Self-Regulatory Organizations: Miami International Securities Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend, Reorganize and Enhance Its Membership, Registration and Qualification Rules and Consolidate These Rules Into New Chapter XIX Registration, Qualification and Continuing Education, 72025-72043 [2019-28089]

Download as PDF Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices burden on competition because all Members may utilize this service. This new rule reflects the Exchange’s current practice. Definitions The Exchange’s proposal to add the acronym for an Electronic Access Member, an ‘‘EAM’’ within General 1, Section 1, add the definition of an ‘‘Away Best Bid or Offer’’ or ‘‘ABBO’’ within Options 1, Section 1(a)(4), and amend the term ‘‘offer’’ within Options 1, Section 1(a)(26) do not impose an undue burden on competition because these amendments will add transparency to the Rulebook. Other Changes The Exchange’s proposal to correct several incorrect references to Options 5, update the reference within Options 3, Section 16(b) to refer to Options 3, Section 12 not just 12(a), and add crossreferences to the Solicited Order Mechanism and Price Improvement Mechanism within Options 3, Section 16 do not impose an undue burden on competition, rather these changes brings greater clarity to the Rules. The remainder of the changes to correct numbering and citations are nonsubstantive. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act 11 and subparagraph (f)(6) of Rule 19b–4 thereunder.12 A proposed rule change filed under Rule 19b–4(f)(6) 13 normally does not become operative prior to 30 days after khammond on DSKJM1Z7X2PROD with NOTICES 11 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires the Exchange to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 13 17 CFR 240.19b–4(f)(6). 12 17 VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 the date of the filing. However, pursuant to Rule 19b–4(f)(6)(iii),14 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange requests that the Commission waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange notes that NOM and BX currently have rules that permit NOM and BX Participants to cancel interest,15 and that the Exchange proposes the additional changes to provide greater clarity in its rules. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Accordingly, the Commission waives the 30-day operative delay and designates the proposed rule change operative upon filing.16 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 to determine whether the proposed rule 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: Electronic Comments • Use the Commission’s internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– ISE–2019–32 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–2019–32. This file number should be included on the subject line if email is used. To help the 14 17 CFR 240.19b–4(f)(6)(iii). NOM and BX Rules at Chapter VII, Section 15 See 11. 16 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 72025 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 (http://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–2019–32 and should be submitted on or before January 21, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2019–28171 Filed 12–27–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87830; File No. SR–MIAX– 2019–50] Self-Regulatory Organizations: Miami International Securities Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend, Reorganize and Enhance Its Membership, Registration and Qualification Rules and Consolidate These Rules Into New Chapter XIX Registration, Qualification and Continuing Education December 20, 2019. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 17 17 E:\FR\FM\30DEN1.SGM CFR 200.30–3(a)(12). 30DEN1 72026 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 10, 2019, Miami International Securities Exchange, LLC (‘‘MIAX Options’’ or the ‘‘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 is filing a proposal 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 http://www.miaxoptions.com/rulefilings/ at MIAX Options’ principal office, 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 adopted registration requirements to ensure that associated persons 3 attain and maintain specified 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 The term ‘‘associated person’’ or ‘‘person associated with a Member’’ means any partner, officer, director, or branch manager of a Member (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with a Member, or any employee of a Member. See Exchange Rule 100. In accordance with other proposed changes in this filing, and as further described below, the Exchange proposes to amend the terms ‘‘associated person’’ or ‘‘person associated with a Member.’’ khammond on DSKJM1Z7X2PROD with NOTICES 2 17 VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 levels of competence and knowledge pertinent to their function. In general, the Exchange’s current rules require that persons engaged in a Member’s 4 securities business who are to function as representatives 5 or principals 6 register with the Exchange in each category of registration appropriate to their functions by passing one or more qualification examinations 7 and exempt specified associated persons from the registration requirements.8 They also prescribe ongoing continuing education requirements for registered persons.9 The Exchange proposes to amend, reorganize and enhance its rules regarding registration, qualification examinations and continuing education, as described below. In 2017, the Commission approved a Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) proposed rule change consolidating and adopting prior National Association of Securities Dealers, Inc. (‘‘NASD’’) rules and rules incorporated from the New York Stock Exchange (‘‘NYSE’’) relating to qualification and registration requirements into the Consolidated FINRA Rulebook,10 restructuring the 4 The term ‘‘Member’’ means an individual or organization approved to exercise the trading rights associated with a Trading Permit. Members are deemed ‘‘members’’ under the Exchange Act. See Exchange Rule 100. 5 A ‘‘representative’’ is 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. See proposed Exchange Rule 1901. 6 A ‘‘principal’’ is 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 shall include, among other persons, a Member’s chief executive officer and chief financial officer (or equivalent officers). A ‘‘principal’’ also includes 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 under Exchange rules. See proposed Exchange Rule 1901. 7 See proposed Exchange Rule 1901, Registration Categories, and Exchange Rule 1302, Registration of Representatives. 8 See proposed Exchange Rule 1902, Associated Persons Exempt from Registration. 9 See proposed Exchange Rule 1903, Continuing Education Requirements. 10 The current FINRA rulebook consists of: (1) FINRA rules; (2) NASD rules; and (3) rules incorporated from the 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. PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 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’’).11 The Exchange now proposes to amend, reorganize and enhance its own membership, registration and qualification requirements rules in response to the FINRA Rule Changes. In addition, the Exchange proposes to enhance its registration rules by adding a new registration requirement applicable to developers of algorithmic trading systems similar to a requirement adopted by FINRA pursuant to a 2016 FINRA rule change.12 As part of the Exchange’s proposed rule change, current Exchange Rule 203, Qualification and Registration of Members and Associated Persons, Exchange Rule 1303, Termination of 11 See Securities Exchange Act Release No. 81098 (July 7, 2017), 82 FR 32419 (July 13, 2017) (SR– FINRA–2017–007) (Order Approving Proposed Rule Change to Adopt Consolidated Registration Rules, Restructure the Representative-Level Qualification Examination Program, Allow Permissive Registration, Establish Exam Waiver Process for Persons Working for Financial Services Affiliate of Member, and Amend the Continuing Education Requirements). See also FINRA Regulatory Notice 17–30 (SEC Approves Consolidated FINRA Registration Rules, Restructured RepresentativeLevel 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. 12 See Securities Exchange Act Release No. 77551 (April 7, 2016), 81 FR 21914 (April 13, 2016) (SR– FINRA–2016–007) (Order Approving a Proposed Rule Change to Require Registration as Securities Traders of Associated Persons Primarily Responsible for the Design, Development, Significant Modification of Algorithmic Trading Strategies or Responsible for the Day-to-Day Supervision of Such Activities). In that 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. E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices Registered Persons, and Exchange Rule 1304, Continuing Education for Registered Persons, are proposed to be deleted. These current Exchange rule provisions are incorporated into the new proposed 1900 Series of Exchange rules, as further described below. Additionally, the Exchange proposes to amend Exchange Rule 100, Definitions, Exchange Rule 601, Registered Option Traders, Exchange Rule 1000, Disciplinary Jurisdiction, Exchange Rule 1014, Imposition of Fines for Minor Rule Violations, Exchange Rule 1301, Registration of Options Principals, Exchange Rule 1302, Registration of Representatives, Exchange Rule 1306, Branch Offices, Exchange Rule 1307, Opening of Accounts, Exchange Rule 1309, Suitability of Recommendations, Exchange Rule 1310, Discretionary Accounts, and Exchange Rule 1319, Profit Sharing. In place of the deleted rules, and parts of the amended rules, the Exchange proposes to adopt new Chapter XIX, Registration, Qualification and Continuing Education, in the Exchange’s Rulebook, together with conforming changes to certain existing Exchange rules. In the new Chapter XIX series of rules, the Exchange would, among other things, recognize additional associated person registration categories, recognize a new general knowledge examination, permit the maintenance of permissive registrations, and require Securities Trader registration of developers of algorithmic trading strategies consistent with a comparable, existing FINRA registration requirement.13 The Exchange notes that the structure of this rule filing, as well as newly proposed Chapter XIX series of rules, is based on a recent rule filing by the Nasdaq Stock Market, LLC (‘‘Nasdaq Stock Market’’).14 The similar Nasdaq Stock Market filing also amended, reorganized and enhanced membership, registration and qualification rules for the Nasdaq Stock Market, and was based on the FINRA Rule Changes.15 khammond on DSKJM1Z7X2PROD with NOTICES New Proposed Rules and Proposed Changes to Current Exchange Rules A. Registration Requirements (Proposed Exchange Rule 1900) Exchange Rule 203(a) currently requires individuals and associated 13 See id. Securities Exchange Act Release No. 84386 (October 9, 2018), 83 FR 51988 (October 15, 2018) (SR–NASDAQ–2018–078) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend, Reorganize and Enhance Its Membership, Registration and Qualification Rules) 15 See id. 14 See VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 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.16 Proposed Exchange Rule 1900 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 Exchange Rule 1901, unless exempt from registration pursuant to proposed Exchange Rule 1902.17 Proposed Exchange Rule 1900 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 Exchange Rule 1900, Interpretation and Policy .01) Exchange Rule 203, Interpretation and Policy .07, requires Members to register with the Exchange in a heightened capacity each individual acting in any of the following capacities: (a) Officer; (b) partner; (c) director; (d) supervisor of proprietary trading, market making or brokerage activities; and/or (e) supervisor of those engaged in proprietary trading, market-making or brokerage activities with respect to those activities. Each Member or Member organization 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 16 In general the 1900 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. However, the Exchange also proposes to adopt Exchange Rule 1900, Interpretation and Policy .12, based upon a current Nasdaq Stock Market rule. See Nasdaq Stock Market, General 4, Section 1, Rule 1.1210, Supplementary Material .12; see also Securities Exchange Act Release No. 84386 (October 9, 2018), 83 FR 51988 (October 15, 2018) (SR–NASDAQ– 2018–078). 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 Exchange Rule 1900, Interpretation and Policy .12, in order to have uniform processes and requirements in this area across the Exchange. 17 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 Exchange Rules 1900, Interpretations and Policies .03 and .10 of Exchange Rule 1900, Exchange Rules 1901 and 1903, and also by omitting as unnecessary from proposed Exchange Rule 1901, a limitation on the qualification of a General Securities Sales Supervisor to supervise the origination and structuring of an underwriting. PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 72027 a Member demonstrates conclusively that only one individual acting in one or more of these capacities should be required to register. A Member or Member organization that conducts proprietary trading only and has 25 or fewer registered persons may be required to have one officer or partner who is registered in this capacity.18 The Exchange proposes to delete these requirements and in their place adopt new Exchange Rule 1900, Interpretation and Policy .01. The proposed rule would provide firms that limit the scope of their business with flexibility in satisfying the two-principal requirement. In particular, proposed Exchange Rule 1900, Interpretation and Policy .01, would require each Member, except a Member with only one associated person, to have at least two officers or partners who are registered as General Securities Principals, provided that a Member that is limited in the scope of its activities may instead have two officers or partners who are registered in a principal category that corresponds to the scope of the Member’s activities.19 For instance, if a firm’s business is limited to securities trading, the firm may have two Securities Trader Principals, instead of two General Securities Principals. Additionally, proposed Exchange Rule 1900, Interpretation and Policy .01, would provide that any Member with only one associated person is excluded from the two principal requirement. Proposed Exchange Rule 1900, Interpretation and Policy .