Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend, Reorganize and Enhance Its Membership, Registration and Qualification Rules and To Make Conforming Changes to Certain Other Rules, 52006-52022 [2018-22294]
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Federal Register / Vol. 83, No. 199 / Monday, October 15, 2018 / Notices
and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget this
request for extension of the previously
approved collection of information
discussed below.
The purpose of Form 12b–25 (17 CFR
240.12b–25) is to provide notice to the
Commission and the marketplace that a
registrant will be unable to timely file a
required periodic or transition report
pursuant to the Securities Exchange Act
of 1934 (15 U.S.C. 78a et seq.) or the
Investment Company Act of 1940 (15
U.S.C. 80a et seq.). If all the filing
conditions of the form are satisfied, the
registrant is granted an automatic filing
extension. The information required is
filed on occasion and is mandatory. All
information is available to the public for
review. Approximately 3,432 registrants
file Form 12b–25 and it takes
approximately 2.5 hours per response
for a total of 8,580 burden hours (2.5
hours per response × 19 responses).
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
The public may view the background
documentation for this information
collection at the following website,
www.reginfo.gov. Comments should be
directed to: (i) Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10102, New Executive
Office Building, Washington, DC 20503,
or by sending an email to:
Lindsay.M.Abate@omb.eop.gov; and (ii)
Charles Riddle, Acting Director/Chief
Information Officer, Securities and
Exchange Commission, c/o Candace
Kenner, 100 F Street NE, Washington,
DC 20549 or send an email to: PRA_
Mailbox@sec.gov. Comments must be
submitted to OMB within 30 days of
this notice.
Dated: October 9, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–22289 Filed 10–12–18; 8:45 am]
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84384; File No. SR–ISE–
2018–82]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend, Reorganize
and Enhance Its Membership,
Registration and Qualification Rules
and To Make Conforming Changes to
Certain Other Rules
October 9, 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 ISE, LLC
(‘‘ISE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend,
reorganize and enhance its membership,
registration and qualification rules and
to make conforming changes to certain
other rules.
The text of the proposed rule change
is available on the Exchange’s website at
https://ise.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.
1 15
2 17
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CFR 240.19b–4.
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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
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.6
Recently, the Commission approved a
Financial Industry Regulatory Authority
(‘‘FINRA’’) proposed rule change
consolidating and adopting NASD and
Incorporated NYSE rules relating to
qualification and registration
requirements into the Consolidated
FINRA Rulebook,7 restructuring the
FINRA representative-level qualification
examinations, creating a general
knowledge examination and specialized
knowledge examinations, allowing
permissive registration, establishing an
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’’).8 The FINRA Rule
3 See, e.g., ISE Rule 313, Registration
Requirements, Section (a)(1).
4 See, e.g., ISE Rule 313, Registration
Requirements, Section (a)(2).
5 See ISE Rule 604, Continuing Education for
Registered Persons.
6 The ISE rules governing these matters were
extensively updated and amended in Securities
Exchange Act Release No. 63843 (February 4, 2011),
76 FR 7884 (SR–ISE–2010–115), which adopted
Rule 313.
7 The current FINRA rulebook consists of: (1)
FINRA rules; (2) NASD rules; and (3) rules
incorporated from the New York Stock Exchange
(‘‘NYSE’’) (the ‘‘Incorporated NYSE rules’’). While
the NASD rules generally apply to all FINRA
members, the Incorporated NYSE rules apply only
to those members of FINRA that are also members
of the NYSE.
8 See Securities Exchange Act Release No. 81098
(July 7, 2017), 82 FR 32419 (July 13, 2017) (Order
Approving File No. SR–FINRA–2017–007). See also
FINRA Regulatory Notice 17–30 (SEC Approves
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Changes will become effective on
October 1, 2018.
The Exchange now proposes to
amend, reorganize and enhance its own
membership, registration and
qualification requirements rules in part
in response to the FINRA Rule Changes,
and also in order to conform its rules 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
ISE. Last, the Exchange proposes to
enhance its registration rules by adding
a new registration requirement for
developers of algorithmic trading
systems similar to a requirement
adopted by FINRA pursuant to a 2016
FINRA proposed rule change.9
As part of this proposed rule change,
current Rules 313, Registration
Requirements; 601, Registration of
Options Principals, Sections (b)–(d);
602, Registration of Representatives,
Section (c); 603, Termination of
Registered Persons; and 604, Continuing
Education for Registered Persons, are
proposed to be deleted.10
In place of the deleted rules and rule
sections, the Exchange proposes to
adopt a new 1200 Series of rules
captioned Registration, Qualification
and Continuing Education, generally
conforming to and based upon FINRA’s
new 1200 Series of rules resulting from
the FINRA Rule Changes but with a
Consolidated FINRA Registration Rules,
Restructured Representative-Level Qualification
Examinations and Changes to Continuing Education
Requirements) (October 2017). FINRA articulated
its belief that the proposed rule change would
streamline, and bring consistency and uniformity
to, its registration rules, which would, in turn,
assist FINRA members and their associated persons
in complying with the rules and improve regulatory
efficiency. FINRA also determined to enhance the
overall efficiency of its representative-level
examinations program by eliminating redundancy
of subject matter content across examinations,
retiring several outdated representative-level
registrations, and introducing a general knowledge
examination that could be taken by all potential
representative-level registrants and the general
public. FINRA amended certain aspects of its
continuing education rule, including by codifying
existing guidance regarding the effect of failing to
complete the Regulatory Element on a registered
person’s activities and compensation.
9 See Securities Exchange Act Release No. 77551
(April 7, 2016), 81 FR 21914 (April 13, 2016) (Order
Approving File No. SR–FINRA–2016–007). In its
proposed rule change FINRA addressed the
increasing significance of algorithmic trading
strategies by amending its rules to require
registration, as Securities Traders, of associated
persons primarily responsible for the design,
development or significant modification of
algorithmic trading strategies, or who are
responsible for the day-to-day supervision or
direction of such activities.
10 Conforming changes are proposed to Rules 100,
Definitions, and 208, Regulatory Fees or Charges, as
well as to Chapter 90, Code of Procedure.
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number of Exchange-specific
variations.11 The proposed new 1200
Series is also being proposed for
adoption by ISE’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 an additional
associated person registration category,
recognize a new general knowledge
examination, permit the maintenance of
permissive registrations, and require
Securities Trader registration of
developers of algorithmic trading
strategies consistent with a comparable
existing FINRA registration
requirement.13
The proposed rule change would
become operative October 1, 2018, with
the exception of the new registration
requirement for developers of
algorithmic trading strategies, which
would become operative April 1, 2019.
Proposed Rules
A. Registration Requirements (Proposed
Rule 1210)
Exchange Rule 313(a) currently
requires individual associated persons
engaged or to be engaged in the
securities business of a member to be
registered with the Exchange in the
category of registration appropriate to
the function to be performed as
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 BX,
Inc. (‘‘BX’’), Nasdaq PHLX LLC (‘‘PHLX’’), Nasdaq
GEMX, LLC (‘‘GEMX’’), and Nasdaq MRX, LLC
(‘‘MRX’’) (together with ISE, the ‘‘Nasdaq Affiliated
Exchanges’’) are also submitting proposed rule
changes to adopt the 1200 Series of rules. See SR–
NASDAQ–2018–078, SR–BX–2018–047, SR–Phlx–
2018–61, SR–GEMX–2018–33, and SR–MRX–2018–
31. Additionally, the Exchange recently added a
shell structure to its rulebook with the purpose of
improving efficiency and readability and to align its
rules closer to those of the other Nasdaq Affiliated
Exchanges. See Securities Exchange Act Release No.
82173 (November 29, 2017), 82 FR 57505
(December 5, 2017) (SR–ISE–2017–102). Ultimately,
the Exchange intends to submit another proposed
rule change to transfer the 1200 Series of rules into
the new shell structure.
13 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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prescribed by the Exchange. The
Exchange is proposing to delete this
language and to adopt in its place
Exchange Rule 1210.14
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
1230.15 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.
B. Minimum Number of Registered
Principals (Proposed Rule 1210.01)
Existing Rule 313.07 requires
members to register with the Exchange
each individual acting in any of the
following capacities: (i) Officer; (ii)
partner; (iii) director; (iv) supervisor of
proprietary trading, market-making or
brokerage activities; and/or (v)
supervisor of those engaged in
proprietary trading, market-making or
brokerage activities with respect to
those activities. Members must register
with the Exchange at least two
individuals acting in one or more of
these capacities (the ‘‘two-principal
requirement’’). The Exchange may
waive this requirement if a member
demonstrates conclusively that only one
individual acting in one or more of
these capacities should be required to
register. Further, a member that
conducts proprietary trading only and
has 25 or fewer registered persons is
14 In general the 1200 Series would conform the
Exchange’s rules to FINRA’s rules as revised in the
FINRA Rule Changes, with modifications tailored to
the business of the Exchange and of the other
Nasdaq Affiliated Exchanges. However, the
Exchange also proposes to adopt Rule 1210,
Supplementary Material .12, which is not based
upon a FINRA rule but instead on current Nasdaq
Rule 1031(c), (d) and (e), which Nasdaq is
proposing in SR–Nasdaq–2018–078 to relocate to
Rule 1210, Supplementary Material .12 in the
Nasdaq rulebook. These provisions govern the
process for applying for registration and amending
the registration application, as well as for notifying
the Exchange of termination of the member’s
association with a person registered with the
Exchange. The Exchange proposes to adopt Rule
1210, Supplemental Material .12, in order to have
uniform processes and requirements in this area
across the Nasdaq Affiliated Exchanges.
15 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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only required to have one officer or
partner who is registered in this
capacity.16
The Exchange is proposing to delete
these requirements and in their place to
adopt new Rule 1210.01. The new rule
would provide firms that limit the scope
of their business with flexibility in
satisfying the two-principal
requirement. In particular, proposed
Rule 1210.01 requires that a member
have a minimum of two General
Securities Principals, provided that a
member that is limited in the scope of
its activities may instead have two
officers or partners who are registered in
a principal category that corresponds to
the scope of the member’s activities.17
For instance, if a firm’s business is
limited to securities trading, the firm
may have two Securities Trader
Principals, instead of two General
Securities Principals. Additionally,
Exchange Rule 1210.01 provides that
any member with only one associated
person is excluded from the two
principal requirement. Proposed Rule
1210.01 would provide that existing
members as well as new applicants may
request a waiver of the two-principal
requirement, consistent with current
Exchange Rule 313.07. Finally, the
Exchange is proposing to include a
provision currently found in current
Rule 313 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.18
16 Rule 313, Supplementary Material .07,
describes when a member is considered to be
conducting only proprietary trading of the member.
Because the Exchange is proposing to delete Rule
313 in its entirety, Rule 313, Supplementary
Material .07 would be reworded and relocated to
Rule 100(a), Definitions, as a provision defining the
term ‘‘proprietary trading’’ for purposes of Rule
1210.
17 The principal registration categories are
described in greater detail below.
18 The Exchange is not proposing provisions
comparable to the new FINRA Rule 1210.01
requirements that all FINRA members are required
to have a Principal Financial Officer and a Principal
Operations Officer, because it believes that its
proposed Rule 1220(a)(4), Financial and Operations
Principal, which requires member firms operating
pursuant to certain provisions of SEC rules to
designate at least one Financial and Operations
Principal, is sufficient. Further, the Exchange is not
adopting the FINRA Rule 1210.01 requirements that
(1) a member engaged in investment banking
activities have an Investment Banking Principal, (2)
a member engaged in research activities have a
Research Principal, or (3) a member engaged in
options activities with the public have a Registered
Options Principal. The Exchange does not recognize
the Investment Banking Principal or the Research
Principal registration categories, and the Registered
Options Principal registration requirement is set
forth in Rule 1210.08 and its inclusion is therefore
unnecessary in Rule 1210.01.
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C. Permissive Registrations (Proposed
Rule 1210.02)
Current Rule 313(a)(1) prohibits
members from maintaining a
registration with the Exchange for any
person (1) who is no longer active in the
member’s securities business; (2) who is
no longer functioning in the registered
capacity; or (3) where the sole purpose
is to avoid an examination requirement.
It further prohibits a member from
making an application for the
registration of any person where there is
no intent to employ that person in the
member’s securities business. A member
may, however, maintain or make
application for the registration of an
individual who performs legal,
compliance, internal audit, back-office
operations, or similar responsibilities
for the member, or a person who
performs administrative support
functions for registered personnel, or a
person engaged in the securities
business of a foreign securities affiliate
or subsidiary of the member.
The Exchange is proposing to replace
this provision with new Rule 1210.02.
The Exchange is also proposing to
expand the scope of permissive
registrations and to clarify a member’s
obligations regarding individuals who
are maintaining such registrations.
Specifically, proposed Rule 1210.02
allows any associated person to obtain
and maintain any registration permitted
by the member. For instance, an
associated person of a member working
solely in a clerical or ministerial
capacity, such as in an administrative
capacity, would be able to obtain and
maintain a General Securities
Representative registration with the
member. As another example, an
associated person of a member who is
registered, and functioning solely, as a
General Securities Representative would
be able to obtain and maintain a General
Securities Principal registration with the
member. Further, proposed Rule
1210.02 allows an individual engaged in
the securities business of a foreign
securities affiliate or subsidiary of a
member to obtain and maintain any
registration permitted by the member.
The Exchange is proposing to permit
the registration of such individuals for
several reasons. First, a member may
foresee a need to move a former
representative or principal who has not
been registered for two or more years
back into a position that would require
such person to be registered. Currently,
such persons are required to requalify
(or obtain a waiver of the applicable
qualification examinations) and reapply
for registration. Second, the proposed
rule change would allow members to
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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.19 With respect to an
individual who solely maintains a
permissive registration, such as an
individual working exclusively in an
administrative capacity, the individual’s
day-to-day supervisor may be a
nonregistered person. Members would
be required to assign a registered
supervisor to this person who would be
responsible for periodically contacting
such individual’s day-to-day supervisor
to verify that the individual is not acting
outside the scope of his or her assigned
functions. If such individual is
permissively registered as a
representative, the registered supervisor
must be registered as a representative or
principal. If the individual is
permissively registered as a principal,
the registered supervisor must be
registered as a principal.20
19 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.
20 In either case, the registered supervisor of an
individual who solely maintains a permissive
registration would not be required to be registered
in the same representative or principal registration
category as the permissively-registered individual.
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D. Qualification Examinations and
Waivers of Examinations (Proposed
Rule 1210.03)
Current Rule 313(a)(1) provides that
before a registration can become
effective, the individual associated
person shall submit the appropriate
application for registration, pass a
qualification examination appropriate to
the category of registration as prescribed
by the Exchange and submit any
required registration and examination
fees. The Exchange is proposing to
replace this rule language with new
Rule 1210.03, Qualification
Examinations and Waivers of
Examinations.
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.21 Thus under the
21 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
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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
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.22 However, with respect to
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.
22 Under the proposed rule change, only
individuals who have passed an appropriate
representative-level examination would be
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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.23
In addition, individuals, with the
exception of Order Processing Assistant
Representatives, who had been
registered as representatives two or
more years, but less than four years,
prior to the operative date of the
proposed rule change would also be
considered to have passed the SIE and
designated as such in the CRD system.
Moreover, if such individuals re-register
with a firm after the operative date of
the proposed rule change and within
four years of having been previously
registered, they would only need to pass
the specialized knowledge examination
associated with that registration
position. However, if they do not
register within four years from the date
of their last registration, their SIE status
in the CRD system would be
administratively terminated. Similar to
the current process for registration,
firms would continue to use the CRD
system to request registrations for
representatives. An individual would be
able to schedule both the SIE and
specialized knowledge examinations for
the same day, provided the individual is
able to reserve space at one of FINRA’s
designated testing centers.
Finally, under current Rule 313.05,
the Exchange may, in exceptional cases
and where good cause is shown, waive
the applicable qualification examination
and accept other standards as evidence
of an applicant’s qualifications for
registration. The Exchange is proposing
to replace Rule 313.05 with proposed
Rule 1210.03 with changes which track
FINRA Rule 1210.03. The proposed rule
provides that the Exchange will only
consider examination waiver requests
submitted by a firm for individuals
associated with the firm who are
seeking registration in a representativeor principal-level registration category.
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.
23 As discussed below, the Exchange is proposing
a four-year expiration period for the SIE.
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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)
The Exchange is proposing to adopt
new Rule 1210.04, which provides 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 period of 120 calendar days prior
to passing an appropriate principal
qualification examination, provided that
such person has at least 18 months of
experience functioning as a registered
representative within the five-year
period immediately preceding the
designation and has fulfilled all
prerequisite registration, fee and
examination requirements prior to
designation as principal. These
requirements apply to any principal
category, including those categories that
are not subject to a prerequisite
representative-level registration
requirement, such as the Financial and
Operations Principal registration
category.24 Similarly, the rule would
permit a member to designate any
person currently registered, or who
becomes registered, with the member as
a principal to function in another
principal category for a period of 120
calendar days prior to passing an
appropriate qualification examination as
specified under Rule 1220.25
This provision, which has no
counterpart in the Exchange’s current
rules, is intended to provide flexibility
to members in meeting their principal
requirements on a temporary basis.
