citizens,
nationals, or residents of the United States or any of its territories
or possessions and that will conduct all of their securities activities
in areas outside the jurisdiction of the United States and will not
engage in any securities activities with or for any citizen, national
or resident of the United States.
Rule 1060(a) is not meant to provide an exclusive or exhaustive
list of exemptions from registration. Associated persons may otherwise
be exempt from registration based on their activities and functions.
The Exchange is proposing to adopt Rule 1060(a) as Rule 1230
subject to the following changes. As noted above, Rule 1060(a) exempts
from registration those associated persons who are not actively engaged
in the investment banking or securities business. Rule 1060(a) 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.\71\ 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 investment
banking or 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
1060(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.\72\ 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.\73\
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\71\ 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.
\72\ 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.
\73\ 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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[[Page 51013]]
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 CE Requirements (Proposed Rule 1240)
As described above, current Rule 1120 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 Exchange is proposing to delete Rule 1120
and replace it with Rule 1240. Proposed Rule 1240 would differ from
current Rule 1120 in a number of respects, discussed below.\74\
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\74\ 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''
under current Rule 1120(a) 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.
The Exchange is also proposing to remove the requirements currently
found in Rule 1120(a)(1) prescribing the specific Regulatory Elements
administered by FINRA that are required for General Securities
Representatives, Securities Traders or persons registered in a
supervisory capacity, so that Rule 1240(a)(1) will conform more closely
to the FINRA counterpart rule which does not identify specific
Regulatory Element requirements for particular categories of
registrant.
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 BX Rule 1140, Electronic Filing Rules, is proposed to be
amended and relocated as Rule 1250, Electronic Requirements for Uniform
Forms. Proposed Rule 1250 is based on existing Nasdaq Rule 1140 which
is a more comprehensive version of existing BX Rule 1140.
Current BX Rule 1140 requires registration forms to be filed
through an electronic process or such other process as the Exchange may
prescribe to the Central Registration Depository. The rule includes
supervisory requirements related to the submission of electronic
filings, as well as Form U4 manual signature requirements. It also
requires applicants' fingerprint cards to be submitted by members,
includes Form U5 filing requirements, and permits a member to employ a
third party to file required forms electronically on its behalf.
Proposed Rule 1250 reorganizes and enhances the content of current
BX Rule 1140. It would provide that all forms required to be filed
under the Exchange's registration rules, including the Rule 1200
series, must be filed through an electronic process or such other
process as the Exchange may prescribe to the Central Registration
Depository. It would provide for the electronic filing of Form U4
amendments in a number of cases without the individual's manual
signature, subject to certain safeguards and procedures, and would
permit the delegation of filing functions by supervisors (again,
subject to certain safeguards). Additionally, Rule 1250, Supplementary
Material .02 would state clearly that members remain responsible for
complying with the requirements of the rule even if forms are filed
electronically by a third party pursuant to an agreement. Finally, it
would establish a number of recordkeeping requirements related to
electronic registration filings.
Rule 1250, as part of the uniform 1200 Series, will consolidate
Form U4 and U5 electronic filing requirements in a single location,
across the Nasdaq Affiliated Exchanges.
Q. Other Rules
The Exchange is deleting Rule 1060, Persons Exempt from
Registration, as explained above. Rule 1060(b) however, contains
provisions dealing with Nonregistered Foreign ``Finders'' and is simply
being relocated with nonsubstantive changes to new Rule 2040.\75\ The
remaining rules identified above under ``Overview'' which are to be
amended in this proposed rule change but are not further discussed
herein simply update citations and/or
[[Page 51014]]
make technical or nonsubstantive changes to the proposed new rules.
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\75\ The FINRA counterpart to current Rule 1060(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,\76\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\77\ 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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\76\ 15 U.S.C. 78f(b).
\77\ 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 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
Exchange rules to maintain appropriate parallelism with corresponding
Exchange rules, in order to prevent unnecessary regulatory burdens and
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 to registration of developers of algorithmic trading
strategies in particular, 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
[[Page 51015]]
19(b)(3)(A) of the Act \78\ and Rule 19b-4(f)(6) thereunder.
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\78\ 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) \79\ 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.\80\ 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.\81\
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\79\ 17 CFR 240.19b-4(f)(6)(iii).
\80\ 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.
\81\ 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-BX-2018-047 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-BX-2018-047. 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 business days between the hours of 10:00 a.m. and
3:00 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-BX-2018-047 and should be submitted on
or before October 31, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\82\
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\82\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21904 Filed 10-9-18; 8:45 am]
BILLING CODE 8011-01-P