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 203, Interpretation and Policy .07. Finally, the Exchange proposes to retain the existing provision in Exchange Rule 203 permitting a proprietary trading firm with 25 or fewer registered representatives to have just one registered principal. The FINRA Rule Changes do not include this provision.20 18 Currently, Exchange Rule 203, Interpretation and Policy .08, describes when a Member is considered to be conducting only proprietary trading of the Member. Because the Exchange now proposes to delete Exchange Rule 203 in its entirety, Interpretation and Policy .08 of that rule would be reworded and relocated to Exchange Rule 100, Definitions, as a defined term. 19 The principal registration categories are described in greater detail below. 20 The Exchange does not propose to adopt provisions comparable to FINRA Rule 1210.01, which requires that all FINRA members have a Principal Financial Officer and a Principal Operations Officer, because the Exchange believes that its proposed Exchange Rule 1901(b)(3), Financial and Operations Principal, is sufficient. As described herein, proposed Exchange Rule E:\FR\FM\30DEN1.SGM Continued 30DEN1 72028 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices khammond on DSKJM1Z7X2PROD with NOTICES C. Permissive Registrations (Proposed Exchange Rule 1900, Interpretation and Policy .02) Current Exchange Rule 203(a) prohibits a Member 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 the examination requirement. Current Exchange Rule 203(a) 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 proposes to replace these provisions with proposed Exchange Rule 1900, Interpretation and Policy .02. The Exchange also proposes to expand the scope of permissive registrations and to clarify a Member’s obligations regarding individuals who are maintaining such registrations. Specifically, proposed Exchange Rule 1900, Interpretation and Policy .02, would allow any associated person to apply for or 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 1901(b)(3), requires Member firms operating pursuant to certain provisions of the Commission’s rules to designate at least one Financial and Operations Principal. Further, the Exchange does not propose to adopt FINRA Rule 1210.01, which requires 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 propose to recognize the Investment Banking Principal or the Research Principal registration categories, and the Registered Options Principal registration requirement is set forth in proposed Exchange Rule 1901(b)(7), and its inclusion is therefore unnecessary in proposed Exchange Rule 1900. VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 with the Member. Further, proposed Exchange Rule 1900, Interpretation and Policy .02, would allow 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 proposes to permit the registration of such individuals for several reasons. First, a Member may foresee a need to move a former representative or principal who has not been registered for two or more years back into a position that would require such person to be registered. Currently, such persons are required to requalify (or obtain a waiver of the applicable qualification examinations) and reapply for registration. Second, the proposed rule change would allow Members to develop a depth of associated persons with registrations in the event of unanticipated personnel changes. Third, allowing registration in additional categories encourages greater regulatory understanding. Finally, the proposed rule change would eliminate an inconsistency in the current rules, which permit some associated persons of a Member to obtain permissive registrations, but not others who equally are engaged in the Member’s business. Individuals maintaining a permissive registration under the proposed rule change would be considered registered persons and subject to all Exchange rules, to the extent relevant to their activities. For instance, an individual working solely in an administrative capacity would be able to maintain a General Securities Representative registration and would be considered a registered person for purposes of rules relating to borrowing from or lending to customers, but the rule would have no practical application to his or her conduct because he or she would not have any customers. Consistent with the Exchange’s supervision rules, Members would be required to have adequate supervisory systems and procedures reasonably designed to ensure that individuals with permissive registrations do not act outside the scope of their assigned functions.21 With respect to an individual who solely maintains a permissive registration, such as an individual working exclusively in an administrative capacity, the individual’s direct supervisor is not required to be a registered person. Members would be required to assign a registered 21 FINRA Rule 1210.02 specifically cites FINRA’s supervisory system rule, FINRA Rule 3110, by number. Proposed Exchange Rule 1900, Interpretation and Policy .02, refers generally to the Exchange’s supervision rules rather than identifying them by number. PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 supervisor to this person who would be responsible for periodically contacting such individual’s direct supervisor to verify that the individual is not acting outside the scope of his or her assigned functions. If such individual is permissively registered as a representative, the registered supervisor must be registered as a representative or principal. If the individual is permissively registered as a principal, the registered supervisor must be registered as a principal.22 D. Qualification Examinations and Waivers of Examinations (Proposed Exchange Rule 1900, Interpretation and Policy .03) Current Exchange Rule 203(a) provides that before a registration can become effective, the individual Member or individual associated person shall submit the appropriate application for registration, pass the Securities Industry Essentials Examination (‘‘SIE’’), 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 proposes to replace this rule language with new Exchange Rule 1900, Interpretation and Policy .03, Qualification Examinations and Waivers of Examinations. As part of the FINRA Rule Changes, FINRA adopted a restructured representative-level qualification examination program whereby representative-level registrants would be required to take a general knowledge examination (the SIE) and a specialized knowledge examination appropriate to the representative’s job functions at the firm with which he or she is associating.23 Therefore, proposed Exchange Rule 1900, Interpretation and Policy .03, provides that before the registration of a person as a representative can become effective under proposed Exchange Rule 1900, such person must pass the SIE and an appropriate representative-level qualification examination as specified in proposed Exchange Rule 1901(c). Proposed Exchange Rule 1900, Interpretation and Policy .03, also provides that before the registration of a person as a principal can become effective under proposed Exchange Rule 1900, such person must pass an 22 In either case, the registered supervisor of an individual who solely maintains a permissive registration would not be required to be registered in the same representative or principal registration category as the permissively-registered individual. See proposed Exchange Rule 1900, Interpretation and Policy .02. 23 See supra note 11. E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices khammond on DSKJM1Z7X2PROD with NOTICES appropriate principal-level qualification examination as specified in proposed Rule 1901(b). Further, proposed Exchange Rule 1900, Interpretation and Policy .03, provides that if the job functions of a registered representative change and he or she needs to become registered in another representative-level category, he or she would not need to pass the SIE again. Rather, the registered person would need to pass only the appropriate representative-level qualification examination.24 Thus under the proposed rule change, individuals seeking registration in two or more representative-level categories would experience a net decrease in the total number of exam questions they would be required to answer because the SIE content would be tested only once. The proposed rule change solely impacts the representative-level qualification requirements. The proposed rule change does not change the scope of the activities permitted under the existing representative categories. For instance, after the operative date of the proposed rule change, a previously unregistered individual registering as a Securities Trader for the first time would be required to pass the SIE and an appropriate specialized knowledge examination. However, such individual may engage only in those activities in 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. 24 FINRA 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 Exchange Rule 1900, Interpretation and Policy .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 1900, Interpretation and Policy .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 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 Exchange Rule 1900, Interpretation and Policy .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. VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 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 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, could do so by taking only the appropriate specialized knowledge examination.25 However, with respect to an individual who is not registered on the operative date of the proposed rule change but was registered within the past two years prior to the operative date of the proposed rule change, the individual’s SIE status in the CRD system would be administratively terminated if such individual does not register within four years from the date of the individual’s last registration.26 In addition, individuals 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 25 Under the proposed rule change, only individuals who have passed an appropriate representative-level examination would be considered to have passed the SIE. Registered principals who do not hold an appropriate representative-level registration would not be considered to have passed the SIE. For example, an individual who is registered solely as a Financial and Operations Principal (Series 27) today would have to take the Series 7 to become registered as a General Securities Representative. Under the proposed rule change, in the future, this individual would have to pass the SIE and the specialized Series 7 examination to obtain registration as a General Securities Representative. 26 As discussed below, the Exchange proposes a four-year expiration period for the SIE. PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 72029 the same day, provided the individual is able to reserve space at one of FINRA’s designated testing centers. Finally, under current Exchange Rule 203, Interpretation and Policy .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 proposes to replace Exchange Rule 203, Interpretation and Policy .05, with proposed Exchange Rule 1900, Interpretation and Policy .03, with changes that track FINRA Rule 1210.03. The proposed rule provides that the Exchange will only consider examination waiver requests submitted by a firm for individuals associated with the firm who are seeking registration in a representative-level or principal-level registration category. Moreover, proposed Exchange Rule 1900, Interpretation and Policy .03, states that the Exchange will consider waivers of the SIE alone or the SIE and the representative-level and principal-level examination(s) for such individuals. E. Requirements for Registered Persons Functioning as Principals for a Limited Period (Proposed Exchange Rule 1900, Interpretation and Policy .04) The Exchange proposes to adopt new Exchange Rule 1900, Interpretation and Policy .04, which provides that subject to the requirements of proposed Exchange Rule 1901, Interpretation and Policy .03, 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.27 Similarly, the proposed rule would permit a Member to designate any person currently registered, or who becomes registered, with the Member as 27 In this regard, the Exchange notes that qualifying as a registered representative is currently a prerequisite to qualifying as a principal on the Exchange except with respect to the Financial and Operations Principal. E:\FR\FM\30DEN1.SGM 30DEN1 72030 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices 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 proposed Rule 1901.28 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. khammond on DSKJM1Z7X2PROD with NOTICES F. Rules of Conduct for Taking Examinations and Confidentiality of Examinations (Proposed Exchange Rule 1900, Interpretation and Policy .05) Before taking an examination, FINRA currently requires each candidate to agree to the SIE 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. The 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, the FINRA Sanction Guidelines recommend barring the individual.29 Effective October 1, 2018, FINRA 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 proposed Exchange Rule 1900, Interpretation and Policy .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 28 Proposed Exchange Rule 1900, Interpretation and Policy .04, omits the reference in FINRA Rule 1210.04 to Foreign Associates, which is a registration category not recognized by the Exchange, but otherwise tracks the language of FINRA Rule 1210.04. 29 See FINRA Sanction Guidelines (March 2019), VII. Qualification and Membership, pg. 38, at https://www.finra.org/sites/default/files/Sanctions_ Guidelines.pdf. VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 violation of Exchange rules requiring observance of high standards of commercial honor or just and equitable principles of trade, such as Exchange Rule 301.30 Further, if the Exchange determines that an associated person has violated the SIE Rules of Conduct or the Rules of Conduct for representative and principal examinations, the associated person may forfeit the results of the examination and may be subject to disciplinary action by the Exchange. Proposed Exchange Rule 1900, Interpretation and Policy .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 shall be prohibited and shall 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 Exchange Rule 1900, Interpretation and Policy .05, would prohibit an applicant from receiving assistance while taking the examination, and require the applicant to certify that no assistance was given to or received by him or her during the examination.31 G. Waiting Periods for Retaking a Failed Examination (Proposed Exchange Rule 1900, Interpretation and Policy .06) The Exchange proposes to adopt new Exchange Rule 1900, Interpretation and Policy .06, which provides that any person who fails to pass a qualification examination prescribed by the Exchange may retake that examination again after a period of 30 calendar days from the date of the person’s last attempt to pass that examination.32 Proposed Exchange Rule 1900, Interpretation and Policy .