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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
24 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.
25 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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content is the intellectual property of
FINRA and that the content cannot be
copied or redistributed by any means. If
FINRA discovers that a candidate has
violated the Rules of Conduct for taking
a qualification examination, the
candidate may forfeit the results of the
examination and may be subject to
disciplinary action by FINRA. For
instance, for cheating on a qualification
examination, FINRA’s Sanction
Guidelines recommend a bar.26
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 400.27 Further, if the Exchange
determines that an associated person
has violated the SIE Rules of Conduct or
the Rules of Conduct for representative
and principal examinations, the
associated person may forfeit the results
of the examination and may be subject
to disciplinary action by the Exchange.
Proposed Rule 1210.05 also states that
the Exchange considers all of the
qualification examinations’ content to
be highly confidential. The removal of
examination content from an
examination center, reproduction,
disclosure, receipt from or passing to
any person, or use for study purposes of
any portion of such qualification
examination or any other use that would
compromise the effectiveness of the
examinations and the use in any manner
and at any time of the questions or
answers to the examinations would be
prohibited and would be deemed to be
a violation of Exchange rules requiring
26 See
SR–FINRA–2017–007, pp. 26–27.
Rule 400 prohibits members from
engaging in acts or practices inconsistent with just
and equitable principles of trade. Persons
associated with members have the same duties and
obligations as members under Rule 400. FINRA
Rule 1210.05 cites FINRA Rule 2010, which is a
comparable rule.
27 Exchange
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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.28
G. Waiting Periods for Retaking a Failed
Examination (Proposed Rule 1210.06)
The Exchange proposes to adopt new
Rule 1210.06, which provides that a
person who fails an examination may
retake that examination after 30
calendar days from the date of the
person’s last attempt to pass that
examination.29 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.30
H. CE Requirements (Proposed Rule
1210.07)
Pursuant to current Exchange Rule
313.04, each individual required to
register under Rule 313 is required to
satisfy the continuing education
requirements set forth in Exchange Rule
604, Continuing Education for
Registered Persons, or any other
applicable continuing education
requirements as prescribed by the
Exchange. Under Rule 604 the CE
requirements applicable to registered
persons consist of a Regulatory
Element 31 and a Firm Element.32 The
Regulatory Element applies to registered
persons and must be completed within
prescribed time frames.33 For purposes
28 The Exchange is not adopting portions of
FINRA’s Rule 1210.05 which apply to nonassociated persons, over whom the Exchange would
in any event have no jurisdiction.
29 Proposed Rule 1210.06 has no counterpart in
existing Exchange rules.
30 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.
31 See Rule 604(a).
32 See Rule 604(c).
33 Pursuant to Rule 604(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
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of the Regulatory Element, a ‘‘registered
person’’ is defined in the current rule as
any person registered or required to be
registered with the Exchange under the
Exchange’s rules.34 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 a Series 57
registration or 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.35
The Exchange proposes to delete Rule
313.04. The CE requirements set forth in
Rule 313.04 have been reorganized and
renumbered, and are now proposed to
be adopted as new Rule 1240. 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 new Rule 1240,
discussed below.36 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.
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
604(a) must cease all activities as a registered
person and is prohibited from performing any
duties and functioning in any capacity requiring
registration. 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.
34 See Rule 604.01.
35 See Rule 604(c)(1).
36 Current Rule 313.04 would be deleted.
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I. Lapse of Registration and Expiration
of SIE (Proposed Rule 1210.08)
Existing Rule 313(e) states that any
person whose registration has been
revoked by the Exchange as a
disciplinary sanction or whose most
recent registration has been terminated
for two or more years immediately
preceding the date of receipt by the
Exchange of a new application shall be
required to pass a qualification
examination appropriate to the category
of registration as prescribed by the
Exchange. The two year period is
calculated from the termination date to
the date the Exchange receives a new
application for registration. The
Exchange is proposing to delete existing
Rule 313(e), and to replace it with Rule
1210.08, Lapse of Registration and
Expiration of SIE.
Proposed Rule 1210.08 contains
language comparable to that of existing
Rule 313(e) but also clarifies that, for
purposes of the proposed rule, an
application would not be considered to
have been received by the Exchange if
that application does not result in a
registration. Proposed Rule 1210.08 also
sets forth the expiration period of the
SIE. Based on the content covered on
the SIE, the Exchange is proposing that
a passing result on the SIE be valid for
four years. Therefore, under the
proposed rule change, an individual
who passes the SIE and is an associated
person of a firm at the time would have
up to four years from the date he or she
passes the SIE to pass a representativelevel examination to register as a
representative with that firm, or a
subsequent firm, without having to
retake the SIE. In addition, an
individual who passes the SIE and is
not an associated person at the time
would have up to four years from the
date he or she passes the SIE to become
an associated person of a firm, pass a
representative-level examination and
register as a representative without
having to retake the SIE.
Moreover, an individual holding a
representative-level registration who
leaves the industry after the operative
date of the proposed rule change would
have up to four years to re-associate
with a firm and register as a
representative without having to retake
the SIE. However, the four-year
expiration period in the proposed rule
change extends only to the SIE, and not
the representative- and principal-level
registrations. The representative- and
principal-level registrations would
continue to be subject to a two year
expiration period as is the case today.
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J. Waiver of Examinations for
Individuals Working for a Financial
Services Industry Affiliate of a Member
(Proposed Rule 1210.09)
The Exchange is proposing Rule
1210.09 to provide a new process
whereby individuals who would be
working for a financial services industry
affiliate of a member 37 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.38 The purpose of the FSA
waiver is to provide a firm greater
flexibility to move personnel, including
senior and middle management,
between the firm and its financial
services affiliate(s) so that they may gain
organizational skills and better
knowledge of products developed by the
affiliate(s) without the individuals
having to requalify by examination each
time they returned to the firm.
Under the proposed waiver process,
the first time a registered person is
designated as eligible for a waiver based
on the FSA criteria, the member with
which the individual is registered
would notify the Exchange of the FSA
designation. The member would
concurrently file a full Form U5
terminating the individual’s registration
with the firm, which would also
terminate the individual’s other SRO
and state registrations.
To be eligible for initial designation as
an FSA-eligible person by a member, an
individual must have been registered for
a total of five years within the most
recent 10-year period prior to the
designation, including for the most
recent year with that member.39 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
37 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.
38 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.
39 For purposes of this requirement, a five year
period of registration with the Exchange, with
FINRA or with another self-regulatory organization
would be sufficient.
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years from the date of initial
designation 40 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.41
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 604, Continuing
Education for Registered Persons).
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
40 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.
41 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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submit an examination waiver request
to the Exchange,42 similar to the process
used today for waiver requests, and it
would represent that the individual is
eligible for an FSA waiver based on the
conditions set forth below. The
Exchange would review the waiver
request and make a determination of
whether to grant the request within 30
calendar days of receiving the request.
The Exchange would summarily grant
the request if the following conditions
are met:
(1) Prior to the individual’s initial
designation as an FSA-eligible person,
the individual was registered for a total
of five years within the most recent 10year period, including for the most
recent year with the member that
initially designated the individual as an
FSA-eligible person;
(2) The waiver request is made within
seven years of the individual’s initial
designation as an FSA-eligible person
by a member;
(3) The initial designation and any
subsequent designation(s) were made
concurrently with the filing of the
individual’s related Form U5;
(4) The individual continuously
worked for the financial services
affiliate(s) of a member since the last
Form U5 filing;
(5) The individual has complied with
the Regulatory Element of CE; and
(6) The individual does not have any
pending or adverse regulatory matters,
or terminations, that are reportable on
the Form U4, and has not otherwise
been subject to a statutory
disqualification while the individual
was designated as an FSA-eligible
person with a member.
Following the Form U5 filing, an
individual could move between the
financial services affiliates of a member
so long as the individual is
continuously working for an affiliate.
Further, a member could submit
multiple waiver requests for the
individual, provided that the waiver
requests are made during the course of
the seven-year period.43 An individual
who has been designated as an FSAeligible person by a member would not
42 The
Exchange would consider a waiver of the
representative-level qualification examination(s),
the principal-level qualification examination(s) and
the SIE, as applicable.
43 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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be able to take additional examinations
to gain additional registrations while
working for a financial services affiliate
of a member.
K. Status of Persons Serving in the
Armed Forces of the United States
(Proposed Rule 1210.10)
The Exchange is proposing to adopt
new Rule 1210.10, Status of Persons
Serving in the Armed Forces of the
United States.44 Rule 1210.10(a) would
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 placed, after proper
notification to the Exchange, on inactive
status. The registered person would not
need to be re-registered by such member
upon his or her return to active
employment with the member.
The registered person would remain
eligible to receive transaction-related
compensation, including continuing
commissions, and the employing
member could allow the registered
person to enter into an arrangement
with another registered person of the
member to take over and service the
person’s accounts and to share
transaction-related compensation based
upon the business generated by such
accounts. However, because such
persons would be inactive, they could
not perform any of the functions and
responsibilities performed by a
registered person, nor would they be
required to complete either the
continuing education Regulatory
Element or Firm Element set forth in
proposed Rule 1240 during the
pendency of such inactive status.45
Pursuant to proposed Exchange Rule
1210.10(b), a member that is a sole
proprietor who temporarily closes his or
her business by reason of volunteering
for or being called into active duty in
the Armed Forces of the United States,
shall be placed, after proper notification
to the Exchange, on inactive status
while the member remains on active
military duty, would not be required to
pay dues or assessments during the
pendency of such inactive status and
would not be required to pay an
44 There is no counterpart to proposed Rule
1210.10 in the Exchange’s existing rules.
45 The relief provided in Rule 1210.10(a) would
be available to a registered person during the period
that such person remains registered with the
member with which he or she was registered at the
beginning of active duty in the Armed Forces of the
United States, regardless of whether the person
returns to active employment with another member
upon completion of his or her active duty. The
relief would apply only to a person registered with
a member and only while the person remains on
active military duty. Further, the member with
which such person is registered would be required
to promptly notify the Exchange of such person’s
return to active employment with the member.
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admission fee upon return to active
participation in the securities business.
This relief would be available only to a
sole proprietor member and only while
the person remains on active military
duty, and the sole proprietor would be
required to promptly notify the
Exchange of his or her return to active
participation in the securities business.
If a person who was formerly
registered with a member volunteers for
or is called into active duty in the
Armed Forces of the United States at
any time within two years after the date
the person ceased to be registered with
a member, the Exchange shall defer the
lapse of registration requirements set
forth in proposed Rule 1210.08 (i.e., toll
the two-year expiration period for
representative and principal
qualification examinations) and the
lapse of the SIE (i.e., toll the four-year
expiration period for the SIE). The
Exchange would defer the lapse of
registration requirements and the SIE
commencing on the date the person
begins actively serving in the Armed
Forces of the United States, provided
that the Exchange is properly notified of
the person’s period of active military
service within 90 days following his or
her completion of active service or upon
his or her re-registration with a member,
whichever occurs first. The deferral will
terminate 90 days following the person’s
completion of active service in the
Armed Forces of the United States.
Accordingly, if such person does not reregister with a member within 90 days
following his or her completion of
active service in the Armed Forces of
the United States, the amount of time in
which the person must become reregistered with a member without being
subject to a representative or principal
qualification examination or the SIE
shall consist of the standard two-year
period for representative and principal
qualification examinations or the
standard four-year period for the SIE,
whichever is applicable, as provided in
Rule 1210.08 reduced by the period of
time between the person’s termination
of registration and beginning of active
service in the Armed Forces of the
United States.
Finally, under proposed Rule
1210.10(c), if a person placed on
inactive status while serving in the
Armed Forces of the United States
ceases to be registered with a member,
the Exchange would defer the lapse of
registration requirements set forth in
Rule 1210.08 (i.e., toll the two-year
expiration period for representative and
principal qualification examinations)
and the lapse of the SIE (i.e., toll the
four-year expiration period for the SIE)
during the pendency of his or her active
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service in the Armed Forces of the
United States. The Exchange would
defer the lapse of registration
requirements based on existing
information in the CRD system,
provided that the Exchange is properly
notified of the person’s period of active
military service within two years
following his or her completion of
active service or upon his or her reregistration with a member, whichever
occurs first. The deferral would
terminate 90 days following the person’s
completion of active service in the
Armed Forces of the United States.
Accordingly, if such person did not reregister with a member within 90 days
following completion of active service,
the amount of time in which the person
must become re-registered with a
member without being subject to a
representative or principal qualification
examination or the SIE would consist of
the standard two-year period for
representative and principal
qualification examinations or the
standard four-year period for the SIE,
whichever is applicable, as provided in
Rule 1210.08.46
L. Impermissible Registrations
(Proposed Rule 1210.11)
Existing Rule 313(a)(1) prohibits a
member from maintaining a
representative or principal registration
with the Exchange for any person who
is no longer active in the member’s
securities business, who is no longer
functioning in the registered capacity, or
where the sole purpose is to avoid an
examination requirement. The rule also
prohibits 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 securities business. These
prohibitions do not apply to the current
permissive registration categories
identified in Rule 313(a)(1).
In light of proposed Rule 1210.02,
Permissive Registrations, discussed
above, the Exchange is proposing to
delete these provisions of Rule 313(a)(1)
and instead adopt Rule 1210.11
prohibiting a member from registering
or maintaining the registration of a
person unless the registration is
46 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 includes
language from existing Nasdaq 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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52013
consistent with the requirements of
proposed Rule 1210.47
M. Registration Categories (Proposed
Rule 1220)
The Exchange is proposing to adopt
new and revised registration category
rules and related definitions in
proposed Rule 1220, Registration
Categories.48
1. Definition of Principal (Proposed
Rule 1220(a)(1))
The Exchange’s registration rules
currently do not include a definition of
the term ‘‘principal.’’ Rather than
employing a defined term, the
Exchange’s principal registration
requirement directly identifies the types
of persons who would be encompassed
within the term ‘‘principal’’ if that term
were defined.49 The Exchange is now
proposing to adopt a definition of
‘‘principal’’ in Rule 1220(a)(1).
Under proposed Rule 1220(a)(1) a
‘‘principal’’ would be defined as any
person associated with a member,
including, but not limited to, sole
proprietor, officer, partner, manager of
office of supervisory jurisdiction,
director or other person occupying a
similar status or performing similar
functions, who is actively engaged in
the management of 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. Such persons would
include, among other persons, a
member’s chief executive officer and
chief financial officer (or equivalent
officers). A ‘‘principal’’ would also
include any other person associated
with a member who is performing
functions or carrying out
responsibilities that are required to be
performed or carried out by a principal
47 As discussed above, the Exchange is also
proposing Rule 1210, Supplementary Material .12,
Application for Registration and Jurisdiction, which
is not included in FINRA Rule 1210. Proposed
Exchange Rule 1210, Supplementary Material .12,
is based upon portions of existing Nasdaq Rule
1031.
48 For ease of reference, the Exchange proposes to
adopt as Rule 1220, Supplementary Material .07, in
chart form, a Summary of Qualification
Requirements for each of the Exchange’s permitted
registration categories discussed below.
49 Pursuant to existing Rule 313.07 each member
must register with the Exchange each individual
acting as an officer, partner, director, supervisor of
proprietary trading, market-making or brokerage
activities, and/or supervisor of those engaged in
proprietary trading, market-making or brokerage
activities with respect to those activities. This
requirement is consistent with FINRA’s current
registration requirement for principals (NASD Rule
1021). See Securities Exchange Act Release No.
63843 (February 4, 2011), 76 FR 7884 (SR–ISE–
2010–115), at footnote 18.
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under Exchange rules. The term
‘‘actively engaged in the management of
the member’s securities business’’
would include 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 managementlevel 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))
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The Exchange currently does not
impose a General Securities Principal
registration obligation. The Exchange is
now proposing to adopt new Rule
1220(a)(2), which establishes an
obligation to register as a General
Securities Principal, but with certain
exceptions.50
Proposed Rule 1220(a)(2)(A) states
that each principal as defined in
proposed Rule 1220(a)(1) is required to
register with the Exchange as a General
Securities Principal, except that if a
principal’s activities are limited to the
functions of a Compliance Official, a
Financial and Operations Principal, a
Securities Trader Principal a Securities
Trader Compliance Officer, or a
Registered Options Principal, then the
principal shall appropriately register in
one or more of these categories.51
Proposed Rule 1220(a)(2)(A) further
provides that if a principal’s activities
are limited solely to the functions of a
General Securities Sales Supervisor,
then the principal may appropriately
register in that category in lieu of
registering as a General Securities
Principal, provided that if the principal
is engaged in options sales activities he
or she would be required to register as
a General Securities Sales Supervisor or
as a Registered Options Principal.52
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.
50 There is no counterpart to proposed Rule
1220(a)(2) in the Exchange’s existing rules.
51 The Exchange is proposing to recognize the
General Securities Principal and the Compliance
Official registration categories for the first time in
this proposed rule change.
52 The Exchange’s proposed Rule 1220(a)(2)(A)
deviates somewhat from the counterpart FINRA
rule in that it does not offer various limited
registration categories provided for in FINRA’s new
Rule 1220(a)(2)(A). It therefore proposes to reserve
Rules 1220(a)(2)(A)(ii) and (iv).
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Proposed Rule 1220(a)(2)(B) provides
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.53
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). 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.54
3. Compliance Official (Proposed Rule
1220(a)(3))
Existing Rule 313(c) requires each
member to designate a Chief
Compliance Officer on Schedule A of
Form BD, and requires individuals
designated as a Chief Compliance
Officer to register with the Exchange
and pass the appropriate heightened
qualification examination(s) as
53 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.
54 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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prescribed by the Exchange.55 Current
Rule 313.08(a)(3) provides that an
individual associated person who is a
Chief Compliance Officer (or performs
similar functions) for a member that
engages in proprietary trading, marketmaking or effecting transactions on
behalf of a broker-dealer is required to
register and qualify as a Securities
Trader Compliance Officer (CT) in
WebCRD and to satisfy the prerequisite
registration and qualification
requirements.56
The Exchange is proposing to delete
Rules 313(c) and 313.08(a)(3) and to
adopt Rule 1220(a)(3), Compliance
Official, in their place. 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 would be required, prior to or
concurrent with such registration, to
pass the Compliance Official
qualification examination. An
individual designated as a Chief
Compliance Officer on Schedule A of
Form BD of a member that is engaged
in limited securities business could be
registered in a principal category under
Rule 1220(a) that corresponds to the
limited scope of the member’s business.
Additionally, Rule 1220(a)(3) would
provide that an individual designated as
a Chief Compliance Officer on Schedule
A of Form BD may register and qualify
as a Securities Trader Compliance
Officer if, with respect to transactions in
equity, preferred or convertible debt
securities, or options such person is
engaged in proprietary trading, the
55 Rule 313(c) further provides that a person who
has been designated as a Chief Compliance Officer
on Schedule A of Form BD for at least two years
immediately prior to January 1, 2002, and who has
not been subject within the last ten years to any
statutory disqualification as defined in Section
3(a)(39) of the Act; a suspension; or the imposition
of a fine of $5,000 or more for a violation of any
provision of any securities law or regulation, or any
agreement with, rule or standard of conduct of any
securities governmental agency, securities selfregulatory organization, or as imposed by any such
regulatory or self-regulatory organization in
connection with a disciplinary proceeding shall be
required to register in the category of registration
appropriate to the function to be performed as
prescribed by the Exchange, but shall be exempt
from the requirement to pass the heightened
qualification examination as prescribed by the
Exchange.
56 Rule 313.08(b) establishes the Series 14 as the
appropriate qualification examination for a
Securities Trader Compliance Officer, but also
permits General Securities Principal Registration
(GP) or Securities Trader Principal (TP) (Series 24)
as alternative acceptable qualifications.
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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 Commission
pursuant to the Investment Company
Act and that controls, is controlled by,
or is under common control with a
member. All individuals registering as
Securities Trader Compliance Officers
would be required to first become
registered pursuant to paragraph (b)(4)
as a Securities Trader, and to pass the
Compliance Official qualification
exam.57
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4. Financial and Operations Principal
(Proposed Rule 1220(a)(4))
Existing Rule 313(b) provides that
each member subject to Exchange Act
Rule 15c3–1 must designate a Financial/
Operations Principal. It specifies that
the duties of a Financial/Operations
Principal shall include taking
appropriate actions to assure that the
member complies with applicable
financial and operational requirements
under the Rules and the Exchange Act,
including but not limited to those
requirements relating to the submission
of financial reports and the maintenance
of books and records. It requires
Financial/Operations Principal to have
successfully completed the Financial
and Operations Principal Examination
(Series 27 Exam). The rule provides that
each Financial/Operations Principal
designated by a trading member shall be
registered in that capacity with the
Exchange as prescribed by the
Exchange, and that a Financial/
Operations Principal of a member may
be a full-time employee, a part-time
employee or independent contractor of
the member.
The Exchange is proposing to delete
Rule 313(b) and to adopt in its place
Rule 1220(a)(4). Under the new rule,
every member of the Exchange that is
operating pursuant to the provisions of
SEC Rule 15c3–1(a)(1)(ii), (a)(2)(i) or
(a)(8), shall designate at least one
Financial and Operations Principal who
shall be responsible for performing the
duties described in subparagraph (B) of
57 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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that rule. In addition, each person
associated with a member who performs
such duties shall be required to register
as a Financial and Operations Principal
with the Exchange.
Subparagraph (B) defines the term
Financial and Operations Principal as a
person associated with a member whose
duties include (i) final approval and
responsibility for the accuracy of
financial reports submitted to any duly
established securities industry
regulatory body, (ii) final preparation of
such reports, (iii) supervision of
individuals who assist in the
preparation of such reports, (iv)
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, (v) supervision and/
or performance of the member’s
responsibilities under all financial
responsibility rules promulgated
pursuant to the provisions of the Act,
(vi) overall supervision of and
responsibility for the individuals who
are involved in the administration and
maintenance of the member’s back
office operations and (vii) any other
matter involving the financial and
operational management of the member.
Subparagraph (C) would require all
individuals registering as a Financial
and Operations Principal to pass the
Financial and Operations Principal
qualification examination before such
registration may become effective.
Finally, subparagraph (D) would
prohibit a person registered solely as a
Financial and Operations Principal from
functioning in a principal capacity with
responsibility over any area of business
activity not described in subparagraph
(2) of the rule.58
5. Investment Banking Principal
(Proposed Rule 1220(a)(5))
The Exchange does not recognize the
Investment Banking Principal
registration category and is therefore
reserving Rule 1220(a)(5), retaining the
caption solely to facilitate comparison
with FINRA’s rules.
58 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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52015
6. Research Principal (Proposed Rule
1220(a)(6))
The Exchange does not recognize the
Research Principal registration category
and is therefore 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 313.08(a)(2) provides
that an individual associated person
who (i) supervises or monitors
proprietary trading, market-making and/
or brokerage activities for brokerdealers; (ii) supervises or trains those
engaged in proprietary trading, marketmaking and/or effecting transactions on
behalf of a broker-dealer, with respect to
those activities; and/or (iii) is an officer,
partner or director of a member is
required to register and qualify as a
Securities Trader Principal (TP) in
WebCRD and to satisfy the prerequisite
registration and qualification
requirements. Further, current Rule
313.08(b) specifies that the Series 24 is
the appropriate qualification
examination, and that General
Securities Sales Supervision
Registration and General Securities
Principal—Sales Supervisor Module
Registration (Series 9/10 and Series 23)
is an alternative acceptable
qualification. Finally, current Rule
313.08(a)(2) provides that Securities
Trader Principals’ (TP) supervisory
authority is limited to supervision of the
securities trading functions of members
and of officers, partners, and directors of
a member.
The Exchange is proposing to delete
Rules 313.08(a)(2) and related portions
of Rule 313.08(b) (a summary chart) and
to adopt in their place Rule 1220(a)(7),
Securities Trader Principal. Proposed
Rule 1220(a)(7) requires that a principal
responsible for supervising the
securities trading activities specified in
proposed Rule 1220(b)(4) 59 register as a
Securities Trader Principal. The
proposed rule requires individuals
registering as Securities Trader
Principals to be registered as Securities
Traders and pass the General Securities
Principal qualification examination.
8. Registered Options Principal
(Proposed Rule 1220(a)(8))
The Exchange is proposing to adopt
Rule 1220(a)(8), Registered Options
Principal, which would require under
its section (a)(8)(A) that each member
that is engaged in transactions in
59 Proposed Rule 1220(b)(4), discussed below,
provides for representative-level registration in the
‘‘Securities Trader’’ category.
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options with the public to have at least
one Registered Options Principal.60
In addition, each principal as defined
in Rule 1220(a)(1) who is responsible for
supervising a member’s options sales
practices with the public would be
required to register with the Exchange
as a Registered Options Principal,
subject to the following exception. If a
principal’s options activities are limited
solely to those activities that may be
supervised by a General Securities Sales
Supervisor, then such person may
register as a General Securities Sales
Supervisor pursuant to paragraph (a)(10)
of the Rule in lieu of registering as a
Registered Options Principal.61
Pursuant to proposed Rule
1220(a)(8)(B), subject to the lapse of
registration provisions in Rule 1210.08,
each person registered with the
Exchange as a Registered Options
Principal on October 1, 2018 and each
person who was registered as a
Registered Options Principal within two
years prior to October 1, 2018 would be
qualified to register as a Registered
Options Principal without passing any
additional qualification examinations.
All other individuals registering as
Registered Options Principals after
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 Current Rule 601(a) provides that no member
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, and
that persons engaged in the supervision of options
sales practices or a person to whom the designated
general partner or executive officer (pursuant to
Rule 609) or another Registered Options Principal
delegates the authority to supervise options sales
practices shall be designated as Options Principals.
Rule 601(e) provides that individuals who are
delegated responsibility pursuant to Rule 609 for
the acceptance of discretionary accounts, for
approving exceptions to a member’s criteria or
standards for uncovered options accounts, and for
approval of communications, shall be designated as
Options Principals and are required to qualify as an
Options Principal by passing the Registered Options
Principal Qualification Examination (Series 4). The
foregoing provisions of Rule 601 are specific to
conducting an options business with the public and
are not proposed to be amended in this proposed
rule change. However, Rule 601(b) and (c) 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. Current Rule
601(d) provides that individuals engaged in the
supervision of options sales practices and
designated as Options Principals are required to
qualify as an Options Principal by passing the
Registered Options Principals Qualification
Examination (Series 4) or the Sales Supervisor
Qualification Examination (Series 9/10), and is
proposed to be deleted in view of proposed Rule
1220(a)(8)(A). Rule 313(d), which merely serves as
a cross-reference to Rules 601 and 602, is
unnecessary and is therefore proposed to be deleted
with the rest of Rule 313.
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October 1, 2018 would, prior to or
concurrent with such registration, be
required to become registered pursuant
to Rule 1220(b)(2) as a General
Securities Representative and pass the
Registered Options Principal
qualification examination.62
9. Government Securities Principal
(Rule 1220(a)(9))
The Exchange does not recognize the
Government Securities Principal
registration category and is therefore
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)
The Exchange is proposing to adopt
new Rule 1220(a)(10), General
Securities Sales Supervisor, as well as
new Rule 1220, Supplementary Material
.04, which explains the purpose of the
General Securities Sales Supervisor
registration category.63 Proposed Rule
1220(a)(10) provides that each principal,
as defined in Rule 1220(a)(1), may
register with the Exchange as a General
Securities Sales Supervisor if his or her
supervisory responsibilities in the
securities business of a member are
limited to the securities sales activities
of the member, including the approval
of customer accounts, training of sales
and sales supervisory personnel and the
maintenance of records of original entry
or ledger accounts of the member
required to be maintained in branch
offices by the Exchange Act’s recordkeeping rules.
A person registered solely as a
General Securities Sales Supervisor
62 Although
the Exchange does not currently list
security futures products, it is also proposing to
adopt Rule 1220, Supplementary Material .02,
which provides that each person who is registered
with the Exchange as a Registered Options
Principal, General Securities Representative,
Options Representative or General Securities Sales
Supervisor shall be eligible to engage in security
futures activities as a principal provided that such
individual completes a Firm Element program as set
forth in proposed Rule 1240 that addresses security
futures products before such person engages in
security futures activities. Unlike FINRA Rule
1220.02, proposed Exchange Rule 1220.02 omits
references to United Kingdom Securities
Representatives and Canada Securities
Representatives, which are registration categories
the Exchange does not recognize. In addition, the
Exchange is also proposing to adopt Rule 1220,
Supplementary Material .03 which requires
notification to the Exchange in the event a
member’s sole Registered Options Principal is
terminated, resigns, becomes incapacitated or is
otherwise unable to perform the duties of a
Registered Options Principal, and imposes certain
restrictions on the member’s options business in
that event.
63 Proposed Rule 1220(a)(10) has no counterpart
in the Exchange’s current rules.
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would not be qualified to perform any
of the following activities: Supervision
of market making commitments,
supervision of the custody of brokerdealer or customer funds or securities
for purposes of SEA Rule 15c3–3, or
supervision of overall compliance with
financial responsibility rules for brokerdealers promulgated pursuant to the
provisions of the Exchange Act.64
Each person seeking to register as a
General Securities Sales Supervisor
would be required, prior to or
concurrent with such registration, to
become registered pursuant to Rule
1220(b)(2) of the rule as a General
Securities Representative and pass the
General Securities Sales Supervisor
qualification examinations.65
11. Investment Company and Variable
Contracts Products Principal and Direct
Participation Programs Principal (Rules
1220(a)(11) and (a)(12))
The Exchange does not recognize the
Investment Company and Variable
Contracts Products Principal and the
Direct Participation Programs Principal
registration categories and is reserving
Rule 1220(a)(11) and (a)(12), retaining
the captions solely to facilitate
comparison with FINRA’s rules.
12. Private Securities Offerings
Principal (Rule 1220(a)(13))
The Exchange does not recognize the
Private Securities Offerings Principal
registration category and is reserving
Rule 1220(a)(13), retaining the caption
solely to facilitate comparison with
FINRA’s rules.
13. Supervisory Analyst (Rule
1220(a)(14))
The Exchange does not recognize the
Supervisory Analyst registration
category and is reserving Rule
1220(a)(14), retaining the caption solely
to facilitate comparison with FINRA’s
rules.
14. Definition of Representative
(Proposed Rule 1220(b)(1))
Exchange rules currently do not
define the term ‘‘representative’’
although Rule 602(b) states that persons
who perform duties for the member
64 Rule 1220(a)(10), however, omits the FINRA
Rule 1220(a)(10) prohibition against supervision of
the origination and structuring of underwritings as
unnecessary, as this kind activity does not fall
within the scope of ‘‘securities trading’’ covered by
the Exchange’s new 1200 Series of rules.
65 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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which are customarily performed by
sales representatives or branch office
managers shall be designated as
representatives of the member.
The Exchange now proposes to delete
Rule 602(b) and to adopt a definition of
‘‘representative’’ in proposed Rule
1220(b)(1). Proposed 1220(b)(1) would
define the term representative as any
person associated with a member,
including assistant officers other than
principals, who is engaged in the
member’s securities business, such as
supervision, solicitation, conduct of
business in securities or the training of
persons associated with a member for
any of these functions.
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15. General Securities Representative
(Proposed Rule 1220(b)(2))
The Exchange proposes to adopt new
Rule 1220(b)(2), General Securities
Representative. Proposed Rule
1220(b)(2)(A) states that each
representative as defined in proposed
Rule 1220(b)(1) is required to register
with the Exchange as a General
Securities Representative, subject to the
exception that if a representative’s
activities include the functions of a
Securities Trader, as specified in Rule
1220(b)(2), then such person shall
appropriately register as a Securities
Trader.66
Further, consistent with the proposed
restructuring of the representative-level
examinations, proposed Rule
1220(b)(2)(B) would require that
individuals registering as General
Securities Representatives pass the SIE
and the General Securities
Representative examination except that
individuals registered as a General
Securities Representatives within two
years prior to October 1, 2018 would be
66 Current Exchange Rule 602(a) and (b) provide
that no member 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 that persons who
perform duties for the member which are
customarily performed by sales representatives or
branch office managers shall be designated as
Representatives of the member. Further, Rule 602(d)
provides that a person accepting orders from nonmember 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).
The foregoing provisions of current Rule 602 are
specific to conducting an options business with the
public and are not proposed to be amended in this
proposed rule change. However, Rule 602(c)
contains provisions regarding the submission of
Form U4 through WebCRD and the necessity of
completing a qualification examination 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 is
therefore proposed to be deleted.
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qualified to register as General
Securities Representatives without
passing any additional qualification
examinations.67
In addition, the Exchange is
proposing to adopt Rule 1220.01 to
provide individuals who are associated
persons of firms and who hold foreign
registrations an alternative, more
flexible, process to obtain an Exchange
representative-level registration. The
Exchange believes that there is
sufficient overlap between the SIE and
these foreign qualification requirements
to permit them to act as exemptions to
the SIE. Under proposed Rule 1220.01,
individuals who are in good standing as
representatives with the Financial
Conduct Authority in the United
Kingdom or with a Canadian stock
exchange or securities regulator would
be exempt from the requirement to pass
the SIE, and thus would be required
only to pass a specialized knowledge
examination to register with the
Exchange as a representative. The
proposed approach would provide
individuals with a United Kingdom or
Canadian qualification more flexibility
to obtain an Exchange representativelevel registration.