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 30 Exchange Rule 301, Just and Equitable Principles of Trade, 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 Exchange Rule 301. 31 The Exchange does not propose to adopt portions of FINRA Rule 1210.05, which apply to non-associated persons, over whom the Exchange would in any event have no jurisdiction. 32 Proposed Exchange Rule 1900, Interpretation and Policy .06, has no counterpart in existing Exchange rules. PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 examination until 180 calendar days has elapsed from the date of the person’s last attempt to pass that examination. These waiting periods would apply to the SIE and the representative and principal examinations.33 H. Continuing Education (‘‘CE’’) Requirements (Proposed Exchange Rule 1900, Interpretation and Policy .07) Pursuant to Exchange Rule 203, Interpretation and Policy .04, each individual required to register under Exchange Rule 203 is required to satisfy the continuing education requirements set forth in Exchange Rule 1304, Continuing Education for Registered Persons, or any other applicable continuing education requirements as prescribed by the Exchange. Under Exchange Rule 1304, the CE requirements applicable to registered persons consist of a Regulatory Element 34 and a Firm Element.35 The Regulatory Element applies to registered persons and must be completed within prescribed time frames.36 Pursuant to current Exchange Rule 1304, Interpretation and Policy .01, a ‘‘registered person’’ means any Member, representative or other person registered or required to be registered under the Exchange’s rules.37 The Firm Element consists of annual, member-developed and administered training programs designed to keep covered registered persons current regarding securities products, services and strategies offered 33 FINRA Rule 1210.06 requires individuals taking the SIE who are not associated persons to agree to be subject to the same waiting periods for retaking the SIE. The Exchange does not propose to include this language in proposed Exchange Rule 1900, Interpretation and Policy .06, as the Exchange will not apply the proposed 1900 Series of rules in any event to individuals who are not associated persons of Members. 34 See Exchange Rule 1304(a) 35 See Exchange Rule 1304(b). 36 Pursuant to Rule 1304(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 1304(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. 37 See Exchange Rule 1304, Interpretation and Policy .01. E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices khammond on DSKJM1Z7X2PROD with NOTICES by the Member. For purposes of the Firm Element, the term ‘‘covered registered persons’’ is defined as any registered person who has direct contact with customers in the conduct of the Member’s securities sales, trading or investment banking activities, and to the immediate supervisors of such persons.38 The Exchange proposes to delete Exchange Rule 203, Interpretation and Policy .04, which CE requirements the Exchange proposes to reorganize, renumber and adopt as proposed Exchange Rule 1903. 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 proposes to adopt Exchange Rule 1900, Interpretation and Policy .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 Exchange Rule 1903, as discussed below.39 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 Exchange Rule 1900, Interpretation and Policy .07, would also provide that if a person registered with a Member has a CE deficiency with respect to that registration, such person shall not be permitted to be registered in another registration category with the Exchange under proposed Exchange Rule 1901 with that Member or to be registered in any registration category with the Exchange under proposed Exchange Rule 1901 with another Member, until the person has satisfied the deficiency. I. Lapse of Registration and Expiration of SIE (Proposed Exchange Rule 1900, Interpretation and Policy .08) Current Exchange Rule 203(h) 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. Any person who last passed 38 See Exchange Rule 1304(b)(1). Exchange proposes to delete Exchange Rule 203, Interpretation and Policy .04, in connection with the adoption of proposed Exchange Rule 1900, Interpretation and Policy .07. 39 The VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 the SIE or who was last registered as a Representative, whichever occurred last, four or more years immediately preceding the date of receipt by the Exchange of a new application for registration as a Representative shall be required to pass the SIE in addition to a representative qualification examination appropriate to his or her category of registration. The two year period is calculated from the termination date to the date the Exchange receives a new application for registration. The Exchange proposes to delete Exchange Rule 203(h), and replace it with proposed Exchange Rule 1900, Interpretation and Policy .08, Lapse of Registration and Expiration of SIE. Proposed Exchange Rule 1900, Interpretation and Policy .08, contains language comparable to that of Exchange Rule 203(h) 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 Exchange Rule 1900, Interpretation and Policy .08, also sets forth the expiration period of the SIE. Based on the content covered on the SIE, the Exchange proposes 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-level and principallevel registrations. The representativelevel and principal-level registrations would continue to be subject to a two year expiration period as is the case today. PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 72031 J. Waiver of Examinations for Individuals Working for a Financial Services Industry Affiliate of a Member (Proposed Exchange Rule 1900, Interpretation and Policy .09) The Exchange proposes to adopt Exchange Rule 1900, Interpretation and Policy .09, to provide a process whereby individuals working for a financial services industry affiliate of a Member 40 would be able to terminate their registrations with the Member and 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.41 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 return to the firm.42 Under the waiver process in proposed Exchange Rule 1900, Interpretation and Policy .09, 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.43 An 40 Proposed Exchange Rule 1900, Interpretation and Policy .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 Commission, Commodity Futures Trading Commission (‘‘CFTC’’), state securities authorities, federal or state banking authorities, state insurance authorities, or substantially equivalent foreign regulatory authorities. 41 There is no counterpart to proposed Exchange Rule 1900, Interpretation and Policy .09, in the Exchange’s existing rules. FINRA Rule 1210.09 was adopted as a new waiver process for FINRA registration, as part of the FINRA Rule Changes. See supra note 11. 42 See supra note 11. 43 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. E:\FR\FM\30DEN1.SGM 30DEN1 72032 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices khammond on DSKJM1Z7X2PROD with NOTICES individual would have to satisfy these preconditions only for purposes of his or her initial designation as an FSAeligible person, and not for any subsequent FSA designation(s). Thereafter, the individual would be eligible for a waiver for up to seven years from the date of initial designation 44 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.45 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 also proposes to make 44 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. 45 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. VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 corresponding changes in proposed Exchange Rule 1903 (which the Exchange proposes will replace current Exchange Rule 1304, 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,46 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.47 An individual 46 The Exchange would consider a waiver of the representative-level qualification examination(s), the principal-level qualification examination(s) and the SIE, as applicable. 47 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 PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 who has been designated as an FSAeligible person by a Member would not be able to take additional examinations to gain additional registrations while working for a financial services affiliate of a Member. K. Status of Persons Serving in the Armed Forces of the United States (Proposed Exchange Rule 1900, Interpretation and Policy .10) The Exchange proposes to adopt Exchange Rule 1900, Interpretation and Policy .10, Status of Persons Serving in the Armed Forces of the United States.48 Proposed Exchange Rule 1900, Interpretation and Policy .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 may 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 Exchange Rule 1903 during the pendency of such inactive status.49 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. 48 There is no counterpart to proposed Exchange Rule 1900, Interpretation and Policy .10, in the Exchange’s current rules. 49 The relief provided in proposed Exchange Rule 1900, Interpretation and Policy .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. E:\FR\FM\30DEN1.SGM 30DEN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices Pursuant to proposed Exchange Rule 1900, Interpretation and Policy .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 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. Pursuant to proposed Exchange Rule 1900, Interpretation and Policy .10(c), 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 Exchange Rule 1900, Interpretation and Policy .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 VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 proposed Exchange Rule 1900, Interpretation and Policy .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. Further, under proposed Exchange Rule 1900, Interpretation and Policy .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 proposed Exchange Rule 1900, Interpretation and Policy .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 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 proposed Exchange Rule 1900, Interpretation and Policy .08.50 L. Impermissible Registrations (Proposed Exchange Rule 1900, Interpretation and Policy .11) Current Exchange Rule 203(a) prohibits a Member 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. This rule also prohibits a Member from applying for the registration of a person 50 See Nasdaq Stock Market, General 4 Regulation, Section 1 Registration, Qualification and Continuing Education, Rule 1.1210.10(c). PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 72033 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 Exchange Rule 203(a). In light of proposed Exchange Rule 1900, Interpretation and Policy .02, Permissive Registrations, discussed above, the Exchange proposes to delete these provisions of current Exchange Rule 203(a) and instead adopt proposed Exchange Rule 1900, Interpretation and Policy .11, prohibiting a Member from registering or maintaining the registration of a person unless the registration is consistent with the requirements of proposed Exchange Rule 1900.51 M. Registration Categories (Proposed Exchange Rule 1901) The Exchange proposes to adopt new and revised registration category rules and related definitions in proposed Exchange Rule 1901, Registration Categories.52 1. Definitions (Proposed Exchange Rule 1901(a)) 53 The Exchanges proposes to adopt Exchange Rule 1901(a) to define certain registration categories and terms used throughout the Exchange’s new proposed 1900s Series of rules. First, the Exchange proposes to adopt a definition for the term ‘‘actively engaged in the management of the Member’s securities business,’’ which is used to describe the functions of a ‘‘principal,’’ as more fully discussed below.54 The Exchange proposes that the term ‘‘actively engaged in the management of the Member’s securities business’’ means the management of, and the implementation of corporate policies related to, such business, as well as managerial decision-making authority 51 As discussed above, the Exchange also proposes to adopt Exchange Rule 1900, Interpretation and Policy .12, Application for Registration and Jurisdiction, which is not included in FINRA Rule 1210. Proposed Exchange Rule 1900, Interpretation and Policy .12, is based upon portions of current Exchange Rules 203 and 1301. See also supra note 16. 52 For ease of reference, the Exchange proposes to adopt as Exchange Rule 1901, Interpretation and Policy .07, in chart form, a Summary of Qualification Requirements for each of the Exchange’s permitted registration categories discussed below. 53 The Exchange notes that proposed Exchange Rule 1901 differs from the Nasdaq Stock Market rule filing in that the Exchange has consolidated the definitions for various registration categories into one section, proposed Exchange Rule 1901(a), whereas the Nasdaq Stock Market filing includes the registration category definition in each individual section pertaining to that specific registration category type. See supra note 14. 54 See also supra note 6. E:\FR\FM\30DEN1.SGM 30DEN1 khammond on DSKJM1Z7X2PROD with NOTICES 72034 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices 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. Next, the Exchange proposes to adopt a definition for the term ‘‘Financial and Operations Principal,’’ which the Exchange proposes to mean 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. Next, the Exchange proposes to adopt a definition for the term ‘‘principal’’ and include it in newly proposed Exchange Rule 1901(a). The Exchange proposes to adopt a definition of ‘‘principal,’’ which would mean 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 shall include, among other persons, a Member’s chief executive officer and chief financial officer (or equivalent officers). The term ‘‘principal’’ also includes 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 under Exchange rules. Finally, the Exchange proposes to adopt a definition for the term ‘‘representative’’ in proposed Exchange Rule 1901(a). Currently, the Exchange’s rules do not define the term VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 ‘‘representative,’’ although Exchange Rule 1302(b) states 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. The Exchange now proposes to delete Exchange Rule 1302(b), as more fully discussed herein, and adopt a definition of the term ‘‘representative’’ in proposed Exchange Rule 1901(a). Proposed Exchange Rule 1901(a) 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. 