16. Operations Professional, Securities
Trader, Investment Banking
Representative, Research Analyst,
Investment Company and Variable
Contracts Products Representative,
Direct Participation Programs
Representative and Private Securities
Offerings Representative (Rules
1220(b)(3), 1220(b)(4), 1220(b)(5),
1220(b)(6), 1220(b)(7), 1220(b)(8),
1220(b)(9) and 1220.05)
Operations Professional, Investment
Banking Representative, Research
Analyst, Investment Company and
Variable Products Representative, Direct
Participation Programs Representative
and Private Securities Offerings
Representative. The Exchange does not
recognize these registration categories
for its associated persons. The Exchange
is therefore reserving Rules 1220(b)(3)—
Operations Professional, and related
Rule 1220.05, Scope of Operations
Professional Requirement; 1220(b)(5)—
Investment Banking Representative;
1220(b)(6)—Research Analyst;
1220(b)(7)—Investment Company and
Variable Products Representative;
1220(b)(8)—Direct Participation
Programs Representative; and
1220(b)(9)—Private Securities Offerings
Representative, retaining the captions
67 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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52017
for each of them solely to facilitate
comparison with FINRA’s rules.
Securities Trader—Proposed Rule
1220(b)(4). Pursuant to current
Exchange Rule 313, Supplementary
Material .08, an individual associated
person who is engaged in proprietary
trading, market-making and/or effecting
transactions on behalf of a broker-dealer
is required to register and qualify as a
Securities Trader (TD).
The Exchange now proposes to delete
that section of Exchange Rule 313,
Supplementary Material .08, and to
replace it with proposed Rule
1220(b)(4).68 Rule 1220(b)(4) would
require each representative as defined in
Rule 1220(b)(1) of the Rule to register
with the Exchange as a Securities Trader
if, with respect to transactions in equity,
preferred or convertible debt securities,
or options 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. The revised
definition of Securities Trader is
consistent with the Securities Trader
definition in the Nasdaq rules.69 As a
result of the revised rule, additional
types of activity on ISE would fall
within the Securities Trader registration
category, including engaging in
customer business. Rule 1220(b)(4)
would require individuals registering as
Securities Traders to pass the SIE as
well as the Securities Trader
qualification exam.
Additionally, proposed Rule
1220(b)(4)(A) would require each person
associated with a member who is: (i)
Primarily responsible for the design,
development or significant modification
of an algorithmic trading strategy
relating to equity, preferred or
convertible debt securities or options; or
(ii) responsible for the day-to-day
supervision or direction of such
activities to register with the Exchange
as a Securities Trader.70
68 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.
69 See current Nasdaq Rule 1032(f), Securities
Trader.
70 As noted above, this new registration
requirement was recently added to the FINRA
rulebook. The Exchange has determined to add a
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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 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
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.71
The associated persons covered by the
expanded registration requirement
would be required to pass the requisite
qualification examination and be subject
to the same continuing education
requirements that are applicable to
individual Securities Traders. The
Exchange believes that potentially
problematic conduct stemming from
algorithmic trading strategies—such as
failure to check for order accuracy,
inappropriate levels of messaging traffic,
and inadequate risk management
controls—could be reduced or
prevented, in part, through improved
education regarding securities
regulations for the specified individuals
involved in the algorithm design and
development process.
The proposal is intended to ensure
the registration of one or more
associated persons that possesses
knowledge of, and responsibility for,
both the design of the intended trading
strategy and the technological
implementation of the strategy,
sufficient to evaluate whether the
resulting product is designed to achieve
regulatory compliance in addition to
business objectives. For example, a lead
developer who liaises with a head trader
regarding the head trader’s desired
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).
71 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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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 offthe-shelf and does not significantly
modify the algorithm, the associated
person responsible for monitoring or
reviewing the performance of the
algorithm would be required to be
registered.
Pursuant to proposed Rule
1220(b)(4)(B) each person registered as a
Securities Trader on October 1, 2018
and each person who was registered as
a Securities Trader within two years
prior to October 1, 2018 would be
qualified to register as a Securities
Trader without passing any additional
qualification examinations. All other
individuals registering as Securities
Traders after October 1, 2018 would be
required, prior to or concurrent with
such registration, to pass the SIE and the
Securities Trader qualification
examination.
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17. Eliminated Registration Categories
(Proposed Rule 1220.06)
Proposed Rule 1220.06 has no
practical relevance to ISE, but is
included because all the Nasdaq
Affiliated Exchanges, including Nasdaq,
are also proposing to adopt the new
1200 Series, on a uniform basis.
Proposed Rule 1220.06 will be relevant
to Nasdaq and BX which, unlike ISE, are
proposing to eliminate certain existing
registration categories that are not
currently recognized by ISE.72
Proposed Rule 1220.06 provides that,
subject to the lapse of registration
provisions in proposed Rule 1210.08,
individuals who are registered with the
Exchange in any capacity recognized by
the Exchange immediately prior to
October 1, 2018, and each person who
was registered with the Exchange in
such categories within two years prior
to October 1, 2018, shall be eligible to
maintain such registrations with the
Exchange. However, if individuals
registered in such categories terminate
their registration with the Exchange and
the registration remains terminated for
two or more years, they would not be
able to re-register in that category. In
addition, proposed Rule 1220.06 would
include the current restrictions to which
Order Processing Assistant
Representatives are subject under
Nasdaq rules.73 As stated above, Rule
1220.06 would have no application to
the Exchange.
18. Grandfathering Provisions
In addition to the grandfathering
provisions in proposed Rule 1220(a)(2)
(relating to General Securities
Principals), and in 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
72 See
SR–Nasdaq–2018–078 and SR–BX–2018–
047.
73 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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corresponding registration categories
without having to take any additional
examinations.
N. Associated Persons Exempt From
Registration (Proposed Rules 1230 and
1230.01)
Existing Rule 313(a)(2) currently
provides that the following persons
associated with a member are not
required to register:
(A) Individual associated persons
whose functions are solely and
exclusively clerical or ministerial;
(B) individual associated persons who
are not actively engaged in the securities
business;
(C) individual associated persons
whose functions are related solely and
exclusively to the Member’s need for
nominal corporate officers or for capital
participation;
(D) individual associated persons
whose functions are related solely and
exclusively to:
(i) Transactions in commodities;
(ii) transactions in security futures;
and/or
(iii) effecting transactions on the floor
of another national securities exchange
and who are registered as floor members
with such exchange.
Rule 313(a)(2) 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 313(a)(2) as Rule 1230 subject to
certain changes. As noted above, Rule
313(a)(2)(B) exempts from registration
those associated persons who are not
actively engaged in the securities
business. Rule 313(a)(2)(C) 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.74 The
Exchange believes that the
determination of whether an associated
person is required to register must be
based on an analysis of the person’s
activities and functions in the context of
the various registration categories. The
Exchange does not believe that
categorical exemptions for associated
persons who are not ‘‘actively engaged’’
in a member’s securities business,
associated persons whose functions are
related only to a member’s need for
nominal corporate officers or associated
74 These exemptions generally apply to associated
persons who are corporate officers of a member in
name only to meet specific corporate legal
obligations or who only provide capital for a
member, but have no other role in a member’s
business.
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persons whose functions are related
only to a member’s need for capital
participation is consistent with this
analytical framework.75 The Exchange
therefore is proposing to delete these
exemptions. Rule 313(a)(2) 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.76 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.77
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.
75 The Exchanges also proposes to delete Rule
313.06 which specifies circumstances in which the
Exchange considers an associated person of a
member to be engaged in the securities business of
a member. The Exchange believes these
determinations may be made on case by case basis,
depending upon facts and circumstances.
76 Proposed Rule 1230 differs from FINRA Rule
1230 in that it contains a number of additional
exemptions, based upon current Nasdaq Rule
1060(a), which are not included in FINRA Rule
1230.
77 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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O. Changes to Continuing Education
Requirements (Proposed Rule 1240)
As described above, existing Rule 604,
Continuing Education for Registered
Persons, includes a Regulatory Element
and a Firm Element. The Regulatory
Element applies to registered persons
and consists of periodic computer-based
training on regulatory, compliance,
ethical, supervisory subjects and sales
practice standards. The Firm Element
consists of at least annual, memberdeveloped and administered training
programs designed to keep covered
registered persons current regarding
securities products, services and
strategies offered by the member. The
CE requirements set forth in Rule 604
have been reorganized and renumbered,
and are now proposed to be adopted
with amendments as new Rule 1240.78
1. Regulatory Element
The Exchange is proposing to replace
the term ‘‘registered person’’ 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
78 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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activities and compensation.
Specifically, proposed Rule 1240(a)(2)
provides that any person whose
registration has been deemed inactive
under the rule may not accept or solicit
business or receive any compensation
for the purchase or sale of securities.
However, like the FINRA rule, the
proposed rule provides that such person
may receive trail or residual
commissions resulting from transactions
completed before the inactive status,
unless the member with which the
person is associated has a policy
prohibiting such trail or residual
commissions.
2. Firm Element
The Exchange believes that training in
ethics and professional responsibility
should apply to all covered registered
persons. Therefore, proposed Rule
1240(b)(2)(B), which provides that the
Firm Element training programs must
cover applicable regulatory
requirements, would also require that a
firm’s training program cover training in
ethics and professional responsibility.
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P. Electronic Filing Rules
Existing Rule 313, Supplementary
Material .01–.03 requires each
individual required to register to
electronically file a Uniform
Application for Securities Industry
Registration (‘‘Form U4’’) through the
Central Registration Depository system
(‘‘Web CRD’’) operated by the Financial
Industry Regulatory Authority,
Incorporated (‘‘FINRA’’) and to
electronically submit to Web CRD any
required amendments to Form U4.
Similarly, any member that discharges
or terminates the employment or
retention of an individual required to
register must comply with certain
termination filing requirements which
include the filing of a Form U5. Form
U4 and U5 electronic filing
requirements applicable to options
principals and representatives, as well a
Form U5 requirement applicable to
members upon termination of
employment of any of their registered
persons, are found in Rules 601,
Registration of Options Principals, 602,
Registration of Representatives, and 603,
Termination of Registered Persons.
The Exchange is proposing to delete
existing Rule 313, Supplementary
Material .01–.03 and the electronic
filing requirements of rules 601, 602 and
603, and to replace them with new Rule
1250, Electronic Filing Requirements for
Uniform Forms which will consolidate
Form U4 and U5 electronic filing
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requirements in a single location.79 The
new rule provides that all forms
required to be filed under the
Exchange’s registration rules including
the Rule 1200 series shall be filed
through an electronic process or such
other process as the Exchange may
prescribe to the Central Registration
Depository. It also would impose certain
new requirements.
Under Rule 1250(b) members would
be required to designate registered
principal(s) or corporate officer(s) who
are responsible for supervising a firm’s
electronic filings. The registered
principal(s) or corporate officer(s) who
has or have the responsibility to review
and approve the forms filed pursuant to
the rule would be required to
acknowledge, electronically, that he is
filing this information on behalf of the
member and the member’s associated
persons. Under Rule 1250,
Supplementary Material .01, the
registered principal(s) or corporate
officer(s) could delegate filing
responsibilities to an associated person
(who need not be registered) but could
not delegate any of the supervision,
review, and approval responsibilities
mandated in Rule 1250(b). The
registered principal(s) or corporate
officer(s) would be required to take
reasonable and appropriate action to
ensure that all delegated electronic
filing functions were properly executed
and supervised.
Under Rule 1250(c)(1), initial and
transfer electronic Form U4 filings and
any amendments to the disclosure
information on Form U4 must be based
on a manually signed Form U4 provided
to the member or applicant for
membership by the person on whose
behalf the Form U4 is being filed. As
part of the member’s recordkeeping
requirements, it would be required to
retain the person’s manually signed
Form U4 or amendments to the
disclosure information on Form U4 in
accordance with Rule 17a–4(e)(1) under
the Act and make them available
promptly upon regulatory request. An
applicant for membership must also
retain every manually signed Form U4
it receives during the application
process and make them available
promptly upon regulatory request. Rule
1250(c)(2) and Supplementary Material
.03 and 04 provide for the electronic
filing of Form U4 amendments without
the individual’s manual signature,
subject to certain safeguards and
procedures.
Rule 1250(d) provides that upon filing
an electronic Form U4 on behalf of a
79 Proposed
Rule 1250 is based upon current
Nasdaq Rule 1140.
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person applying for registration, a
member must promptly submit
fingerprint information for that person
and that the Exchange may make a
registration effective pending receipt of
the fingerprint information. It further
provides that if a member fails to submit
the fingerprint information within 30
days after filing of an electronic Form
U4, the person’s registration will be
deemed inactive, requiring the person to
immediately cease all activities
requiring registration or performing any
duties and functioning in any capacity
requiring registration. Under the rule
the Exchange must administratively
terminate a registration that is inactive
for a period of two years. A person
whose registration is administratively
terminated could reactivate the
registration only by reapplying for
registration and meeting the
qualification requirements of the
applicable provisions of proposed
Exchange Rule 1220. Upon application
and a showing of good cause, the
Exchange could extend the 30-day
period.
Rule 1250(e) would require initial
filings and amendments of Form U5 to
be submitted electronically. As part of
the member’s recordkeeping
requirements, it would be required to
retain such records for a period of not
less than three years, the first two years
in an easily accessible place, in
accordance with Rule 17a–4 under the
Act, and to make such records available
promptly upon regulatory request.
Finally, under proposed Rule 1250,
Supplementary Material .02, a member
could enter into an agreement with a
third party pursuant to which the third
party agrees to file the required forms
electronically on behalf of the member
and the member’s associated persons.
Notwithstanding the existence of such
an agreement, the member would
remain responsible for complying with
the requirements of the Rule.
Q. Other Rules
As noted above, the Exchange is
proposing minor conforming
amendments to Rule 208, Regulatory
Fees or Charges, as well as to Chapter
90, Code of Procedure. In both cases, the
amendments delete citations to rules
proposed to be deleted or cite the
relevant portions of the new 1200
Series. Chapter 90 would delete
references to Exchange Rule 313,
proposed to be deleted herein, and to
BX Rule 1070, proposed to be deleted in
SR–BX–2018–047.80
80 See Securities Exchange Act Release No. 83703
(July 25, 2018), 83 FR 36992 (July 31, 2018) (SR–
ISE–2018–59), adding Chapter 90. Chapter 90
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2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,81 in general, and furthers the
objectives of Section 6(b)(5) of the Act,82
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
incorporates into the ISE rules by reference Series
9000 of the BX rules. Chapter 90 states that
references in the BX Rule 9000 Series to ‘‘Rule
1070’’ shall be read to refer to the Supplementary
Material to ISE Rule 306. As noted above, both the
BX and the ISE rules are proposed to be deleted.
81 15 U.S.C. 78f(b).
82 15 U.S.C. 78f(b)(5).
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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 the
Exchange’s registration and
qualification rules to align them with
registration and qualification rules of
the Nasdaq Affiliated Exchanges, in
order to prevent unnecessary regulatory
burdens and to promote efficient
administration of the rules. The change
also makes minor updates and
corrections to the Exchange’s rules
which improve readability.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change is designed to
ensure that all associated persons of
members engaged in a securities
business are, and will continue to be,
properly trained and qualified to
perform their functions, will be
supervised, and can be identified by
regulators. The proposed new 1200
Series of rules, which are similar in
many respects to the registration-related
requirements adopted by FINRA
effective October 1, 2018, should
enhance the ability of member firms to
comply with the Exchange’s rules as
well as with the Federal securities laws.
Additionally, as described above, the
Exchange intends the amendments
described herein to eliminate
inconsistent registration-related
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
52021
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 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 prior to 30 days from the date
on which it was filed, or such shorter
time as the Commission may designate,
if consistent with the protection of
E:\FR\FM\15OCN1.SGM
15OCN1
52022
Federal Register / Vol. 83, No. 199 / Monday, October 15, 2018 / Notices
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 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) 83 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.84 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, 2018.85
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. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 86 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2018–82 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–ISE–2018–82. 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–ISE–2018–82 and should be
submitted on or before November 5,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.87
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–22294 Filed 10–12–18; 8:45 am]
Electronic Comments
BILLING CODE 8011–01–P
khammond on DSK30JT082PROD with NOTICES
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
83 17
SECURITIES AND EXCHANGE
COMMISSION
CFR 240.19b–4(f)(6)(iii).
supra note 5.
85 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).
86 15 U.S.C. 78s(b)(2)(B).
84 See
VerDate Sep<11>2014
21:34 Oct 12, 2018
Jkt 247001
Submission for OMB Review;
Comment Request
Upon Written Request Copies Available
From: Securities and Exchange
87 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00100
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Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Extension:
Form TH SEC File No. 270–377, OMB
Control No. 3235–0425
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget this
request for extension of the previously
approved collection of information
discussed below.
Form TH (17 CFR 239.65, 249.447,
269.10 and 274.404) under the
Securities Act of 1933 (15 U.S.C. 77a et
seq.), the Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.), the Trust
Indenture Act of 1939 (15 U.S.C. 77aaa
et seq.) and the Investment Company
Act of 1940 (15 U.S.C. 80a–1 et seq.) is
used by registrants to notify the
Commission that an electronic filer is
relying on the temporary hardship
exemption for the filing of a document
in paper form that would otherwise be
required to be filed electronically as
required by Rule 201(a) of Regulation S–
T. (17 CFR. 232.201(a)). Form TH is a
public document and is filed on
occasion. Form TH must be filed every
time an electronic filer experiences
unanticipated technical difficulties
preventing the timely preparation and
submission of a required electronic
filing. Approximately 5 registrants file
Form TH and it takes an estimated 0.33
hours per response for a total annual
burden of 2 hours (0.33 hours per
response × 5 responses).
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
The public may view the background
documentation for this information
collection at the following website,
www.reginfo.gov. Comments should be
directed to: (i) Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10102, New Executive
Office Building, Washington, DC 20503,
or by sending an email to:
Lindsay.M.Abate@omb.eop.gov; and (ii)
Charles Riddle, Acting Director/Chief
Information Officer, Securities and
Exchange Commission, c/o Candace
Kenner, 100 F Street NE, Washington,
DC 20549 or send an email to: PRA_
Mailbox@sec.gov. Comments must be
submitted to OMB within 30 days of
this notice.
E:\FR\FM\15OCN1.SGM
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]]>Agencies
[Federal Register Volume 83, Number 199 (Monday, October 15, 2018)]
[Notices]
[Pages 52006-52022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22294]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84384; File No. SR-ISE-2018-82]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend,
Reorganize and Enhance Its Membership, Registration and Qualification
Rules and To Make Conforming Changes to Certain Other Rules
October 9, 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 ISE, LLC (``ISE'' 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://ise.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 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.\6\
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\3\ See, e.g., ISE Rule 313, Registration Requirements, Section
(a)(1).
\4\ See, e.g., ISE Rule 313, Registration Requirements, Section
(a)(2).
\5\ See ISE Rule 604, Continuing Education for Registered
Persons.
\6\ The ISE rules governing these matters were extensively
updated and amended in Securities Exchange Act Release No. 63843
(February 4, 2011), 76 FR 7884 (SR-ISE-2010-115), which adopted Rule
313.
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Recently, the Commission approved a Financial Industry Regulatory
Authority (``FINRA'') proposed rule change consolidating and adopting
NASD and Incorporated NYSE rules relating to qualification and
registration requirements into the Consolidated FINRA Rulebook,\7\
restructuring the FINRA representative-level qualification
examinations, creating a general knowledge examination and specialized
knowledge examinations, allowing permissive registration, establishing
an 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'').\8\ The FINRA Rule
[[Page 52007]]
Changes will become effective on October 1, 2018.
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\7\ The current FINRA rulebook consists of: (1) FINRA rules; (2)
NASD rules; and (3) rules incorporated from the New York Stock
Exchange (``NYSE'') (the ``Incorporated NYSE rules''). While the
NASD rules generally apply to all FINRA members, the Incorporated
NYSE rules apply only to those members of FINRA that are also
members of the NYSE.
\8\ See Securities Exchange Act Release No. 81098 (July 7,
2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-
FINRA-2017-007). See also FINRA Regulatory Notice 17-30 (SEC
Approves Consolidated FINRA Registration Rules, Restructured
Representative-Level Qualification Examinations and Changes to
Continuing Education Requirements) (October 2017). FINRA articulated
its belief that the proposed rule change would streamline, and bring
consistency and uniformity to, its registration rules, which would,
in turn, assist FINRA members and their associated persons in
complying with the rules and improve regulatory efficiency. FINRA
also determined to enhance the overall efficiency of its
representative-level examinations program by eliminating redundancy
of subject matter content across examinations, retiring several
outdated representative-level registrations, and introducing a
general knowledge examination that could be taken by all potential
representative-level registrants and the general public. FINRA
amended certain aspects of its continuing education rule, including
by codifying existing guidance regarding the effect of failing to
complete the Regulatory Element on a registered person's activities
and compensation.
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The Exchange now proposes to amend, reorganize and enhance its own
membership, registration and qualification requirements rules in part
in response to the FINRA Rule Changes, and also in order to conform its
rules 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 ISE. Last, the Exchange proposes
to enhance its registration rules by adding a new registration
requirement for developers of algorithmic trading systems similar to a
requirement adopted by FINRA pursuant to a 2016 FINRA proposed rule
change.\9\
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\9\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007). In its proposed rule change FINRA addressed the
increasing significance of algorithmic trading strategies by
amending its rules to require registration, as Securities Traders,
of associated persons primarily responsible for the design,
development or significant modification of algorithmic trading
strategies, or who are responsible for the day-to-day supervision or
direction of such activities.
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As part of this proposed rule change, current Rules 313,
Registration Requirements; 601, Registration of Options Principals,
Sections (b)-(d); 602, Registration of Representatives, Section (c);
603, Termination of Registered Persons; and 604, Continuing Education
for Registered Persons, are proposed to be deleted.\10\
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\10\ Conforming changes are proposed to Rules 100, Definitions,
and 208, Regulatory Fees or Charges, as well as to Chapter 90, Code
of Procedure.
---------------------------------------------------------------------------
In place of the deleted rules and rule sections, the Exchange
proposes to adopt a new 1200 Series of rules captioned Registration,
Qualification and Continuing Education, generally conforming to and
based upon FINRA's new 1200 Series of rules resulting from the FINRA
Rule Changes but with a number of Exchange-specific variations.\11\ The
proposed new 1200 Series is also being proposed for adoption by ISE'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 an additional
associated person registration category, 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 BX, Inc. (``BX''), Nasdaq PHLX LLC
(``PHLX''), Nasdaq GEMX, LLC (``GEMX''), and Nasdaq MRX, LLC
(``MRX'') (together with ISE, the ``Nasdaq Affiliated Exchanges'')
are also submitting proposed rule changes to adopt the 1200 Series
of rules. See SR-NASDAQ-2018-078, SR-BX-2018-047, SR-Phlx-2018-61,
SR-GEMX-2018-33, and SR-MRX-2018-31. Additionally, the Exchange
recently added a shell structure to its rulebook with the purpose of
improving efficiency and readability and to align its rules closer
to those of the other Nasdaq Affiliated Exchanges. See Securities
Exchange Act Release No. 82173 (November 29, 2017), 82 FR 57505
(December 5, 2017) (SR-ISE-2017-102). Ultimately, the Exchange
intends to submit another proposed rule change to transfer the 1200
Series of rules into the new shell structure.
\13\ 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.
---------------------------------------------------------------------------
The proposed rule change would become operative October 1, 2018,
with the exception of the new registration requirement for developers
of algorithmic trading strategies, which would become operative April
1, 2019.
Proposed Rules
A. Registration Requirements (Proposed Rule 1210)
Exchange Rule 313(a) currently requires individual associated
persons engaged or to be engaged in the securities business of a member
to be registered with the Exchange in the category of registration
appropriate to the function to be performed as prescribed by the
Exchange. The Exchange is proposing to delete this language and to
adopt in its place Exchange Rule 1210.\14\
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\14\ In general the 1200 Series would conform the Exchange's
rules to FINRA's rules as revised in the FINRA Rule Changes, with
modifications tailored to the business of the Exchange and of the
other Nasdaq Affiliated Exchanges. However, the Exchange also
proposes to adopt Rule 1210, Supplementary Material .12, which is
not based upon a FINRA rule but instead on current Nasdaq Rule
1031(c), (d) and (e), which Nasdaq is proposing in SR-Nasdaq-2018-
078 to relocate to Rule 1210, Supplementary Material .12 in the
Nasdaq rulebook. These provisions govern the process for applying
for registration and amending the registration application, as well
as for notifying the Exchange of termination of the member's
association with a person registered with the Exchange. The Exchange
proposes to adopt Rule 1210, Supplemental Material .12, in order to
have uniform processes and requirements in this area across the
Nasdaq Affiliated Exchanges.
---------------------------------------------------------------------------
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.\15\ 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.
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\15\ Because the Exchange's proposed registration rules focus
solely on securities trading activity, the proposed rules differ
from the FINRA Rule Changes by omitting references to investment
banking in proposed Rules 1210, 1210.03, 1210.10, 1220(a)(1),
1220(a)(2)(B), 1220(b), and 1240(b)(1), and also by omitting as
unnecessary from Rule 1220(a)(10) a limitation on the qualification
of a General Securities Sales Supervisor to supervise the
origination and structuring of an underwriting.
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B. Minimum Number of Registered Principals (Proposed Rule 1210.01)
Existing Rule 313.07 requires members to register with the Exchange
each individual acting in any of the following capacities: (i) Officer;
(ii) partner; (iii) director; (iv) supervisor of proprietary trading,
market-making or brokerage activities; and/or (v) supervisor of those
engaged in proprietary trading, market-making or brokerage activities
with respect to those activities. Members must register with the
Exchange at least two individuals acting in one or more of these
capacities (the ``two-principal requirement''). The Exchange may waive
this requirement if a member demonstrates conclusively that only one
individual acting in one or more of these capacities should be required
to register. Further, a member that conducts proprietary trading only
and has 25 or fewer registered persons is
[[Page 52008]]
only required to have one officer or partner who is registered in this
capacity.\16\
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\16\ Rule 313, Supplementary Material .07, describes when a
member is considered to be conducting only proprietary trading of
the member. Because the Exchange is proposing to delete Rule 313 in
its entirety, Rule 313, Supplementary Material .07 would be reworded
and relocated to Rule 100(a), Definitions, as a provision defining
the term ``proprietary trading'' for purposes of Rule 1210.
---------------------------------------------------------------------------
The Exchange is proposing to delete these requirements and in their
place to adopt new Rule 1210.01. The new rule would provide firms that
limit the scope of their business with flexibility in satisfying the
two-principal requirement. In particular, proposed Rule 1210.01
requires that a member have a minimum of two General Securities
Principals, provided that a member that is limited in the scope of its
activities may instead have two officers or partners who are registered
in a principal category that corresponds to the scope of the member's
activities.\17\ For instance, if a firm's business is limited to
securities trading, the firm may have two Securities Trader Principals,
instead of two General Securities Principals. Additionally, Exchange
Rule 1210.01 provides that any member with only one associated person
is excluded from the two principal requirement. Proposed Rule 1210.01
would provide that existing members as well as new applicants may
request a waiver of the two-principal requirement, consistent with
current Exchange Rule 313.07. Finally, the Exchange is proposing to
include a provision currently found in current Rule 313 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.\18\
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\17\ The principal registration categories are described in
greater detail below.
\18\ The Exchange is not proposing provisions comparable to the
new FINRA Rule 1210.01 requirements that all FINRA members are
required to have a Principal Financial Officer and a Principal
Operations Officer, because it believes that its proposed Rule
1220(a)(4), Financial and Operations Principal, which requires
member firms operating pursuant to certain provisions of SEC rules
to designate at least one Financial and Operations Principal, is
sufficient. Further, the Exchange is not adopting the FINRA Rule
1210.01 requirements that (1) a member engaged in investment banking
activities have an Investment Banking Principal, (2) a member
engaged in research activities have a Research Principal, or (3) a
member engaged in options activities with the public have a
Registered Options Principal. The Exchange does not recognize the
Investment Banking Principal or the Research Principal registration
categories, and the Registered Options Principal registration
requirement is set forth in Rule 1210.08 and its inclusion is
therefore unnecessary in Rule 1210.01.
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C. Permissive Registrations (Proposed Rule 1210.02)
Current Rule 313(a)(1) prohibits members from maintaining a
registration with the Exchange for any person (1) who is no longer
active in the member's securities business; (2) who is no longer
functioning in the registered capacity; or (3) where the sole purpose
is to avoid an examination requirement. It further prohibits a member
from making an application for the registration of any person where
there is no intent to employ that person in the member's securities
business. A member may, however, maintain or make application for the
registration of an individual who performs legal, compliance, internal
audit, back-office operations, or similar responsibilities for the
member, or a person who performs administrative support functions for
registered personnel, or a person engaged in the securities business of
a foreign securities affiliate or subsidiary of the member.
The Exchange is proposing to replace this provision with new Rule
1210.02. The Exchange is also proposing to expand the scope of
permissive registrations and to clarify a member's obligations
regarding individuals who are maintaining such registrations.
Specifically, proposed Rule 1210.02 allows any associated person to
obtain and maintain any registration permitted by the member. For
instance, an associated person of a member working solely in a clerical
or ministerial capacity, such as in an administrative capacity, would
be able to obtain and maintain a General Securities Representative
registration with the member. As another example, an associated person
of a member who is registered, and functioning solely, as a General
Securities Representative would be able to obtain and maintain a
General Securities Principal registration with the member. Further,
proposed Rule 1210.02 allows an individual engaged in the securities
business of a foreign securities affiliate or subsidiary of a member to
obtain and maintain any registration permitted by the member.
The Exchange is proposing to permit the registration of such
individuals for several reasons. First, a member may foresee a need to
move a former representative or principal who has not been registered
for two or more years back into a position that would require such
person to be registered. Currently, such persons are required to
requalify (or obtain a waiver of the applicable qualification
examinations) and reapply for registration. Second, the proposed rule
change would allow members to develop a depth of associated persons
with registrations in the event of unanticipated personnel changes.
Third, allowing registration in additional categories encourages
greater regulatory understanding. Finally, the proposed rule change
would eliminate an inconsistency in the current rules, which permit
some associated persons of a member to obtain permissive registrations,
but not others who equally are engaged in the member's business.
Individuals maintaining a permissive registration under the
proposed rule change would be considered registered persons and subject
to all Exchange rules, to the extent relevant to their activities. For
instance, an individual working solely in an administrative capacity
would be able to maintain a General Securities Representative
registration and would be considered a registered person for purposes
of rules relating to borrowing from or lending to customers, but the
rule would have no practical application to his or her conduct because
he or she would not have any customers.
Consistent with the Exchange's supervision rules, members would be
required to have adequate supervisory systems and procedures reasonably
designed to ensure that individuals with permissive registrations do
not act outside the scope of their assigned functions.\19\ With respect
to an individual who solely maintains a permissive registration, such
as an individual working exclusively in an administrative capacity, the
individual's day-to-day supervisor may be a nonregistered person.
Members would be required to assign a registered supervisor to this
person who would be responsible for periodically contacting such
individual's day-to-day supervisor to verify that the individual is not
acting outside the scope of his or her assigned functions. If such
individual is permissively registered as a representative, the
registered supervisor must be registered as a representative or
principal. If the individual is permissively registered as a principal,
the registered supervisor must be registered as a principal.\20\
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\19\ 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.
\20\ 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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[[Page 52009]]
D. Qualification Examinations and Waivers of Examinations (Proposed
Rule 1210.03)
Current Rule 313(a)(1) provides that before a registration can
become effective, the individual associated person shall submit the
appropriate application for registration, pass a qualification
examination appropriate to the category of registration as prescribed
by the Exchange and submit any required registration and examination
fees. The Exchange is proposing to replace this rule language with new
Rule 1210.03, Qualification Examinations and Waivers of Examinations.
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.\21\ 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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\21\ 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.\22\ 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.\23\
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\22\ 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.
\23\ As discussed below, the Exchange is proposing a four-year
expiration period for the SIE.
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In addition, individuals, with the exception of Order Processing
Assistant Representatives, who had been registered as representatives
two or more years, but less than four years, prior to the operative
date of the proposed rule change would also be considered to have
passed the SIE and designated as such in the CRD system. Moreover, if
such individuals re-register with a firm after the operative date of
the proposed rule change and within four years of having been
previously registered, they would only need to pass the specialized
knowledge examination associated with that registration position.
However, if they do not register within four years from the date of
their last registration, their SIE status in the CRD system would be
administratively terminated. Similar to the current process for
registration, firms would continue to use the CRD system to request
registrations for representatives. An individual would be able to
schedule both the SIE and specialized knowledge examinations for the
same day, provided the individual is able to reserve space at one of
FINRA's designated testing centers.
Finally, under current Rule 313.05, the Exchange may, in
exceptional cases and where good cause is shown, waive the applicable
qualification examination and accept other standards as evidence of an
applicant's qualifications for registration. The Exchange is proposing
to replace Rule 313.05 with proposed Rule 1210.03 with changes which
track FINRA Rule 1210.03. The proposed rule provides that the Exchange
will only consider examination waiver requests submitted by a firm for
individuals associated with the firm who are seeking registration in a
representative- or principal-level registration category.