2. Principal Registration Categories (Proposed Exchange Rule 1901(b)) i. General Securities Principal (Proposed Rule 1901(b)(1)) The Exchange currently does not impose a General Securities Principal registration obligation. The Exchange proposes to adopt Exchange Rule 1901(b)(1), which would establish an obligation to register as a General Securities Principal, subject to certain exceptions.55 Proposed Exchange Rule 1901(b)(1) states that each principal 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 those categories.56 Proposed Exchange Rule 1901(b)(1)(i)(C) 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, however, 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.57 55 There is no counterpart to proposed Exchange Rule 1901(b)(1) in the Exchange’s current rules. 56 The Exchange proposes to recognize the General Securities Principal registration category for the first time in this proposed rule change. 57 See Nasdaq Stock Market, General 4, Regulation, Section 1, Registration, Qualification and Continuing Education, Rule 1.1220(a)(2)(A)(i)– (iv). Proposed Exchange Rule 1901(b)(1) deviates somewhat from the counterpart FINRA rule in that PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 Proposed Exchange Rule 1901(b)(1)(ii) 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. The Exchange does not propose to adopt FINRA Rule 1220(a)(2)(B), which permits 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.58 ii. Compliance Official (Proposed Exchange Rule 1901(b)(2)) Currently, Exchange Rule 203(f) requires each Member and Member organization that is a registered brokerdealer 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.59 it does not offer various limited registration categories provided for in FINRA Rule 1220(a)(2)(A). The Exchange therefore proposes to reserve Exchange Rules 1901(b)(1)(i)(B) and (D). 58 Proposed Exchange Rule 1901(b)(1) 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 1901(b)(1)(i)(A) 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.’’ 59 Exchange Rule 203(f) 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: (1) Any statutory disqualification as defined in Section 3(a)(39) of the Act; (2) a suspension; (3) 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, or securities self-regulatory organization; or (4) the imposition of a fine of $5,000 or more by any such regulatory or selfregulatory organization in connection with a disciplinary proceeding; shall be required to register in this heightened category of registration as prescribed by the Exchange, but shall be exempt from the requirement to pass the heightened qualification examination as prescribed by the Exchange. E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices khammond on DSKJM1Z7X2PROD with NOTICES The Exchange proposes to delete Exchange Rule 203(f) and adopt Exchange Rule 1901(b)(2) in its place. Proposed Exchange Rule 1901(b)(2) would provide 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. However, pursuant to Exchange Rule 1901(b)(2)(iii), an individual designated as a Chief Compliance Officer on Schedule A of Form BD of a Member that is engaged in limited securities business may be registered in a principal category under proposed Exchange Rule 1901(b) that corresponds to the limited scope of the Member’s business. Additionally, proposed Exchange Rule 1901(b)(2)(iv) would provide that an individual designated as a Chief Compliance Officer on Schedule A of Form BD may register and qualify as a Securities Trader Compliance Officer if, with respect to transactions in equity, preferred or convertible debt securities, or options such person is engaged in proprietary trading, the execution of transactions on an agency basis, or the direct supervision of such activities other than a person associated with a Member whose trading activities are conducted principally on behalf of an investment company that is registered with the SEC pursuant to the Investment Company Act and that controls, is controlled by, or is under common control with a Member. All individuals registering as Securities Trader Compliance Officers would be required to first become registered pursuant to paragraph (c)(3) as a Securities Trader, and to pass the Compliance Official qualification exam.60 60 Proposed Exchange Rule 1901(b)(2) differs from FINRA Rule 1220(a)(3), Compliance Officer, as 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 Exchange Rule 1901(b)(2), 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. VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 iii. Financial and Operations Principal (Proposed Exchange Rule 1901(b)(3)) Current Exchange Rule 203(e) provides that each Member subject to Rule 15c3–1 of the Act 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 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). It further provides that each Financial/Operations Principal designated by a 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 proposes to delete Exchange Rule 203(e) and adopt in its place Exchange Rule 1901(b)(3). Under the new rule, every Member of the Exchange that is operating pursuant to the provisions of Rules 15c3–1(a)(1)(ii), (a)(2)(i) or (a)(8) of the Commission, shall designate at least one Financial and Operations Principal who shall be responsible for performing the duties described in paragraph (a) of proposed Exchange Rule 1901. 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. Proposed Exchange Rule 1901(b)(3)(ii) 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, proposed Exchange Rule 1901(b)(3)(iii) 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 paragraph (a) of the rule for a Financial and Operations Principal.61 61 FINRA Rule 1220(a)(4) differs from proposed Exchange Rule 1901(b)(3) in that it includes an Introducing Broker-Dealer Financial and Operations Principal registration requirement. Additionally, proposed Exchange Rule 1901(b)(3) 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. PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 72035 iv. Investment Banking Principal (Proposed Exchange Rule 1901(b)(4)) The Exchange does not recognize the Investment Banking Principal registration category and proposes to reserve Exchange Rule 1901(b)(4), retaining the caption solely to facilitate comparison with FINRA’s rules. v. Research Principal (Proposed Exchange Rule 1901(b)(5)) The Exchange does not recognize the Research Principal registration category and proposes to reserve Exchange Rule 1901(b)(5), retaining the caption solely to facilitate comparison with FINRA’s rules. vi. Securities Trader Principal (Proposed Exchange Rule 1901(b)(6)) Current Exchange Rule 203(c) provides that Members that are individuals and associated persons of Members included within the definition of Option Principal in Exchange Rule 100 and who will have supervisory responsibility over the securities trading activities described in Exchange Rule 203(d) shall become qualified and registered as a Securities Trader Principal. To qualify for registration as a Securities Trader Principal, such person shall become qualified and registered as a Securities Trader under Rule 1302(e) and pass the SIE and General Securities Principal qualification examination (Series 24). A person who is qualified and registered as a Securities Trader Principal under this provision may only have supervisory responsibility over the Securities Trader activities specified in Exchange Rule 203(d), unless such person is separately qualified and registered in another appropriate principal registration category, such as the General Securities Principal registration category. Current Exchange Rule 203(c)(2) provides that a person who is registered as a General Securities Principal shall not be qualified to supervise the trading activities described in Exchange Rule 203(d), unless such person has also become qualified and registered as a Securities Trader under Exchange Rule 1302(e) and become registered as a Securities Trader Principal. The Exchange proposes to delete Exchange Rule 203(c) and adopt in its place Exchange Rule 1901(b)(6), Securities Trader Principal. Proposed Exchange Rule 1901(b)(6) would require Further, as discussed above, the Exchange does not propose to adopt a Principal Financial Officer or Principal Operations Officer requirement similar to FINRA Rule 1220(a)(4)(B), as it believes the Financial and Operations Principal requirement is sufficient. E:\FR\FM\30DEN1.SGM 30DEN1 72036 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices that a principal responsible for supervising the securities trading activities specified in proposed Exchange Rule 1901(c)(3) 62 register as a Securities Trader Principal. The proposed rule requires individuals registering as Securities Trader Principals to be registered as Securities Traders and to pass the General Securities Principal qualification examination. khammond on DSKJM1Z7X2PROD with NOTICES vii. Registered Options Principal (Proposed Exchange Rule 1901(b)(7)) The Exchange proposes to adopt Exchange Rule 1901(b)(7), Registered Options Principal, which would require that each Member that is engaged in transactions in options with the public have at least one Registered Options Principal.63 Currently, Exchange Rule 100, Definitions, provides a definition for an ‘‘Options Principal.’’ In accordance with the proposal to adopt Exchange Rule 1901(b)(7), Registered Options Principal, the Exchange proposes to delete the definition for ‘‘Options Principal’’ in Exchange Rule 100. As discussed below, the Exchange proposes to adopt a corresponding definition for a ‘‘Registered Options Principal’’ in Exchange Rule 100, which would refer to proposed Exchange Rule 1901(b)(7). In addition, each principal as defined in proposed Exchange Rule 1901(a) 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, with one exception, as follows. 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 (b)(9) of this Rule in lieu of registering as a Registered Options Principal.64 62 Proposed Exchange Rule 1901(c)(3), discussed below, provides for representative-level registration in the ‘‘Securities Trader’’ category. 63 Proposed Exchange Rule 1901(b)(7) differs from FINRA Rule 1220(a)(8) in that it omits certain references to other specific FINRA rules. 64 Current Exchange Rule 1301(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. Persons engaged in the supervision of options sales practices or a person to whom the designated general partner or executive officer (pursuant to Rule 1308) or another Registered Options Principal delegates the authority to supervise options sales practices shall be designated as Options Principals. Exchange Rule 1301(e) provides that individuals who are delegated responsibility pursuant to Rule 1308 for the acceptance of discretionary accounts, for approving exceptions to a Member’s criteria or standards for uncovered options accounts, and for approval of VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 Pursuant to proposed Exchange Rule 1901(b)(7)(ii), subject to the lapse of registration provisions in proposed Exchange Rule 1900, Interpretation and Policy .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 proposed Exchange Rule 1901(c)(1) as a General Securities Representative and pass the Registered Options Principal qualification examination.65 communications, shall be designated as Options Principals and are required to qualify as an Options Principal by passing the SIE, the General Securities Representative qualification examination (Series 7) and the Registered Options Principal Qualification Examination (Series 4). The foregoing provisions of Exchange Rule 1301 are specific to conducting an options business with the public and are not proposed to be amended in this proposed rule change, other than conforming all references to ‘‘Options Principal’’ with ‘‘Registered Options Principal,’’ as more fully discussed herein. However, Exchange Rules 1301(b) and (c) contain provisions regarding submission of Forms U4 and U5 to WebCRD that are duplicative of the proposed 1900 Series of rules, in particular proposed Exchange Rule 1900, Interpretation and Policy .12, Application for Registration and Jurisdiction, and proposed Exchange Rule 1904, Electronic Filing Requirements for Electronic Forms, and are therefore proposed to be deleted. Current Exchange Rule 1301(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 Exchange Rule 1901(b)(7). Exchange Rule 203(g), which merely serves as a cross-reference to Exchange Rules 1301 and 1302, is unnecessary and is therefore proposed to be deleted with the rest of Exchange Rule 203. 65 Although the Exchange does not currently list security futures products, it also proposes to adopt Exchange Rule 1901, Interpretation and Policy .02, which provides that each person who is registered with the Exchange as a General Securities Representative, Registered Options Principal, 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 Exchange Rule 1903 that addresses security futures products before such person engages in security futures activities. Unlike FINRA Rule 1220.02, proposed Exchange Rule 1901, Interpretation and Policy .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 also proposes to adopt Exchange Rule 1901, Interpretation and Policy .03, which requires notification to the Exchange in the event a Member’s sole Registered Options Principal is terminated, resigns, becomes incapacitated or is PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 viii. Government Securities Principal (Proposed Exchange Rule 1901(b)(8)) The Exchange does not recognize the Government Securities Principal registration category and proposes to reserve Exchange Rule 1901(b)(8), retaining the caption solely to facilitate comparison with FINRA’s rules. ix. General Securities Sales Supervisor (Proposed Exchange Rules 1901(b)(9) and Interpretation and Policy .04) The Exchange proposes to adopt Exchange Rule 1901(b)(9), General Securities Sales Supervisor, as well as Interpretation and Policy .04 to Exchange Rule 1901, which explains the purpose of the General Securities Sales Supervisor registration category.66 Proposed Exchange Rule 1901(b)(9) provides that each principal, as defined in proposed paragraph (a) of this Rule, 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 Exchange Act record-keeping rules. Further, a person registered solely as a General Securities Sales Supervisor would not be qualified to perform any of the following activities: (i) Supervision of market making commitments; (ii) supervision of the custody of broker-dealer or customer funds or securities for purposes of Exchange Act Rule 15c3–3; or (iii) supervision of overall compliance with financial responsibility rules for brokerdealers promulgated pursuant to the provisions of the Exchange Act.67 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 proposed Exchange Rule 1901(c)(1) of the rule as a General Securities Representative and pass the General Securities Sales otherwise unable to perform the duties of a Registered Options Principal, and imposes certain restrictions on the Member’s options business in that event. 66 Proposed Exchange Rule 1901(b)(9) has no counterpart in the Exchange’s current rules. 67 Proposed Exchange Rule 1901(b)(9), 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 1900 Series of rules. E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices Supervisor qualification examinations.68 x. Investment Company and Variable Contracts Products Principal (Proposed Exchange Rule 1901(b)(10)) The Exchange does not recognize the Investment Company and Variable Contracts Products Principal category and is reserving proposed Exchange Rule 1901(b)(10), retaining the caption solely to facilitate comparison with FINRA’s rules. xi. Direct Participation Programs Principal (Proposed Exchange Rule 1901(b)(11)) The Exchange does not recognize the Direct Participation Programs Principal registration category and is reserving proposed Exchange Rule 1901(b)(11), retaining the caption solely to facilitate comparison with FINRA’s rules. xii. Private Securities Offerings Principal (Proposed Exchange Rule 1901(b)(12)) The Exchange does not recognize the Private Securities Offerings Principal registration category and is reserving proposed Exchange Rule 1901(b)(12), retaining the caption solely to facilitate comparison with FINRA’s rules. xiii. Supervisory Analyst (Proposed Exchange Rule 1901(b)(13)) The Exchange does not recognize the Supervisory Analyst registration category and is reserving proposed Exchange Rule 1901(b)(13), retaining the caption solely to facilitate comparison with FINRA’s rules. 3. Representative Registration Categories (Proposed Exchange Rule 1901(c)) khammond on DSKJM1Z7X2PROD with NOTICES i. General Securities Representative (Proposed Exchange Rule 1901(c)(1)) The Exchange proposes to adopt Exchange Rule 1901(c)(1), General Securities Representative. Proposed Exchange Rule 1901(c)(1)(i) would state that each representative as defined in proposed Exchange Rule 1901(a) 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 this Rule, then such person shall appropriately register as a Securities Trader. 68 Unlike FINRA Rule 1220.04, proposed Exchange Rule 1901, Interpretation and Policy .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. VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 Further, consistent with the proposed restructuring of the representative-level examinations, proposed Exchange Rule 1901(c)(1)(ii) 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.69 In addition, the Exchange proposes to adopt Exchange Rule 1901, Interpretation and Policy .01, to provide certain individuals who are associated persons of firms and who hold specific 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. In particular, pursuant to proposed Exchange Rule 1901, Interpretation and Policy .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. This proposed rule would provide individuals with a United Kingdom or Canadian qualification more flexibility to obtain an Exchange representativelevel registration. ii. Operations Professional (Proposed Exchange Rule 1901(c)(2)) The Exchange does not recognize the Operations Professional registration category for its associated persons. The Exchange therefore proposes to reserve Exchange Rule 1901(c)(2), Operations Professional, and related Interpretation and Policy .05 to proposed Exchange Rule 1901, Scope of Operations Professional Requirement, retaining the caption solely to facilitate comparison with FINRA’s rules. iii. Securities Trader (Proposed Exchange Rule 1901(c)(3)) Pursuant to current Exchange Rule 203(d)(1) and (2), Members that are 69 Proposed Exchange Rule 1901(c)(1)(i) differs from FINRA Rule 1220(b)(2)(A) in that it omits references to various registration categories which FINRA recognizes but which the Exchange does not propose to recognize. PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 72037 individuals and associated persons of Members must register with the Exchange as a Securities Trader if, with respect to transactions in equity, preferred or convertible debt securities, or foreign currency options on the Exchange, such person is engaged in proprietary trading, the execution of transactions on an agency basis, or the direct supervision of such activities, other than any person associated with a Member whose trading activities are conducted principally on behalf of an investment company that is registered with the Commission pursuant to the Investment Company Act of 1940 and that controls, is controlled by or is under common control, with the Member. In addition, an applicant must become qualified as a Securities Trader by passing the Securities Trader Qualification examination (Series 57) as stated in current Exchange Rule 1302(e). The Exchange proposes to delete Exchange Rule 203(d), and replace it with proposed Exchange Rule 1901(c)(3).70 Proposed Exchange Rule 1901(c)(3) would require each representative as defined in paragraph (a) of this 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 Commission pursuant to the Investment Company Act of 1940 and that controls, is controlled by, or is under common control with a Member. Additionally, proposed Exchange Rule 1901(c)(3)(i) 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.71 70 Proposed Exchange Rule 1901(c)(3)(i) differs from FINRA Rule 1220(b)(4)(A) in that it applies to trading on the Exchange while the FINRA rule is limited to the specified trading which is ‘‘effected otherwise than on a securities exchange.’’ Additionally, the FINRA rule does not specifically extend to options trading. 71 As noted above, this new registration requirement was 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 E:\FR\FM\30DEN1.SGM Continued 30DEN1 72038 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices khammond on DSKJM1Z7X2PROD with NOTICES For purposes of this proposed new registration requirement an ‘‘algorithmic trading strategy’’ would be 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.72 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 proposed rule’s coverage. See Securities Exchange Act Release No. 77551 (April 7, 2016), 81 FR 21914 (April 13, 2016) (SR–FINRA–2016–007) (Order Approving a Proposed Rule Change to Require Registration as Securities Traders of Associated Persons Primarily Responsible for the Design, Development, Significant Modification of Algorithmic Trading Strategies or Responsible for the Day-to-Day Supervision of Such Activities). 72 See supra note 12. VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 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 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 Exchange Rule 1901(c)(3)(ii), 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 PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 Securities Trader qualification examination. Further, the Exchange proposes to delete Exchange Rule 1302(e) in connection with its proposal to adopt Exchange Rule 1901(c)(3), which defines the requirements and qualifications for a Securities Trader, as well as its proposal to amend Exchange Rule 100 to insert definitions for ‘‘proprietary trading’’ and ‘‘proprietary trading firm,’’ as described below. Accordingly, Exchange Rule 1302(e) is repetitive and no longer necessary in light of the Exchange’s other proposed changes. iv. Investment Banking Representative (Proposed Exchange Rule 1901(c)(4)) The Exchange does not recognize the Investment Banking Representative registration category for its associated persons. The Exchange therefore proposes to reserve Exchange Rule 1901(c)(4), Investment Banking Representative, retaining the caption solely to facilitate comparison with FINRA’s rules. v. Research Analyst (Proposed Exchange Rule 1901(c)(5)) The Exchange does not recognize the Research Analyst registration category for its associated persons. The Exchange therefore proposes to reserve Exchange Rule 1901(c)(5), Research Analyst, retaining the caption solely to facilitate comparison with FINRA’s rules. vi. Investment Company and Variable Products Representative (Proposed Exchange Rule 1901(c)(6)) The Exchange does not recognize the Investment Company and Variable Products Representative registration category for its associated persons. The Exchange therefore proposes to reserve Exchange Rule 1901(c)(6), Investment Company and Variable Products Representative, retaining the caption solely to facilitate comparison with FINRA’s rules. vii. Direct Participation Programs Representative (Proposed Exchange Rule 1901(c)(7)) The Exchange does not recognize the Direct Participation Programs Representative registration category for its associated persons. The Exchange therefore proposes to reserve Exchange Rule 1901(c)(7), Direct Participation Programs Representative, retaining the caption solely to facilitate comparison with FINRA’s rules. E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices viii. Private Securities Offerings Representative (Proposed Exchange Rule 1901(c)(8)) The Exchange does not recognize the Private Securities Offerings Representative registration category for its associated persons. The Exchange therefore proposes to reserve Exchange Rule 1901(c)(8), Private Securities Offerings Representative, retaining the caption solely to facilitate comparison with FINRA’s rules. 4. Eliminated Registration Categories (Proposed Exchange Rule 1901, Interpretation and Policy .06) Proposed Exchange Rule 1901, Interpretation and Policy .06, has no practical relevance to the Exchange, but is included because the Exchange proposes to adopt rules similar to FINRA’s 1200 Series, on a near uniform basis. Accordingly, proposed Exchange Rule 1901, Interpretation and Policy .06, provides that, subject to the lapse of registration provisions in proposed Exchange Rule 1900, Interpretation and Policy .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. khammond on DSKJM1Z7X2PROD with NOTICES 5. Grandfathering Provisions In addition to the grandfathering provisions in proposed Exchange Rule 1901(b)(1)(ii) (relating to General Securities Principals) and proposed Exchange Rule 1901, Interpretation and Policy .06 (relating to the eliminated registration categories), the Exchange proposes to include grandfathering provisions in proposed Exchange Rule 1901(b)(7) (Registered Options Principal), Exchange Rule 1901(c)(1) (General Securities Representative), and Exchange Rule 1901(c)(3) (Securities Trader). Specifically, the proposed grandfathering provisions provide that, subject to the lapse of registration provisions in proposed Exchange Rule 1900, Interpretation and Policy .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 VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 date of the proposed rule change would be qualified to register in the proposed corresponding registration categories without having to take any additional examinations. N. Associated Persons Exempt From Registration (Proposed Exchange Rules 1902 and 1902, Interpretation and Policy .01) Current Exchange Rule 203(b) currently provides that the following individual Members and individual associated persons of Members are not required to register: (1) Individual associated persons whose functions are solely and exclusively clerical or ministerial; (2) individual Members and individual associated persons who are not actively engaged in the securities business; (3) individual associated persons whose functions are related solely and exclusively to the Member’s need for nominal corporate officers or for capital participation; (4) 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 securities exchange and who are registered floor members with such exchange. The Exchange proposes to delete Exchange Rule 203(b) and adopt provisions of Exchange Rule 203(b) in the newly proposed Exchange Rule 1902, subject to certain changes. Current Exchange Rule 203(b)(2) exempts from registration those individual Members and individual associated persons of Members who are not actively engaged in the securities business. Exchange Rule 203(b)(3) 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.73 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 individual Members and individual associated persons who are not ‘‘actively engaged’’ in a Member’s 73 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. PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 72039 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.74 The Exchange therefore proposes to delete these exemptions. Exchange Rule 203(b)(4)(iii) 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 Exchange Rule 1902 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.75 Additionally, the Exchange proposes to adopt paragraph (c) of proposed Exchange Rule 1902, 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.76 The Exchange proposes to adopt Exchange Rule 1902, Interpretation and Policy .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 74 The Exchange also proposes to delete Exchange Rule 203, Interpretation and Policy .06, which specifies circumstances in which the Exchange considers an individual Member or an individual associated person to be engaged in the securities business of a Member or Member organization. The Exchange believes these determinations may be made on case by case basis, depending upon facts and circumstances. 75 Proposed Exchange Rule 1902 differs from FINRA Rule 1230 in that it contains a number of additional exemptions, based upon current Nasdaq Stock Market Rule 1.1230, which are not included in FINRA Rule 1230. See Nasdaq Stock Market, General 4, Regulations, Section 1, Registration, Qualification and Continuing Education, Rule 1.1230. 76 Individuals described by paragraph (c) of proposed Exchange Rule 1902 who are associated with FINRA members may be registered with FINRA as Foreign Associates pursuant to FINRA Rule 1220.06. FINRA eliminated this registration category effective October 1, 2018, and the Exchange never recognized it. E:\FR\FM\30DEN1.SGM 30DEN1 72040 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices 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. khammond on DSKJM1Z7X2PROD with NOTICES O. Changes to Continuing Education Requirements (Proposed Exchange Rule 1903) As described above, current Exchange Rule 1304, 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 Exchange Rule 1304 have been reorganized and renumbered, and are now proposed to be adopted with amendments as proposed Exchange Rule 1903.77 1. Regulatory Element The Exchange proposes to replace the term ‘‘registered person’’ in current Exchange Rule 1304(a) with the term ‘‘covered person’’ and make conforming changes to proposed Exchange Rule 1903(a). For purposes of the Regulatory Element, the Exchange proposes to define the term ‘‘covered person’’ in proposed Exchange Rule 1903(a)(5), as any person registered pursuant to proposed Exchange Rule 1900, including any person who is permissively registered pursuant to proposed Exchange Rule 1900, Interpretation and Policy .02, and any person who is designated as eligible for an FSA waiver pursuant to proposed Exchange Rule 1900, Interpretation and Policy .