[[Page 52010]]
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)
The Exchange is proposing to adopt new Rule 1210.04, which provides
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 period of 120 calendar days prior to passing an
appropriate principal qualification examination, provided that such
person has at least 18 months of experience functioning as a registered
representative within the five-year period immediately preceding the
designation and has fulfilled all prerequisite registration, fee and
examination requirements prior to designation as principal. These
requirements apply to any principal category, including those
categories that are not subject to a prerequisite representative-level
registration requirement, such as the Financial and Operations
Principal registration category.\24\ Similarly, the rule would permit a
member to designate any person currently registered, or who becomes
registered, with the member as a principal to function in another
principal category for a period of 120 calendar days prior to passing
an appropriate qualification examination as specified under Rule
1220.\25\
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\24\ 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.
\25\ 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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This provision, which has no counterpart in the Exchange's current
rules, is intended to provide flexibility to members in meeting their
principal requirements on a temporary basis.
F. Rules of Conduct for Taking Examinations and Confidentiality of
Examinations (Proposed Rule 1210.05)
Before taking an examination, FINRA currently requires each
candidate to agree to the Rules of Conduct for taking a qualification
examination. Among other things, the examination Rules of Conduct
require each candidate to attest that he or she is in fact the person
who is taking the examination. These Rules of Conduct also require that
each candidate agree that the examination content is the intellectual
property of FINRA and that the content cannot be copied or
redistributed by any means. If FINRA discovers that a candidate has
violated the Rules of Conduct for taking a qualification examination,
the candidate may forfeit the results of the examination and may be
subject to disciplinary action by FINRA. For instance, for cheating on
a qualification examination, FINRA's Sanction Guidelines recommend a
bar.\26\
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\26\ 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 400.\27\ 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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\27\ Exchange Rule 400 prohibits members from engaging in acts
or practices inconsistent with just and equitable principles of
trade. Persons associated with members have the same duties and
obligations as members under Rule 400. FINRA Rule 1210.05 cites
FINRA Rule 2010, which is a comparable rule.
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Proposed Rule 1210.05 also states that the Exchange considers all
of the qualification examinations' content to be highly confidential.
The removal of examination content from an examination center,
reproduction, disclosure, receipt from or passing to any person, or use
for study purposes of any portion of such qualification examination or
any other use that would compromise the effectiveness of the
examinations and the use in any manner and at any time of the questions
or answers to the examinations would be prohibited and would be deemed
to be a violation of Exchange rules requiring observance of high
standards of commercial honor or just and equitable principles of
trade. Finally, proposed Rule 1210.05 would prohibit an applicant from
receiving assistance while taking the examination, and require the
applicant to certify that no assistance was given to or received by him
or her during the examination.\28\
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\28\ The Exchange is not adopting portions of FINRA's Rule
1210.05 which apply to non-associated persons, over whom the
Exchange would in any event have no jurisdiction.
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G. Waiting Periods for Retaking a Failed Examination (Proposed Rule
1210.06)
The Exchange proposes to adopt new Rule 1210.06, which provides
that a person who fails an examination may retake that examination
after 30 calendar days from the date of the person's last attempt to
pass that examination.\29\ 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.\30\
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\29\ Proposed Rule 1210.06 has no counterpart in existing
Exchange rules.
\30\ 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 Exchange Rule 313.04, each individual required
to register under Rule 313 is required to satisfy the continuing
education requirements set forth in Exchange Rule 604, Continuing
Education for Registered Persons, or any other applicable continuing
education requirements as prescribed by the Exchange. Under Rule 604
the CE requirements applicable to registered persons consist of a
Regulatory Element \31\ and a Firm Element.\32\ The Regulatory Element
applies to registered persons and must be completed within prescribed
time frames.\33\ For purposes
[[Page 52011]]
of the Regulatory Element, a ``registered person'' is defined in the
current rule as any person registered or required to be registered with
the Exchange under the Exchange's rules.\34\ 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 a Series 57 registration or 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.\35\
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\31\ See Rule 604(a).
\32\ See Rule 604(c).
\33\ Pursuant to Rule 604(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 604(a) must cease all activities as a registered person
and is prohibited from performing any duties and functioning in any
capacity requiring registration. 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.
\34\ See Rule 604.01.
\35\ See Rule 604(c)(1).
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The Exchange proposes to delete Rule 313.04. The CE requirements
set forth in Rule 313.04 have been reorganized and renumbered, and are
now proposed to be adopted as new Rule 1240. 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 new Rule 1240, discussed below.\36\ 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.
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\36\ Current Rule 313.04 would be deleted.
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I. Lapse of Registration and Expiration of SIE (Proposed Rule 1210.08)
Existing Rule 313(e) states that any person whose registration has
been revoked by the Exchange as a disciplinary sanction or whose most
recent registration has been terminated for two or more years
immediately preceding the date of receipt by the Exchange of a new
application shall be required to pass a qualification examination
appropriate to the category of registration as prescribed by the
Exchange. The two year period is calculated from the termination date
to the date the Exchange receives a new application for registration.
The Exchange is proposing to delete existing Rule 313(e), and to
replace it with Rule 1210.08, Lapse of Registration and Expiration of
SIE.
Proposed Rule 1210.08 contains language comparable to that of
existing Rule 313(e) but also clarifies that, for purposes of the
proposed rule, an application would not be considered to have been
received by the Exchange if that application does not result in a
registration. Proposed Rule 1210.08 also sets forth the expiration
period of the SIE. Based on the content covered on the SIE, the
Exchange is proposing that a passing result on the SIE be valid for
four years. Therefore, under the proposed rule change, an individual
who passes the SIE and is an associated person of a firm at the time
would have up to four years from the date he or she passes the SIE to
pass a representative-level examination to register as a representative
with that firm, or a subsequent firm, without having to retake the SIE.
In addition, an individual who passes the SIE and is not an associated
person at the time would have up to four years from the date he or she
passes the SIE to become an associated person of a firm, pass a
representative-level examination and register as a representative
without having to retake the SIE.
Moreover, an individual holding a representative-level registration
who leaves the industry after the operative date of the proposed rule
change would have up to four years to re-associate with a firm and
register as a representative without having to retake the SIE. However,
the four-year expiration period in the proposed rule change extends
only to the SIE, and not the representative- and principal-level
registrations. The representative- and principal-level registrations
would continue to be subject to a two year expiration period as is the
case today.
J. Waiver of Examinations for Individuals Working for a Financial
Services Industry Affiliate of a Member (Proposed Rule 1210.09)
The Exchange is proposing Rule 1210.09 to provide a new process
whereby individuals who would be working for a financial services
industry affiliate of a member \37\ 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.\38\ 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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\37\ 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.
\38\ 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.\39\ 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
[[Page 52012]]
years from the date of initial designation \40\ 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.\41\
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\39\ 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.
\40\ 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.
\41\ 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 604,
Continuing Education for Registered Persons).
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,\42\ 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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\42\ The Exchange would consider a waiver of the representative-
level qualification examination(s), the principal-level
qualification examination(s) and the SIE, as applicable.
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(1) Prior to the individual's initial designation as an FSA-
eligible person, the individual was registered for a total of five
years within the most recent 10-year period, including for the most
recent year with the member that initially designated the individual as
an FSA-eligible person;
(2) The waiver request is made within seven years of the
individual's initial designation as an FSA-eligible person by a member;
(3) The initial designation and any subsequent designation(s) were
made concurrently with the filing of the individual's related Form U5;
(4) The individual continuously worked for the financial services
affiliate(s) of a member since the last Form U5 filing;
(5) The individual has complied with the Regulatory Element of CE;
and
(6) The individual does not have any pending or adverse regulatory
matters, or terminations, that are reportable on the Form U4, and has
not otherwise been subject to a statutory disqualification while the
individual was designated as an FSA-eligible person with a member.
Following the Form U5 filing, an individual could move between the
financial services affiliates of a member so long as the individual is
continuously working for an affiliate. Further, a member could submit
multiple waiver requests for the individual, provided that the waiver
requests are made during the course of the seven-year period.\43\ 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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\43\ 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)
The Exchange is proposing to adopt new Rule 1210.10, Status of
Persons Serving in the Armed Forces of the United States.\44\ Rule
1210.10(a) would 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 placed, after proper notification to the Exchange, on
inactive status. The registered person would not need to be re-
registered by such member upon his or her return to active employment
with the member.
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\44\ There is no counterpart to proposed Rule 1210.10 in the
Exchange's existing rules.
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The registered person would remain eligible to receive transaction-
related compensation, including continuing commissions, and the
employing member could allow the registered person to enter into an
arrangement with another registered person of the member to take over
and service the person's accounts and to share transaction-related
compensation based upon the business generated by such accounts.
However, because such persons would be inactive, they could not perform
any of the functions and responsibilities performed by a registered
person, nor would they be required to complete either the continuing
education Regulatory Element or Firm Element set forth in proposed Rule
1240 during the pendency of such inactive status.\45\
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\45\ The relief provided in Rule 1210.10(a) would be available
to a registered person during the period that such person remains
registered with the member with which he or she was registered at
the beginning of active duty in the Armed Forces of the United
States, regardless of whether the person returns to active
employment with another member upon completion of his or her active
duty. The relief would apply only to a person registered with a
member and only while the person remains on active military duty.
Further, the member with which such person is registered would be
required to promptly notify the Exchange of such person's return to
active employment with the member.
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Pursuant to proposed Exchange Rule 1210.10(b), a member that is a
sole proprietor who temporarily closes his or her business by reason of
volunteering for or being called into active duty in the Armed Forces
of the United States, shall be placed, after proper notification to the
Exchange, on inactive status while the member remains on active
military duty, would not be required to pay dues or assessments during
the pendency of such inactive status and would not be required to pay
an
[[Page 52013]]
admission fee upon return to active participation in the securities
business. This relief would be available only to a sole proprietor
member and only while the person remains on active military duty, and
the sole proprietor would be required to promptly notify the Exchange
of his or her return to active participation in the securities
business.
If a person who was formerly registered with a member volunteers
for or is called into active duty in the Armed Forces of the United
States at any time within two years after the date the person ceased to
be registered with a member, the Exchange shall defer the lapse of
registration requirements set forth in proposed Rule 1210.08 (i.e.,
toll the two-year expiration period for representative and principal
qualification examinations) and the lapse of the SIE (i.e., toll the
four-year expiration period for the SIE). The Exchange would defer the
lapse of registration requirements and the SIE commencing on the date
the person begins actively serving in the Armed Forces of the United
States, provided that the Exchange is properly notified of the person's
period of active military service within 90 days following his or her
completion of active service or upon his or her re-registration with a
member, whichever occurs first. The deferral will terminate 90 days
following the person's completion of active service in the Armed Forces
of the United States. Accordingly, if such person does not re-register
with a member within 90 days following his or her completion of active
service in the Armed Forces of the United States, the amount of time in
which the person must become re-registered with a member without being
subject to a representative or principal qualification examination or
the SIE shall consist of the standard two-year period for
representative and principal qualification examinations or the standard
four-year period for the SIE, whichever is applicable, as provided in
Rule 1210.08 reduced by the period of time between the person's
termination of registration and beginning of active service in the
Armed Forces of the United States.
Finally, under proposed Rule 1210.10(c), if a person placed on
inactive status while serving in the Armed Forces of the United States
ceases to be registered with a member, the Exchange would defer the
lapse of registration requirements set forth in Rule 1210.08 (i.e.,
toll the two-year expiration period for representative and principal
qualification examinations) and the lapse of the SIE (i.e., toll the
four-year expiration period for the SIE) during the pendency of his or
her active service in the Armed Forces of the United States. The
Exchange would defer the lapse of registration requirements based on
existing information in the CRD system, provided that the Exchange is
properly notified of the person's period of active military service
within two years following his or her completion of active service or
upon his or her re-registration with a member, whichever occurs first.
The deferral would terminate 90 days following the person's completion
of active service in the Armed Forces of the United States.
Accordingly, if such person did not re-register with a member within 90
days following completion of active service, the amount of time in
which the person must become re-registered with a member without being
subject to a representative or principal qualification examination or
the SIE would consist of the standard two-year period for
representative and principal qualification examinations or the standard
four-year period for the SIE, whichever is applicable, as provided in
Rule 1210.08.\46\
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\46\ 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 includes language from existing
Nasdaq IM-1002-2 stating that inactive persons under the rule are
not included within the scope of fees, if any, charged by the
Exchange with respect to registered persons.
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L. Impermissible Registrations (Proposed Rule 1210.11)
Existing Rule 313(a)(1) prohibits a member from maintaining a
representative or principal registration with the Exchange for any
person who is no longer active in the member's securities business, who
is no longer functioning in the registered capacity, or where the sole
purpose is to avoid an examination requirement. The rule also prohibits
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 securities business. These prohibitions do not apply
to the current permissive registration categories identified in Rule
313(a)(1).
In light of proposed Rule 1210.02, Permissive Registrations,
discussed above, the Exchange is proposing to delete these provisions
of Rule 313(a)(1) 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.\47\
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\47\ As discussed above, the Exchange is also proposing Rule
1210, Supplementary Material .12, Application for Registration and
Jurisdiction, which is not included in FINRA Rule 1210. Proposed
Exchange Rule 1210, Supplementary Material .12, is based upon
portions of existing Nasdaq Rule 1031.
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M. Registration Categories (Proposed Rule 1220)
The Exchange is proposing to adopt new and revised registration
category rules and related definitions in proposed Rule 1220,
Registration Categories.\48\
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\48\ For ease of reference, the Exchange proposes to adopt as
Rule 1220, Supplementary Material .07, in chart form, a Summary of
Qualification Requirements for each of the Exchange's permitted
registration categories discussed below.
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1. Definition of Principal (Proposed Rule 1220(a)(1))
The Exchange's registration rules currently do not include a
definition of the term ``principal.'' Rather than employing a defined
term, the Exchange's principal registration requirement directly
identifies the types of persons who would be encompassed within the
term ``principal'' if that term were defined.\49\ The Exchange is now
proposing to adopt a definition of ``principal'' in Rule 1220(a)(1).
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\49\ Pursuant to existing Rule 313.07 each member must register
with the Exchange each individual acting as an officer, partner,
director, supervisor of proprietary trading, market-making or
brokerage activities, and/or supervisor of those engaged in
proprietary trading, market-making or brokerage activities with
respect to those activities. This requirement is consistent with
FINRA's current registration requirement for principals (NASD Rule
1021). See Securities Exchange Act Release No. 63843 (February 4,
2011), 76 FR 7884 (SR-ISE-2010-115), at footnote 18.
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Under proposed Rule 1220(a)(1) a ``principal'' would be defined as
any person associated with a member, including, but not limited to,
sole proprietor, officer, partner, manager of office of supervisory
jurisdiction, director or other person occupying a similar status or
performing similar functions, who is actively engaged in the management
of 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. Such persons would include,
among other persons, a member's chief executive officer and chief
financial officer (or equivalent officers). A ``principal'' would also
include any other person associated with a member who is performing
functions or carrying out responsibilities that are required to be
performed or carried out by a principal
[[Page 52014]]
under Exchange rules. The term ``actively engaged in the management of
the member's securities business'' would include 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))
The Exchange currently does not impose a General Securities
Principal registration obligation. The Exchange is now proposing to
adopt new Rule 1220(a)(2), which establishes an obligation to register
as a General Securities Principal, but with certain exceptions.\50\
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\50\ There is no counterpart to proposed Rule 1220(a)(2) in the
Exchange's existing rules.
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Proposed Rule 1220(a)(2)(A) states that each principal as defined
in proposed Rule 1220(a)(1) is required to register with the Exchange
as a General Securities Principal, except that if a principal's
activities are limited to the functions of a Compliance Official, a
Financial and Operations Principal, a Securities Trader Principal a
Securities Trader Compliance Officer, or a Registered Options
Principal, then the principal shall appropriately register in one or
more of these categories.\51\ Proposed Rule 1220(a)(2)(A) further
provides that if a principal's activities are limited solely to the
functions of a General Securities Sales Supervisor, then the principal
may appropriately register in that category in lieu of registering as a
General Securities Principal, provided that if the principal is engaged
in options sales activities he or she would be required to register as
a General Securities Sales Supervisor or as a Registered Options
Principal.\52\
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\51\ The Exchange is proposing to recognize the General
Securities Principal and the Compliance Official registration
categories for the first time in this proposed rule change.
\52\ The Exchange's proposed Rule 1220(a)(2)(A) deviates
somewhat from the counterpart FINRA rule in that it does not offer
various limited registration categories provided for in FINRA's new
Rule 1220(a)(2)(A). It therefore proposes to reserve Rules
1220(a)(2)(A)(ii) and (iv).
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Proposed Rule 1220(a)(2)(B) requires that an individual registering
as a General Securities Principal satisfy the General Securities
Representative prerequisite registration and pass the General
Securities Principal qualification examination.