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 Exchange 77 Proposed Exchange Rule 1903 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. VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 Rule 1900, Interpretation and Policy .09. In addition, consistent with proposed Exchange Rule 1900, Interpretation and Policy .09, proposed Exchange Rule 1903(a)(1) 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 proposes to add a rule to address the impact of failing to complete the Regulatory Element on a registered person’s activities and compensation. Specifically, proposed Exchange Rule 1903(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 Exchange Rule 1903(b)(2)(ii), 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 Requirements for Uniform Rules (Proposed Exchange Rule 1904) Current Exchange Rule 203, Interpretations and Policies .01–.03, state that each individual required to register shall electronically file a Uniform Application for Securities Industry Registration (‘‘Form U4’’) through the Central Registration Depository system (‘‘Web CRD’’) operated by FINRA and to electronically submit to Web CRD any required amendments to Form U4. Further, any Member or Member organization 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 Form U5 electronic filing requirements applicable PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 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 Exchange Rules 1301, 1302, and 1303. The Exchange proposes to delete current Exchange Rule 203, Interpretations and Policies .01–.03, and the electronic filing requirements of Exchange Rules 1301, 1302 and 1303, and to replace them with proposed Exchange Rule 1904, Electronic Filing Requirements for Uniform Forms, which will consolidate Form U4 and Form U5 electronic filing requirements into a single rule. The proposed rule provides that all forms required to be filed under the Exchange’s registration rules including the Exchange Rule 1900 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 proposed Exchange Rule 1904(b), each Member 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 or she is filing this information on behalf of the Member and the Member’s associated persons. Under proposed Exchange Rule 1904, Interpretation and Policy .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 proposed Exchange Rule 1904(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. Pursuant to proposed Exchange Rule 1904(c)(1), every initial and transfer electronic Form U4 filing 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 Exchange Act Rule E:\FR\FM\30DEN1.SGM 30DEN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices 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. Proposed Exchange Rule 1904(c)(2) and Interpretations and Policies .03 and .04 to proposed Exchange Rule 1904, provide for the electronic filing of Form U4 amendments without the individual’s manual signature, subject to certain safeguards and procedures. Proposed Exchange Rule 1904(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 this proposed 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 1901. Upon application and a showing of good cause, the Exchange could extend the 30-day period. Proposed Exchange Rule 1904(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 Exchange Rule 1904, Interpretation and Policy .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 VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 complying with the requirements of the Rule. Q. Exchange Rule 100, Definitions The Exchange proposes to amend Exchange Rule 100, Definitions, to amend the term ‘‘associated person’’ or ‘‘person associated with a Member.’’ Currently, the term associated person or person associated with a Member means any partner, officer, director, or branch manager of a Member (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with a Member, or any employee of a Member. The Exchange proposes to amend the term associated person or person associated with a Member to insert, at the end of the definition, the phrase ‘‘except that any person associated with a Member whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of these Rules.’’ With the proposed change, the definition for associated person or person associated with a Member would be as follows: The term ‘‘associated person’’ or ‘‘person associated with a Member’’ means any partner, officer, director, or branch manager of a Member (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with a Member, or any employee of a Member, except that any person associated with a Member whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of these Rules. Additionally, the Exchange proposes to amend Exchange Rule 100, Definitions to adopt definitions for the following terms: Person, proprietary trading, and proprietary trading firm. The Exchange proposes that the term ‘‘person’’ shall refer to a natural person, corporation, partnership (general or limited), limited liability company, association, joint stock company, trust, trustee of a trust fund, or any organized group of persons whether incorporated or not and a government or agency or political subdivision thereof. The Exchange proposes that the term ‘‘proprietary trading’’ for the purpose of proposed Exchange Rule 1900, means trading done by a Member having the following characteristics: (i) The Member is not required by Section 15(b)(8) of the Act to become a FINRA member but is a Member of another registered securities exchange not registered solely under Section 6(g) of the Act; (ii) all funds used or proposed to be used by the Member are the trading member’s own capital, traded PO 00000 Frm 00152 Fmt 4703 Sfmt 4703 72041 through the Member’s own accounts; (iii) the Member does not, and will not, have customers; and (iv) all persons registered on behalf of the Member acting or to be acting in the capacity of a trader must be owners of, employees of, or contractors to the Member. The Exchange proposes that the term ‘‘proprietary trading firm’’ for the purpose of proposed Exchange Rule 1900, means a Member organization or applicant with the following characteristics: (i) The applicant is not required by Section 15(b)(8) of the Act to become a FINRA Member but is a Member of another registered securities exchange not registered solely under Section 6(g) of the Act; (ii) all funds used or proposed to be used by the applicant for trading are the applicant’s own capital, traded through the applicant’s own accounts; (iii) the applicant does not, and will not have customers; and (iv) all principals and representatives of the applicant acting or to be acting in the capacity of a trader must be owners of, employees of, or contractors to the applicant. As described above, in connection with the Exchange’s proposal to adopt Exchange Rule 1901(b)(7), Registered Options Principal, the Exchange proposes to delete the definition for ‘‘Options Principal’’ from Exchange Rule 100 in order to provide consistency and clarity within the rule text. In proposed Exchange Rule 1901(b)(7), the Exchange sets forth the requirements and qualifications for a ‘‘Registered Options Principal,’’ which incorporates, and adds to, the rule text for the Exchange’s current definition for ‘‘Options Principal.’’ Accordingly, the Exchange proposes to delete the term ‘‘Options Principal’’ and replace all references in the rule text to ‘‘Options Principal’’ with the new proposed term ‘‘Registered Options Principal.’’ The proposed changes would be to references to ‘‘Options Principal’’ that are currently in Exchange Rules 1301, 1306, 1307, 1309, 1310 and 1319. The Exchange also proposes to adopt a definition for a ‘‘Registered Options Principal’’ in Exchange Rule 100, that will provide a cross-reference to Exchange Rule 1901(b)(7). R. Exchange Rule 601, Registered Options Traders In accordance with the proposed change to delete Exchange Rule 203 in its entirety, revise and relocate the provisions of Exchange Rule 203 to the newly proposed 1900 Series, the Exchange proposes to amend a crossreference in Exchange Rule 601(b)(2). Currently, Exchange Rule 601(b)(2) has a cross-reference to Exchange Rule E:\FR\FM\30DEN1.SGM 30DEN1 72042 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices 203(a). The Exchange proposes to amend that cross-reference to proposed Exchange Rule 1900. S. Exchange Rule 1000, Disciplinary Jurisdiction In accordance with the proposed change to delete several provisions of Exchange Rule 1302, revise and relocate those provisions to the newly proposed 1900 Series, the Exchange proposes to amend a cross-reference in Exchange Rule 1000(c). Currently, Exchange Rule 1000(c) has a cross-reference to Exchange Rule 1302. The Exchange proposes to amend that cross-reference to proposed Exchange Rule 1900, Interpretation and Policy .12. T. Exchange Rule 1014, Imposition of Fines for Minor Rule Violations The Exchange proposes to amend the cross-references in Exchange Rule 1014(d)(14) that are to current Exchanges Rules 1301, 1302 and 1303. With the proposed changes described above to delete Exchange Rule 1303 and selection provisions of Exchange Rules 1301 and 1302, the Exchange proposes to amend the cross-references in Exchange 1014(d)(14) that are to Exchange Rules 1301, 1302 and 1303 to the newly proposed Exchange Rule 1904, which incorporates that deleted rule text. Accordingly, the Exchange proposes to amend the cross-reference in Exchange Rule 1014(d)(14) to now be to proposed Exchange Rule 1904. khammond on DSKJM1Z7X2PROD with NOTICES U. Exchange Rule 1301, Registration of Options Principals As described above, the Exchange proposes to delete subparagraphs (b), (c), and (d) of Exchange Rule 1301 and relocate those provisions to the proposed 1900 Series of rules. In particular, subparagraphs (b) and (c) are incorporated into proposed Exchange Rule 1900, Interpretation and Policy .12. Subparagraph (d) is incorporated into proposed Exchange Rule 1901(b)(7). Accordingly, the Exchange proposes to renumber Exchange Rule 1301(e) to conform to the hierarchical heading scheme used throughout the Exchange’s rulebook to provide consistency and clarity. The Exchange proposes to renumber Exchange Rule 1301(e) to be Exchange Rule 1301(b). 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.78 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 79 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, 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. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 80 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Exchange believes that the proposed rule changes will streamline, and bring consistency and uniformity to, the Exchange’s registration rules. The Exchange believes that this will, in turn, assist Members and their associated persons in complying with these rules and improve regulatory efficiency. The proposed rule changes 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 changes 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 changes 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 changes 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 79 15 78 15 U.S.C. 78f(b). VerDate Sep<11>2014 20:00 Dec 27, 2019 U.S.C. 78f(b)(5). 80 Id. Jkt 250001 PO 00000 Frm 00153 Fmt 4703 Sfmt 4703 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. The proposed rule changes, including additional definitions and changes to cross-references, make organizational changes to the Exchange’s registration and qualification rules, 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 changes will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The proposed rule changes are 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 1900 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 E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices 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 Exchange, thereby promoting uniformity of regulation across markets. The proposed 1900 Series of rules should in fact remove administrative burdens that currently exist for Members seeking to register associated persons on the Exchange featuring varying registrationrelated requirements. Additionally, all similarly-situated associated persons of Members will be treated similarly under the new 1900 Series of rules in terms of standards of training, experience and competence for persons associated with Exchange Members. With respect in particular to registration of developers of algorithmic trading strategies, the Exchange recognizes that the proposal would impose costs on member firms employing associated persons engaged in the activity subject to the registration requirement. Specifically, among other things, additional associated persons would be required to become registered under the proposal, and the firm would need to establish policies and procedures to monitor compliance with the proposed requirement on an ongoing basis. However, given the prevalence and importance of algorithmic trading strategies in today’s markets, the Exchange believes that associated persons engaged in the activities covered by this proposal must meet a minimum standard of knowledge regarding the applicable securities rules and regulations. To mitigate the costs imposed on member firms, the proposed rule change limits the scope of registration requirement by excluding technological or development support personnel who are not primarily responsible for the covered activities. It also excludes supervisors who are not responsible for the covered activities. It also excludes supervisors who are not responsible for the ‘‘day-to-day’’ supervision or direction of the covered activities. khammond on DSKJM1Z7X2PROD with NOTICES C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: VerDate Sep<11>2014 20:00 Dec 27, 2019 Jkt 250001 (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6) thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MIAX–2019–50 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–MIAX–2019–50. 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 (http://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 PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 72043 filing also will be available for inspection and copying at the principal offices 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–MIAX–2019–50, and should be submitted on or before January 21, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.81 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2019–28089 Filed 12–27–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87819; File No. SR–ISE– 2019–31] Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a New Rule Titled ‘‘Off-Exchange RWA Transfers’’ at ISE Options 6, Section 6 December 20, 2019. 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 December 17, 2019, 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, II, and III, 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 adopt a new rule titled ‘‘Off-Exchange RWA Transfers’’ at ISE Options 6, Section 6. The text of the proposed rule change is available on the Exchange’s website at http://ise.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 81 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\30DEN1.SGM 30DEN1