Proposed Rule 1220(a)(2)(B) provides 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.\53\ 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). 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.\54\
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\53\ 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.
\54\ 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))
Existing Rule 313(c) requires each member to designate a Chief
Compliance Officer on Schedule A of Form BD, and requires individuals
designated as a Chief Compliance Officer to register with the Exchange
and pass the appropriate heightened qualification examination(s) as
prescribed by the Exchange.\55\ Current Rule 313.08(a)(3) provides that
an individual associated person who is a Chief Compliance Officer (or
performs similar functions) for a member that engages in proprietary
trading, market-making or effecting transactions on behalf of a broker-
dealer is required to register and qualify as a Securities Trader
Compliance Officer (CT) in WebCRD and to satisfy the prerequisite
registration and qualification requirements.\56\
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\55\ Rule 313(c) further provides that a person who has been
designated as a Chief Compliance Officer on Schedule A of Form BD
for at least two years immediately prior to January 1, 2002, and who
has not been subject within the last ten years to any statutory
disqualification as defined in Section 3(a)(39) of the Act; a
suspension; or the imposition of a fine of $5,000 or more for a
violation of any provision of any securities law or regulation, or
any agreement with, rule or standard of conduct of any securities
governmental agency, securities self-regulatory organization, or as
imposed by any such regulatory or self-regulatory organization in
connection with a disciplinary proceeding shall be required to
register in the category of registration appropriate to the function
to be performed as prescribed by the Exchange, but shall be exempt
from the requirement to pass the heightened qualification
examination as prescribed by the Exchange.
\56\ Rule 313.08(b) establishes the Series 14 as the appropriate
qualification examination for a Securities Trader Compliance
Officer, but also permits General Securities Principal Registration
(GP) or Securities Trader Principal (TP) (Series 24) as alternative
acceptable qualifications.
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The Exchange is proposing to delete Rules 313(c) and 313.08(a)(3)
and to adopt Rule 1220(a)(3), Compliance Official, in their place.
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 would be required, prior to or
concurrent with such registration, to pass the Compliance Official
qualification examination. An individual designated as a Chief
Compliance Officer on Schedule A of Form BD of a member that is engaged
in limited securities business could be registered in a principal
category under Rule 1220(a) that corresponds to the limited scope of
the member's business.
Additionally, Rule 1220(a)(3) would provide that an individual
designated as a Chief Compliance Officer on Schedule A of Form BD may
register and qualify as a Securities Trader Compliance Officer if, with
respect to transactions in equity, preferred or convertible debt
securities, or options such person is engaged in proprietary trading,
the
[[Page 52015]]
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 Commission pursuant to the
Investment Company Act and that controls, is controlled by, or is under
common control with a member. All individuals registering as Securities
Trader Compliance Officers would be required to first become registered
pursuant to paragraph (b)(4) as a Securities Trader, and to pass the
Compliance Official qualification exam.\57\
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\57\ Proposed Rule 1220(a)(3) differs from FINRA Rule
1220(a)(3), Compliance Officer. The Exchange does not recognize the
Compliance Officer registration category. Similarly, FINRA does not
recognize the Compliance Official or the Securities Trader
Compliance Officer registration categories which the Exchange
proposes to recognize. However, FINRA Rule 1220(a)(3), like proposed
Rule 1220(a)(3), offers an exception pursuant to which a Chief
Compliance Officer designated on Schedule A of Form BD may register
in a principal category that corresponds to the limited scope of the
member's business.
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4. Financial and Operations Principal (Proposed Rule 1220(a)(4))
Existing Rule 313(b) provides that each member subject to Exchange
Act Rule 15c3-1 must designate a Financial/Operations Principal. It
specifies that the duties of a Financial/Operations Principal shall
include taking appropriate actions to assure that the member complies
with applicable financial and operational requirements under the Rules
and the Exchange Act, including but not limited to those requirements
relating to the submission of financial reports and the maintenance of
books and records. It requires Financial/Operations Principal to have
successfully completed the Financial and Operations Principal
Examination (Series 27 Exam). The rule provides that each Financial/
Operations Principal designated by a trading member shall be registered
in that capacity with the Exchange as prescribed by the Exchange, and
that a Financial/Operations Principal of a member may be a full-time
employee, a part-time employee or independent contractor of the member.
The Exchange is proposing to delete Rule 313(b) and to adopt in its
place Rule 1220(a)(4). Under the new rule, every member of the Exchange
that is operating pursuant to the provisions of SEC Rule 15c3-
1(a)(1)(ii), (a)(2)(i) or (a)(8), shall designate at least one
Financial and Operations Principal who shall be responsible for
performing the duties described in subparagraph (B) of that rule. In
addition, each person associated with a member who performs such duties
shall be required to register as a Financial and Operations Principal
with the Exchange.
Subparagraph (B) defines the term Financial and Operations
Principal as a person associated with a member whose duties include (i)
final approval and responsibility for the accuracy of financial reports
submitted to any duly established securities industry regulatory body,
(ii) final preparation of such reports, (iii) supervision of
individuals who assist in the preparation of such reports, (iv)
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, (v) supervision and/or performance of the
member's responsibilities under all financial responsibility rules
promulgated pursuant to the provisions of the Act, (vi) overall
supervision of and responsibility for the individuals who are involved
in the administration and maintenance of the member's back office
operations and (vii) any other matter involving the financial and
operational management of the member.
Subparagraph (C) would require all individuals registering as a
Financial and Operations Principal to pass the Financial and Operations
Principal qualification examination before such registration may become
effective. Finally, subparagraph (D) would prohibit a person registered
solely as a Financial and Operations Principal from functioning in a
principal capacity with responsibility over any area of business
activity not described in subparagraph (2) of the rule.\58\
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\58\ 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 therefore 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 therefore 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 313.08(a)(2) provides that an individual associated
person who (i) supervises or monitors proprietary trading, market-
making and/or brokerage activities for broker-dealers; (ii) supervises
or trains those engaged in proprietary trading, market-making and/or
effecting transactions on behalf of a broker-dealer, with respect to
those activities; and/or (iii) is an officer, partner or director of a
member is required to register and qualify as a Securities Trader
Principal (TP) in WebCRD and to satisfy the prerequisite registration
and qualification requirements. Further, current Rule 313.08(b)
specifies that the Series 24 is the appropriate qualification
examination, and that General Securities Sales Supervision Registration
and General Securities Principal--Sales Supervisor Module Registration
(Series 9/10 and Series 23) is an alternative acceptable qualification.
Finally, current Rule 313.08(a)(2) provides that Securities Trader
Principals' (TP) supervisory authority is limited to supervision of the
securities trading functions of members and of officers, partners, and
directors of a member.
The Exchange is proposing to delete Rules 313.08(a)(2) and related
portions of Rule 313.08(b) (a summary chart) and to adopt in their
place Rule 1220(a)(7), Securities Trader Principal. Proposed Rule
1220(a)(7) requires that a principal responsible for supervising the
securities trading activities specified in proposed Rule 1220(b)(4)
\59\ register as a Securities Trader Principal. The proposed rule
requires individuals registering as Securities Trader Principals to be
registered as Securities Traders and pass the General Securities
Principal qualification examination.
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\59\ Proposed Rule 1220(b)(4), discussed below, provides for
representative-level registration in the ``Securities Trader''
category.
---------------------------------------------------------------------------
8. Registered Options Principal (Proposed Rule 1220(a)(8))
The Exchange is proposing to adopt Rule 1220(a)(8), Registered
Options Principal, which would require under its section (a)(8)(A) that
each member that is engaged in transactions in
[[Page 52016]]
options with the public to have at least one Registered Options
Principal.\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.
---------------------------------------------------------------------------
In addition, each principal as defined in Rule 1220(a)(1) who is
responsible for supervising a member's options sales practices with the
public would be required to register with the Exchange as a Registered
Options Principal, subject to the following exception. If a principal's
options activities are limited solely to those activities that may be
supervised by a General Securities Sales Supervisor, then such person
may register as a General Securities Sales Supervisor pursuant to
paragraph (a)(10) of the Rule in lieu of registering as a Registered
Options Principal.\61\
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\61\ Current Rule 601(a) provides that no member 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, and that persons
engaged in the supervision of options sales practices or a person to
whom the designated general partner or executive officer (pursuant
to Rule 609) or another Registered Options Principal delegates the
authority to supervise options sales practices shall be designated
as Options Principals. Rule 601(e) provides that individuals who are
delegated responsibility pursuant to Rule 609 for the acceptance of
discretionary accounts, for approving exceptions to a member's
criteria or standards for uncovered options accounts, and for
approval of communications, shall be designated as Options
Principals and are required to qualify as an Options Principal by
passing the Registered Options Principal Qualification Examination
(Series 4). The foregoing provisions of Rule 601 are specific to
conducting an options business with the public and are not proposed
to be amended in this proposed rule change. However, Rule 601(b) and
(c) 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. Current
Rule 601(d) provides that individuals engaged in the supervision of
options sales practices and designated as Options Principals are
required to qualify as an Options Principal by passing the
Registered Options Principals Qualification Examination (Series 4)
or the Sales Supervisor Qualification Examination (Series 9/10), and
is proposed to be deleted in view of proposed Rule 1220(a)(8)(A).
Rule 313(d), which merely serves as a cross-reference to Rules 601
and 602, is unnecessary and is therefore proposed to be deleted with
the rest of Rule 313.
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Pursuant to proposed Rule 1220(a)(8)(B), subject to the lapse of
registration provisions in Rule 1210.08, each person registered with
the Exchange as a Registered Options Principal on October 1, 2018 and
each person who was registered as a Registered Options Principal within
two years prior to October 1, 2018 would be qualified to register as a
Registered Options Principal without passing any additional
qualification examinations. All other individuals registering as
Registered Options Principals after October 1, 2018 would, prior to or
concurrent with such registration, be required to become registered
pursuant to Rule 1220(b)(2) as a General Securities Representative and
pass the Registered Options Principal qualification examination.\62\
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\62\ Although the Exchange does not currently list security
futures products, it is also proposing to adopt Rule 1220,
Supplementary Material .02, which provides that each person who is
registered with the Exchange as a Registered Options Principal,
General Securities Representative, Options Representative or General
Securities Sales Supervisor shall be eligible to engage in security
futures activities as a principal provided that such individual
completes a Firm Element program as set forth in proposed Rule 1240
that addresses security futures products before such person engages
in security futures activities. Unlike FINRA Rule 1220.02, proposed
Exchange Rule 1220.02 omits references to United Kingdom Securities
Representatives and Canada Securities Representatives, which are
registration categories the Exchange does not recognize. In
addition, the Exchange is also proposing to adopt Rule 1220,
Supplementary Material .03 which requires notification to the
Exchange in the event a member's sole Registered Options Principal
is terminated, resigns, becomes incapacitated or is otherwise unable
to perform the duties of a Registered Options Principal, and imposes
certain restrictions on the member's options business in that event.
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9. Government Securities Principal (Rule 1220(a)(9))
The Exchange does not recognize the Government Securities Principal
registration category and is therefore 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)
The Exchange is proposing to adopt new Rule 1220(a)(10), General
Securities Sales Supervisor, as well as new Rule 1220, Supplementary
Material .04, which explains the purpose of the General Securities
Sales Supervisor registration category.\63\ Proposed Rule 1220(a)(10)
provides that each principal, as defined in Rule 1220(a)(1), may
register with the Exchange as a General Securities Sales Supervisor if
his or her supervisory responsibilities in the securities business of a
member are limited to the securities sales activities of the member,
including the approval of customer accounts, training of sales and
sales supervisory personnel and the maintenance of records of original
entry or ledger accounts of the member required to be maintained in
branch offices by the Exchange Act's record-keeping rules.
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\63\ Proposed Rule 1220(a)(10) has no counterpart in the
Exchange's current rules.
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A person registered solely as a General Securities Sales Supervisor
would not be qualified to perform any of the following activities:
Supervision of market making commitments, supervision of the custody of
broker-dealer or customer funds or securities for purposes of SEA Rule
15c3-3, or supervision of overall compliance with financial
responsibility rules for broker-dealers promulgated pursuant to the
provisions of the Exchange Act.\64\
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\64\ Rule 1220(a)(10), however, omits the FINRA Rule 1220(a)(10)
prohibition against supervision of the origination and structuring
of underwritings as unnecessary, as this kind activity does not fall
within the scope of ``securities trading'' covered by the Exchange's
new 1200 Series of rules.
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Each person seeking to register as a General Securities Sales
Supervisor would be required, prior to or concurrent with such
registration, to become registered pursuant to Rule 1220(b)(2) of the
rule as a General Securities Representative and pass the General
Securities Sales Supervisor qualification examinations.\65\
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\65\ 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 and the Direct Participation Programs
Principal registration categories and is reserving Rule 1220(a)(11) and
(a)(12), retaining the captions solely to facilitate comparison with
FINRA's rules.
12. Private Securities Offerings Principal (Rule 1220(a)(13))
The Exchange does not recognize the Private Securities Offerings
Principal registration category and is reserving Rule 1220(a)(13),
retaining the caption solely to facilitate comparison with FINRA's
rules.
13. Supervisory Analyst (Rule 1220(a)(14))
The Exchange does not recognize the Supervisory Analyst
registration category and is reserving Rule 1220(a)(14), retaining the
caption solely to facilitate comparison with FINRA's rules.
14. Definition of Representative (Proposed Rule 1220(b)(1))
Exchange rules currently do not define the term ``representative''
although Rule 602(b) states that persons who perform duties for the
member
[[Page 52017]]
which are customarily performed by sales representatives or branch
office managers shall be designated as representatives of the member.
The Exchange now proposes to delete Rule 602(b) and to adopt a
definition of ``representative'' in proposed Rule 1220(b)(1). Proposed
1220(b)(1) would define the term representative as any person
associated with a member, including assistant officers other than
principals, who is engaged in the member's securities business, such as
supervision, solicitation, conduct of business in securities or the
training of persons associated with a member for any of these
functions.
15. General Securities Representative (Proposed Rule 1220(b)(2))
The Exchange proposes to adopt new Rule 1220(b)(2), General
Securities Representative. Proposed Rule 1220(b)(2)(A) states that each
representative as defined in proposed Rule 1220(b)(1) is required to
register with the Exchange as a General Securities Representative,
subject to the exception that if a representative's activities include
the functions of a Securities Trader, as specified in Rule 1220(b)(2),
then such person shall appropriately register as a Securities
Trader.\66\
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\66\ Current Exchange Rule 602(a) and (b) provide that no member
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 that persons
who perform duties for the member which are customarily performed by
sales representatives or branch office managers shall be designated
as Representatives of the member. Further, Rule 602(d) provides 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). The foregoing provisions of current Rule 602 are
specific to conducting an options business with the public and are
not proposed to be amended in this proposed rule change. However,
Rule 602(c) contains provisions regarding the submission of Form U4
through WebCRD and the necessity of completing a qualification
examination 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 is therefore proposed to be
deleted.
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Further, consistent with the proposed restructuring of the
representative-level examinations, proposed Rule 1220(b)(2)(B) would
require that individuals registering as General Securities
Representatives pass the SIE and the General Securities Representative
examination except that individuals registered as a General Securities
Representatives within two years prior to October 1, 2018 would be
qualified to register as General Securities Representatives without
passing any additional qualification examinations.\67\
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\67\ Proposed Rule 1220(b)(2)(B) differs from FINRA Rule
1220(b)(2)(B) in that it omits references to various registration
categories which FINRA recognizes but which the Exchange does not
propose to recognize.
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In addition, the Exchange is proposing to adopt Rule 1220.01 to
provide individuals who are associated persons of firms and who hold
foreign registrations an alternative, more flexible, process to obtain
an Exchange representative-level registration. The Exchange believes
that there is sufficient overlap between the SIE and these foreign
qualification requirements to permit them to act as exemptions to the
SIE. Under proposed Rule 1220.01, individuals who are in good standing
as representatives with the Financial Conduct Authority in the United
Kingdom or with a Canadian stock exchange or securities regulator would
be exempt from the requirement to pass the SIE, and thus would be
required only to pass a specialized knowledge examination to register
with the Exchange as a representative. The proposed approach would
provide individuals with a United Kingdom or Canadian qualification
more flexibility to obtain an Exchange representative-level
registration.
16. Operations Professional, Securities Trader, Investment Banking
Representative, Research Analyst, Investment Company and Variable
Contracts Products Representative, Direct Participation Programs
Representative and Private Securities Offerings Representative (Rules
1220(b)(3), 1220(b)(4), 1220(b)(5), 1220(b)(6), 1220(b)(7), 1220(b)(8),
1220(b)(9) and 1220.05)
Operations Professional, Investment Banking Representative,
Research Analyst, Investment Company and Variable Products
Representative, Direct Participation Programs Representative and
Private Securities Offerings Representative. The Exchange does not
recognize these registration categories for its associated persons. The
Exchange is therefore reserving Rules 1220(b)(3)--Operations
Professional, and related Rule 1220.05, Scope of Operations
Professional Requirement; 1220(b)(5)--Investment Banking
Representative; 1220(b)(6)--Research Analyst; 1220(b)(7)--Investment
Company and Variable Products Representative; 1220(b)(8)--Direct
Participation Programs Representative; and 1220(b)(9)--Private
Securities Offerings Representative, retaining the captions for each of
them solely to facilitate comparison with FINRA's rules.