Agencies

[Federal Register Volume 84, Number 249 (Monday, December 30, 2019)]
[Notices]
[Pages 72025-72043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87830; File No. SR-MIAX-2019-50]


Self-Regulatory Organizations: Miami International Securities 
Exchange LLC; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend, Reorganize and Enhance Its Membership, 
Registration and Qualification Rules and Consolidate These Rules Into 
New Chapter XIX Registration, Qualification and Continuing Education

December 20, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 72026]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 10, 2019, Miami International Securities Exchange, LLC 
(``MIAX Options'' or the ``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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal 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 http://www.miaxoptions.com/rule-filings/ at MIAX Options' 
principal office, 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 adopted registration requirements to ensure that 
associated persons \3\ attain and maintain specified levels of 
competence and knowledge pertinent to their function. In general, the 
Exchange's current rules require that persons engaged in a Member's \4\ 
securities business who are to function as representatives \5\ or 
principals \6\ register with the Exchange in each category of 
registration appropriate to their functions by passing one or more 
qualification examinations \7\ and exempt specified associated persons 
from the registration requirements.\8\ They also prescribe ongoing 
continuing education requirements for registered persons.\9\ The 
Exchange proposes to amend, reorganize and enhance its rules regarding 
registration, qualification examinations and continuing education, as 
described below.
---------------------------------------------------------------------------

    \3\ The term ``associated person'' or ``person associated with a 
Member'' means any partner, officer, director, or branch manager of 
a Member (or any person occupying a similar status or performing 
similar functions), any person directly or indirectly controlling, 
controlled by, or under common control with a Member, or any 
employee of a Member. See Exchange Rule 100. In accordance with 
other proposed changes in this filing, and as further described 
below, the Exchange proposes to amend the terms ``associated 
person'' or ``person associated with a Member.''
    \4\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \5\ A ``representative'' is 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. See 
proposed Exchange Rule 1901.
    \6\ A ``principal'' is 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 shall include, among other 
persons, a Member's chief executive officer and chief financial 
officer (or equivalent officers). A ``principal'' also includes 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 under Exchange rules. See proposed 
Exchange Rule 1901.
    \7\ See proposed Exchange Rule 1901, Registration Categories, 
and Exchange Rule 1302, Registration of Representatives.
    \8\ See proposed Exchange Rule 1902, Associated Persons Exempt 
from Registration.
    \9\ See proposed Exchange Rule 1903, Continuing Education 
Requirements.
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    In 2017, the Commission approved a Financial Industry Regulatory 
Authority, Inc. (``FINRA'') proposed rule change consolidating and 
adopting prior National Association of Securities Dealers, Inc. 
(``NASD'') rules and rules incorporated from the New York Stock 
Exchange (``NYSE'') relating to qualification and registration 
requirements into the Consolidated FINRA Rulebook,\10\ 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'').\11\
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    \10\ The current FINRA rulebook consists of: (1) FINRA rules; 
(2) NASD rules; and (3) rules incorporated from the 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.
    \11\ See Securities Exchange Act Release No. 81098 (July 7, 
2017), 82 FR 32419 (July 13, 2017) (SR-FINRA-2017-007) (Order 
Approving Proposed Rule Change to Adopt Consolidated Registration 
Rules, Restructure the Representative-Level Qualification 
Examination Program, Allow Permissive Registration, Establish Exam 
Waiver Process for Persons Working for Financial Services Affiliate 
of Member, and Amend the Continuing Education Requirements). 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 
response to the FINRA Rule Changes. In addition, the Exchange proposes 
to enhance its registration rules by adding a new registration 
requirement applicable to developers of algorithmic trading systems 
similar to a requirement adopted by FINRA pursuant to a 2016 FINRA rule 
change.\12\
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    \12\ See Securities Exchange Act Release No. 77551 (April 7, 
2016), 81 FR 21914 (April 13, 2016) (SR-FINRA-2016-007) (Order 
Approving a Proposed Rule Change to Require Registration as 
Securities Traders of Associated Persons Primarily Responsible for 
the Design, Development, Significant Modification of Algorithmic 
Trading Strategies or Responsible for the Day-to-Day Supervision of 
Such Activities). In that 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 the Exchange's proposed rule change, current Exchange 
Rule 203, Qualification and Registration of Members and Associated 
Persons, Exchange Rule 1303, Termination of

[[Page 72027]]

Registered Persons, and Exchange Rule 1304, Continuing Education for 
Registered Persons, are proposed to be deleted. These current Exchange 
rule provisions are incorporated into the new proposed 1900 Series of 
Exchange rules, as further described below.
    Additionally, the Exchange proposes to amend Exchange Rule 100, 
Definitions, Exchange Rule 601, Registered Option Traders, Exchange 
Rule 1000, Disciplinary Jurisdiction, Exchange Rule 1014, Imposition of 
Fines for Minor Rule Violations, Exchange Rule 1301, Registration of 
Options Principals, Exchange Rule 1302, Registration of 
Representatives, Exchange Rule 1306, Branch Offices, Exchange Rule 
1307, Opening of Accounts, Exchange Rule 1309, Suitability of 
Recommendations, Exchange Rule 1310, Discretionary Accounts, and 
Exchange Rule 1319, Profit Sharing.
    In place of the deleted rules, and parts of the amended rules, the 
Exchange proposes to adopt new Chapter XIX, Registration, Qualification 
and Continuing Education, in the Exchange's Rulebook, together with 
conforming changes to certain existing Exchange rules. In the new 
Chapter XIX series of rules, the Exchange would, among other things, 
recognize additional associated person registration categories, 
recognize a new general knowledge examination, permit the maintenance 
of permissive registrations, and require Securities Trader registration 
of developers of algorithmic trading strategies consistent with a 
comparable, existing FINRA registration requirement.\13\
---------------------------------------------------------------------------

    \13\ See id.
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    The Exchange notes that the structure of this rule filing, as well 
as newly proposed Chapter XIX series of rules, is based on a recent 
rule filing by the Nasdaq Stock Market, LLC (``Nasdaq Stock 
Market'').\14\ The similar Nasdaq Stock Market filing also amended, 
reorganized and enhanced membership, registration and qualification 
rules for the Nasdaq Stock Market, and was based on the FINRA Rule 
Changes.\15\
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    \14\ See Securities Exchange Act Release No. 84386 (October 9, 
2018), 83 FR 51988 (October 15, 2018) (SR-NASDAQ-2018-078) (Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change to 
Amend, Reorganize and Enhance Its Membership, Registration and 
Qualification Rules)
    \15\ See id.
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New Proposed Rules and Proposed Changes to Current Exchange Rules
A. Registration Requirements (Proposed Exchange Rule 1900)
    Exchange Rule 203(a) currently requires individuals and 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.\16\
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    \16\ In general the 1900 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. However, the 
Exchange also proposes to adopt Exchange Rule 1900, Interpretation 
and Policy .12, based upon a current Nasdaq Stock Market rule. See 
Nasdaq Stock Market, General 4, Section 1, Rule 1.1210, 
Supplementary Material .12; see also Securities Exchange Act Release 
No. 84386 (October 9, 2018), 83 FR 51988 (October 15, 2018) (SR-
NASDAQ-2018-078). 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 Exchange Rule 1900, Interpretation and Policy .12, 
in order to have uniform processes and requirements in this area 
across the Exchange.
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    Proposed Exchange Rule 1900 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 Exchange Rule 1901, unless exempt from registration 
pursuant to proposed Exchange Rule 1902.\17\ Proposed Exchange Rule 
1900 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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    \17\ 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 Exchange Rules 1900, Interpretations and 
Policies .03 and .10 of Exchange Rule 1900, Exchange Rules 1901 and 
1903, and also by omitting as unnecessary from proposed Exchange 
Rule 1901, 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 Exchange Rule 
1900, Interpretation and Policy .01)
    Exchange Rule 203, Interpretation and Policy .07, requires Members 
to register with the Exchange in a heightened capacity each individual 
acting in any of the following capacities: (a) Officer; (b) partner; 
(c) director; (d) supervisor of proprietary trading, market making or 
brokerage activities; and/or (e) supervisor of those engaged in 
proprietary trading, market-making or brokerage activities with respect 
to those activities. Each Member or Member organization 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. A Member or Member organization that conducts 
proprietary trading only and has 25 or fewer registered persons may be 
required to have one officer or partner who is registered in this 
capacity.\18\
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    \18\ Currently, Exchange Rule 203, Interpretation and Policy 
.08, describes when a Member is considered to be conducting only 
proprietary trading of the Member. Because the Exchange now proposes 
to delete Exchange Rule 203 in its entirety, Interpretation and 
Policy .08 of that rule would be reworded and relocated to Exchange 
Rule 100, Definitions, as a defined term.
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    The Exchange proposes to delete these requirements and in their 
place adopt new Exchange Rule 1900, Interpretation and Policy .01. The 
proposed rule would provide firms that limit the scope of their 
business with flexibility in satisfying the two-principal requirement. 
In particular, proposed Exchange Rule 1900, Interpretation and Policy 
.01, would require each Member, except a Member with only one 
associated person, to have at least two officers or partners who are 
registered as General Securities Principals, provided that a Member 
that is limited in the scope of its activities may instead have two 
officers or partners who are registered in a principal category that 
corresponds to the scope of the Member's activities.\19\ For instance, 
if a firm's business is limited to securities trading, the firm may 
have two Securities Trader Principals, instead of two General 
Securities Principals. Additionally, proposed Exchange Rule 1900, 
Interpretation and Policy .01, would provide that any Member with only 
one associated person is excluded from the two principal requirement. 
Proposed Exchange Rule 1900, Interpretation and Policy .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 203, Interpretation and Policy .07. Finally, the Exchange 
proposes to retain the existing provision in Exchange Rule 203 
permitting a proprietary trading firm with 25 or fewer registered 
representatives to have just one registered principal. The FINRA Rule 
Changes do not include this provision.\20\
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    \19\ The principal registration categories are described in 
greater detail below.
    \20\ The Exchange does not propose to adopt provisions 
comparable to FINRA Rule 1210.01, which requires that all FINRA 
members have a Principal Financial Officer and a Principal 
Operations Officer, because the Exchange believes that its proposed 
Exchange Rule 1901(b)(3), Financial and Operations Principal, is 
sufficient. As described herein, proposed Exchange Rule 1901(b)(3), 
requires Member firms operating pursuant to certain provisions of 
the Commission's rules to designate at least one Financial and 
Operations Principal. Further, the Exchange does not propose to 
adopt FINRA Rule 1210.01, which requires 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 propose to recognize the Investment Banking Principal or 
the Research Principal registration categories, and the Registered 
Options Principal registration requirement is set forth in proposed 
Exchange Rule 1901(b)(7), and its inclusion is therefore unnecessary 
in proposed Exchange Rule 1900.