Securities Trader--Proposed Rule 1220(b)(4). Pursuant to current
Exchange Rule 313, Supplementary Material .08, an individual associated
person who is engaged in proprietary trading, market-making and/or
effecting transactions on behalf of a broker-dealer is required to
register and qualify as a Securities Trader (TD).
The Exchange now proposes to delete that section of Exchange Rule
313, Supplementary Material .08, and to replace it with proposed Rule
1220(b)(4).\68\ Rule 1220(b)(4) would require each representative as
defined in Rule 1220(b)(1) of the Rule to register with the Exchange as
a Securities Trader if, with respect to transactions in equity,
preferred or convertible debt securities, or options 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. The revised
definition of Securities Trader is consistent with the Securities
Trader definition in the Nasdaq rules.\69\ As a result of the revised
rule, additional types of activity on ISE would fall within the
Securities Trader registration category, including engaging in customer
business. Rule 1220(b)(4) would require individuals registering as
Securities Traders to pass the SIE as well as the Securities Trader
qualification exam.
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\68\ 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.
\69\ See current Nasdaq Rule 1032(f), Securities Trader.
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Additionally, proposed Rule 1220(b)(4)(A) would require each person
associated with a member who is: (i) Primarily responsible for the
design, development or significant modification of an algorithmic
trading strategy relating to equity, preferred or convertible debt
securities or options; or (ii) responsible for the day-to-day
supervision or direction of such activities to register with the
Exchange as a Securities Trader.\70\
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\70\ 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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[[Page 52018]]
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.\71\
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\71\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007).
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The associated persons covered by the expanded registration
requirement would be required to pass the requisite qualification
examination and be subject to the same continuing education
requirements that are applicable to individual Securities Traders. The
Exchange believes that potentially problematic conduct stemming from
algorithmic trading strategies--such as failure to check for order
accuracy, inappropriate levels of messaging traffic, and inadequate
risk management controls--could be reduced or prevented, in part,
through improved education regarding securities regulations for the
specified individuals involved in the algorithm design and development
process.
The proposal is intended to ensure the registration of one or more
associated persons that possesses knowledge of, and responsibility for,
both the design of the intended trading strategy and the technological
implementation of the strategy, sufficient to evaluate whether the
resulting product is designed to achieve regulatory compliance in
addition to business objectives. For example, a lead developer who
liaises with a head trader regarding the head trader's desired
algorithmic trading strategy and is primarily responsible for the
supervision of the development of the algorithm to meet such objectives
must be registered under the proposal as the associated person
primarily responsible for the development of the algorithmic trading
strategy and supervising or directing the team of developers.
Individuals under the lead developer's supervision would not be
required to register under the proposal if they are not primarily
responsible for the development of the algorithmic trading strategy or
are not responsible for the day-to-day supervision or direction of
others on the team. Under this scenario, the person on the business
side that is primarily responsible for the design of the algorithmic
trading strategy, as communicated to the lead developer, also would be
required to register. In the event of a significant modification to the
algorithm, members, likewise, would be required to ensure that the
associated person primarily responsible for the significant
modification (or the associated person supervising or directing such
activity), is registered as a Securities Trader.
A member employing an algorithm is responsible for the algorithm's
activities whether the algorithm is designed or developed in house or
by a third-party. Thus, in all cases, robust supervisory procedures,
both before and after deployment of an algorithmic trading strategy,
are a key component in protecting against problematic behavior stemming
from algorithmic trading. In addition, associated persons responsible
for monitoring or reviewing the performance of an algorithmic trading
strategy must be registered, and a member's trading activity must
always be supervised by an appropriately registered person. Therefore,
even where a firm purchases an algorithm off-the-shelf and does not
significantly modify the algorithm, the associated person responsible
for monitoring or reviewing the performance of the algorithm would be
required to be registered.
Pursuant to proposed Rule 1220(b)(4)(B) each person registered as a
Securities Trader on October 1, 2018 and each person who was registered
as a Securities Trader within two years prior to October 1, 2018 would
be qualified to register as a Securities Trader without passing any
additional qualification examinations. All other individuals
registering as Securities Traders after October 1, 2018 would be
required, prior to or concurrent with such registration, to pass the
SIE and the Securities Trader qualification examination.
17. Eliminated Registration Categories (Proposed Rule 1220.06)
Proposed Rule 1220.06 has no practical relevance to ISE, but is
included because all the Nasdaq Affiliated Exchanges, including Nasdaq,
are also proposing to adopt the new 1200 Series, on a uniform basis.
Proposed Rule 1220.06 will be relevant to Nasdaq and BX which, unlike
ISE, are proposing to eliminate certain existing registration
categories that are not currently recognized by ISE.\72\
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\72\ See SR-Nasdaq-2018-078 and SR-BX-2018-047.
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Proposed Rule 1220.06 provides that, subject to the lapse of
registration provisions in proposed Rule 1210.08, individuals who are
registered with the Exchange in any capacity recognized by the Exchange
immediately prior to October 1, 2018, and each person who was
registered with the Exchange in such categories within two years prior
to October 1, 2018, shall be eligible to maintain such registrations
with the Exchange. However, if individuals registered in such
categories terminate their registration with the Exchange and the
registration remains terminated for two or more years, they would not
be able to re-register in that category. In addition, proposed Rule
1220.06 would include the current restrictions to which Order
Processing Assistant Representatives are subject under Nasdaq
rules.\73\ As stated above, Rule 1220.06 would have no application to
the Exchange.
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\73\ 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 in 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
[[Page 52019]]
corresponding registration categories without having to take any
additional examinations.
N. Associated Persons Exempt From Registration (Proposed Rules 1230 and
1230.01)
Existing Rule 313(a)(2) currently provides that the following
persons associated with a member are not required to register:
(A) Individual associated persons whose functions are solely and
exclusively clerical or ministerial;
(B) individual associated persons who are not actively engaged in
the securities business;
(C) individual associated persons whose functions are related
solely and exclusively to the Member's need for nominal corporate
officers or for capital participation;
(D) individual associated persons whose functions are related
solely and exclusively to:
(i) Transactions in commodities;
(ii) transactions in security futures; and/or
(iii) effecting transactions on the floor of another national
securities exchange and who are registered as floor members with such
exchange.
Rule 313(a)(2) 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 313(a)(2) as Rule 1230
subject to certain changes. As noted above, Rule 313(a)(2)(B) exempts
from registration those associated persons who are not actively engaged
in the securities business. Rule 313(a)(2)(C) 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.\74\ The Exchange believes that
the determination of whether an associated person is required to
register must be based on an analysis of the person's activities and
functions in the context of the various registration categories. The
Exchange does not believe that categorical exemptions for associated
persons who are not ``actively engaged'' in a member's securities
business, associated persons whose functions are related only to a
member's need for nominal corporate officers or associated persons
whose functions are related only to a member's need for capital
participation is consistent with this analytical framework.\75\ The
Exchange therefore is proposing to delete these exemptions. Rule
313(a)(2) 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.\76\ 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.\77\
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\74\ 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.
\75\ The Exchanges also proposes to delete Rule 313.06 which
specifies circumstances in which the Exchange considers an
associated person of a member to be engaged in the securities
business of a member. The Exchange believes these determinations may
be made on case by case basis, depending upon facts and
circumstances.
\76\ Proposed Rule 1230 differs from FINRA Rule 1230 in that it
contains a number of additional exemptions, based upon current
Nasdaq Rule 1060(a), which are not included in FINRA Rule 1230.
\77\ Individuals described by Section 3 of Rule 1230 who are
associated with FINRA members may be registered with FINRA as
Foreign Associates pursuant to FINRA Rule 1220.06. FINRA is
eliminating this registration category effective October 1, 2018,
and the Exchange has never recognized it.
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The Exchange proposes to adopt Rule 1230.01 to clarify that the
function of accepting customer orders is not considered a clerical or
ministerial function and that associated persons who accept customer
orders under any circumstances are required to be appropriately
registered. However, the proposed rule provides that an associated
person is not accepting a customer order where occasionally, when an
appropriately registered person is unavailable, the associated person
transcribes the order details and the registered person contacts the
customer to confirm the order details before entering the order.
O. Changes to Continuing Education Requirements (Proposed Rule 1240)
As described above, existing Rule 604, Continuing Education for
Registered Persons, includes a Regulatory Element and a Firm Element.
The Regulatory Element applies to registered persons and consists of
periodic computer-based training on regulatory, compliance, ethical,
supervisory subjects and sales practice standards. The Firm Element
consists of at least annual, member-developed and administered training
programs designed to keep covered registered persons current regarding
securities products, services and strategies offered by the member. The
CE requirements set forth in Rule 604 have been reorganized and
renumbered, and are now proposed to be adopted with amendments as new
Rule 1240.\78\
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\78\ 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''
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
[[Page 52020]]
activities and compensation. Specifically, proposed Rule 1240(a)(2)
provides that any person whose registration has been deemed inactive
under the rule may not accept or solicit business or receive any
compensation for the purchase or sale of securities. However, like the
FINRA rule, the proposed rule provides that such person may receive
trail or residual commissions resulting from transactions completed
before the inactive status, unless the member with which the person is
associated has a policy prohibiting such trail or residual commissions.
2. Firm Element
The Exchange believes that training in ethics and professional
responsibility should apply to all covered registered persons.
Therefore, proposed Rule 1240(b)(2)(B), which provides that the Firm
Element training programs must cover applicable regulatory
requirements, would also require that a firm's training program cover
training in ethics and professional responsibility.
P. Electronic Filing Rules
Existing Rule 313, Supplementary Material .01-.03 requires each
individual required to register to electronically file a Uniform
Application for Securities Industry Registration (``Form U4'') through
the Central Registration Depository system (``Web CRD'') operated by
the Financial Industry Regulatory Authority, Incorporated (``FINRA'')
and to electronically submit to Web CRD any required amendments to Form
U4. Similarly, any member that discharges or terminates the employment
or retention of an individual required to register must comply with
certain termination filing requirements which include the filing of a
Form U5. Form U4 and U5 electronic filing requirements applicable to
options principals and representatives, as well a Form U5 requirement
applicable to members upon termination of employment of any of their
registered persons, are found in Rules 601, Registration of Options
Principals, 602, Registration of Representatives, and 603, Termination
of Registered Persons.
The Exchange is proposing to delete existing Rule 313,
Supplementary Material .01-.03 and the electronic filing requirements
of rules 601, 602 and 603, and to replace them with new Rule 1250,
Electronic Filing Requirements for Uniform Forms which will consolidate
Form U4 and U5 electronic filing requirements in a single location.\79\
The new rule provides that all forms required to be filed under the
Exchange's registration rules including the Rule 1200 series shall be
filed through an electronic process or such other process as the
Exchange may prescribe to the Central Registration Depository. It also
would impose certain new requirements.
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\79\ Proposed Rule 1250 is based upon current Nasdaq Rule 1140.
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Under Rule 1250(b) members would be required to designate
registered principal(s) or corporate officer(s) who are responsible for
supervising a firm's electronic filings. The registered principal(s) or
corporate officer(s) who has or have the responsibility to review and
approve the forms filed pursuant to the rule would be required to
acknowledge, electronically, that he is filing this information on
behalf of the member and the member's associated persons. Under Rule
1250, Supplementary Material .01, the registered principal(s) or
corporate officer(s) could delegate filing responsibilities to an
associated person (who need not be registered) but could not delegate
any of the supervision, review, and approval responsibilities mandated
in Rule 1250(b). The registered principal(s) or corporate officer(s)
would be required to take reasonable and appropriate action to ensure
that all delegated electronic filing functions were properly executed
and supervised.
Under Rule 1250(c)(1), initial and transfer electronic Form U4
filings and any amendments to the disclosure information on Form U4
must be based on a manually signed Form U4 provided to the member or
applicant for membership by the person on whose behalf the Form U4 is
being filed. As part of the member's recordkeeping requirements, it
would be required to retain the person's manually signed Form U4 or
amendments to the disclosure information on Form U4 in accordance with
Rule 17a-4(e)(1) under the Act and make them available promptly upon
regulatory request. An applicant for membership must also retain every
manually signed Form U4 it receives during the application process and
make them available promptly upon regulatory request. Rule 1250(c)(2)
and Supplementary Material .03 and 04 provide for the electronic filing
of Form U4 amendments without the individual's manual signature,
subject to certain safeguards and procedures.
Rule 1250(d) provides that upon filing an electronic Form U4 on
behalf of a person applying for registration, a member must promptly
submit fingerprint information for that person and that the Exchange
may make a registration effective pending receipt of the fingerprint
information. It further provides that if a member fails to submit the
fingerprint information within 30 days after filing of an electronic
Form U4, the person's registration will be deemed inactive, requiring
the person to immediately cease all activities requiring registration
or performing any duties and functioning in any capacity requiring
registration. Under the rule the Exchange must administratively
terminate a registration that is inactive for a period of two years. A
person whose registration is administratively terminated could
reactivate the registration only by reapplying for registration and
meeting the qualification requirements of the applicable provisions of
proposed Exchange Rule 1220. Upon application and a showing of good
cause, the Exchange could extend the 30-day period.
Rule 1250(e) would require initial filings and amendments of Form
U5 to be submitted electronically. As part of the member's
recordkeeping requirements, it would be required to retain such records
for a period of not less than three years, the first two years in an
easily accessible place, in accordance with Rule 17a-4 under the Act,
and to make such records available promptly upon regulatory request.
Finally, under proposed Rule 1250, Supplementary Material .02, a
member could enter into an agreement with a third party pursuant to
which the third party agrees to file the required forms electronically
on behalf of the member and the member's associated persons.
Notwithstanding the existence of such an agreement, the member would
remain responsible for complying with the requirements of the Rule.
Q. Other Rules
As noted above, the Exchange is proposing minor conforming
amendments to Rule 208, Regulatory Fees or Charges, as well as to
Chapter 90, Code of Procedure. In both cases, the amendments delete
citations to rules proposed to be deleted or cite the relevant portions
of the new 1200 Series. Chapter 90 would delete references to Exchange
Rule 313, proposed to be deleted herein, and to BX Rule 1070, proposed
to be deleted in SR-BX-2018-047.\80\
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\80\ See Securities Exchange Act Release No. 83703 (July 25,
2018), 83 FR 36992 (July 31, 2018) (SR-ISE-2018-59), adding Chapter
90. Chapter 90 incorporates into the ISE rules by reference Series
9000 of the BX rules. Chapter 90 states that references in the BX
Rule 9000 Series to ``Rule 1070'' shall be read to refer to the
Supplementary Material to ISE Rule 306. As noted above, both the BX
and the ISE rules are proposed to be deleted.
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[[Page 52021]]
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\81\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\82\ 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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\81\ 15 U.S.C. 78f(b).
\82\ 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
the Exchange's registration and qualification rules to align them with
registration and qualification rules of the Nasdaq Affiliated
Exchanges, in order to prevent unnecessary regulatory burdens and to
promote efficient administration of the rules. The change also makes
minor updates and corrections to the Exchange's rules which improve
readability.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is
designed to ensure that all associated persons of members engaged in a
securities business are, and will continue to be, properly trained and
qualified to perform their functions, will be supervised, and can be
identified by regulators. The proposed new 1200 Series of rules, which
are similar in many respects to the registration-related requirements
adopted by FINRA effective October 1, 2018, should enhance the ability
of member firms to comply with the Exchange's rules as well as with the
Federal securities laws. Additionally, as described above, the Exchange
intends the amendments described herein to eliminate inconsistent
registration-related requirements across the Nasdaq Affiliated
Exchanges, thereby promoting uniformity of regulation across markets.
The new 1200 Series should in fact remove administrative burdens that
currently exist for members seeking to register associated persons on
multiple Nasdaq Affiliated Exchanges featuring varying registration-
related requirements. Additionally, all similarly-situated associated
persons of members will be treated similarly under the new 1200 Series
in terms of standards of training, experience and competence for
persons associated with Exchange members.
With respect 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 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 prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
[[Page 52022]]
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act 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) \83\ 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.\84\ 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.\85\
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\83\ 17 CFR 240.19b-4(f)(6)(iii).
\84\ See supra note 5.
\85\ 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. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \86\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\86\ 15 U.S.C. 78s(b)(2)(B).
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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-ISE-2018-82 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-ISE-2018-82. 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-ISE-2018-82 and should be submitted on
or before November 5, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\87\
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\87\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22294 Filed 10-12-18; 8:45 am]
BILLING CODE 8011-01-P