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[[Page 72028]]

C. Permissive Registrations (Proposed Exchange Rule 1900, 
Interpretation and Policy .02)
    Current Exchange Rule 203(a) prohibits a Member 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 the examination requirement. Current Exchange Rule 203(a) 
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 proposes to replace these provisions with proposed 
Exchange Rule 1900, Interpretation and Policy .02. The Exchange also 
proposes to expand the scope of permissive registrations and to clarify 
a Member's obligations regarding individuals who are maintaining such 
registrations.
    Specifically, proposed Exchange Rule 1900, Interpretation and 
Policy .02, would allow any associated person to apply for or 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 
Exchange Rule 1900, Interpretation and Policy .02, would allow 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 proposes to permit the registration of such 
individuals for several reasons. First, a Member may foresee a need to 
move a former representative or principal who has not been registered 
for two or more years back into a position that would require such 
person to be registered. Currently, such persons are required to 
requalify (or obtain a waiver of the applicable qualification 
examinations) and reapply for registration. Second, the proposed rule 
change would allow Members to develop a depth of associated persons 
with registrations in the event of unanticipated personnel changes. 
Third, allowing registration in additional categories encourages 
greater regulatory understanding. Finally, the proposed rule change 
would eliminate an inconsistency in the current rules, which permit 
some associated persons of a Member to obtain permissive registrations, 
but not others who equally are engaged in the Member's business.
    Individuals maintaining a permissive registration under the 
proposed rule change would be considered registered persons and subject 
to all Exchange rules, to the extent relevant to their activities. For 
instance, an individual working solely in an administrative capacity 
would be able to maintain a General Securities Representative 
registration and would be considered a registered person for purposes 
of rules relating to borrowing from or lending to customers, but the 
rule would have no practical application to his or her conduct because 
he or she would not have any customers.
    Consistent with the Exchange's supervision rules, Members would be 
required to have adequate supervisory systems and procedures reasonably 
designed to ensure that individuals with permissive registrations do 
not act outside the scope of their assigned functions.\21\ With respect 
to an individual who solely maintains a permissive registration, such 
as an individual working exclusively in an administrative capacity, the 
individual's direct supervisor is not required to be a registered 
person. Members would be required to assign a registered supervisor to 
this person who would be responsible for periodically contacting such 
individual's direct supervisor to verify that the individual is not 
acting outside the scope of his or her assigned functions. If such 
individual is permissively registered as a representative, the 
registered supervisor must be registered as a representative or 
principal. If the individual is permissively registered as a principal, 
the registered supervisor must be registered as a principal.\22\
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    \21\ FINRA Rule 1210.02 specifically cites FINRA's supervisory 
system rule, FINRA Rule 3110, by number. Proposed Exchange Rule 
1900, Interpretation and Policy .02, refers generally to the 
Exchange's supervision rules rather than identifying them by number.
    \22\ In either case, the registered supervisor of an individual 
who solely maintains a permissive registration would not be required 
to be registered in the same representative or principal 
registration category as the permissively-registered individual. See 
proposed Exchange Rule 1900, Interpretation and Policy .02.
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D. Qualification Examinations and Waivers of Examinations (Proposed 
Exchange Rule 1900, Interpretation and Policy .03)
    Current Exchange Rule 203(a) provides that before a registration 
can become effective, the individual Member or individual associated 
person shall submit the appropriate application for registration, pass 
the Securities Industry Essentials Examination (``SIE''), 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 proposes to replace this rule language 
with new Exchange Rule 1900, Interpretation and Policy .03, 
Qualification Examinations and Waivers of Examinations.
    As part of the FINRA Rule Changes, FINRA adopted a restructured 
representative-level qualification examination program whereby 
representative-level registrants would be required to take a general 
knowledge examination (the SIE) and a specialized knowledge examination 
appropriate to the representative's job functions at the firm with 
which he or she is associating.\23\ Therefore, proposed Exchange Rule 
1900, Interpretation and Policy .03, provides that before the 
registration of a person as a representative can become effective under 
proposed Exchange Rule 1900, such person must pass the SIE and an 
appropriate representative-level qualification examination as specified 
in proposed Exchange Rule 1901(c). Proposed Exchange Rule 1900, 
Interpretation and Policy .03, also provides that before the 
registration of a person as a principal can become effective under 
proposed Exchange Rule 1900, such person must pass an

[[Page 72029]]

appropriate principal-level qualification examination as specified in 
proposed Rule 1901(b).
---------------------------------------------------------------------------

    \23\ See supra note 11.
---------------------------------------------------------------------------

    Further, proposed Exchange Rule 1900, Interpretation and Policy 
.03, provides that if the job functions of a registered representative 
change and he or she needs to become registered in another 
representative-level category, he or she would not need to pass the SIE 
again. Rather, the registered person would need to pass only the 
appropriate representative-level qualification examination.\24\ Thus 
under the proposed rule change, individuals seeking registration in two 
or more representative-level categories would experience a net decrease 
in the total number of exam questions they would be required to answer 
because the SIE content would be tested only once.
---------------------------------------------------------------------------

    \24\ FINRA 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 Exchange Rule 1900, Interpretation 
and Policy .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 
1900, Interpretation and Policy .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 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 Exchange Rule 1900, 
Interpretation and Policy .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.
---------------------------------------------------------------------------

    The proposed rule change solely impacts the representative-level 
qualification requirements. The proposed rule change does not change 
the scope of the activities permitted under the existing representative 
categories. For instance, after the operative date of the proposed rule 
change, a previously unregistered individual registering as a 
Securities Trader for the first time would be required to pass the SIE 
and an appropriate specialized knowledge examination. However, such 
individual may engage only in those activities in which a current 
Securities Trader may engage under current Exchange Rules.
    Individuals who are registered on the operative date of the 
proposed rule change would be eligible to maintain those registrations 
without being subject to any additional requirements. Individuals who 
had been registered within the past two years prior to the operative 
date of the proposed rule change would also be eligible to maintain 
those registrations without being subject to any additional 
requirements, provided that they reregister with the Exchange within 
two years from the date of their last registration.
    Further, registered representatives 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, could do so by taking only the appropriate 
specialized knowledge examination.\25\ However, with respect to an 
individual who is not registered on the operative date of the proposed 
rule change but was registered within the past two years prior to the 
operative date of the proposed rule change, the individual's SIE status 
in the CRD system would be administratively terminated if such 
individual does not register within four years from the date of the 
individual's last registration.\26\
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    \25\ Under the proposed rule change, only individuals who have 
passed an appropriate representative-level examination would be 
considered to have passed the SIE. Registered principals who do not 
hold an appropriate representative-level registration would not be 
considered to have passed the SIE. For example, an individual who is 
registered solely as a Financial and Operations Principal (Series 
27) today would have to take the Series 7 to become registered as a 
General Securities Representative. Under the proposed rule change, 
in the future, this individual would have to pass the SIE and the 
specialized Series 7 examination to obtain registration as a General 
Securities Representative.
    \26\ As discussed below, the Exchange proposes a four-year 
expiration period for the SIE.
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    In addition, individuals 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 Exchange Rule 203, Interpretation and Policy 
.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 proposes to replace Exchange Rule 203, 
Interpretation and Policy .05, with proposed Exchange Rule 1900, 
Interpretation and Policy .03, with changes that track FINRA Rule 
1210.03. The proposed rule provides that the Exchange will only 
consider examination waiver requests submitted by a firm for 
individuals associated with the firm who are seeking registration in a 
representative-level or principal-level registration category. 
Moreover, proposed Exchange Rule 1900, Interpretation and Policy .03, 
states that the Exchange will consider waivers of the SIE alone or the 
SIE and the representative-level and principal-level examination(s) for 
such individuals.
E. Requirements for Registered Persons Functioning as Principals for a 
Limited Period (Proposed Exchange Rule 1900, Interpretation and Policy 
.04)
    The Exchange proposes to adopt new Exchange Rule 1900, 
Interpretation and Policy .04, which provides that subject to the 
requirements of proposed Exchange Rule 1901, Interpretation and Policy 
.03, 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.\27\ Similarly, the proposed rule would 
permit a Member to designate any person currently registered, or who 
becomes registered, with the Member as

[[Page 72030]]

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 proposed Rule 1901.\28\ 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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    \27\ In this regard, the Exchange notes that qualifying as a 
registered representative is currently a prerequisite to qualifying 
as a principal on the Exchange except with respect to the Financial 
and Operations Principal.
    \28\ Proposed Exchange Rule 1900, Interpretation and Policy .04, 
omits the reference in FINRA Rule 1210.04 to Foreign Associates, 
which is a registration category not recognized by the Exchange, but 
otherwise tracks the language of FINRA Rule 1210.04.
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F. Rules of Conduct for Taking Examinations and Confidentiality of 
Examinations (Proposed Exchange Rule 1900, Interpretation and Policy 
.05)
    Before taking an examination, FINRA currently requires each 
candidate to agree to the SIE 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. The 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, the FINRA Sanction Guidelines recommend 
barring the individual.\29\
---------------------------------------------------------------------------

    \29\ See FINRA Sanction Guidelines (March 2019), VII. 
Qualification and Membership, pg. 38, at https://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.
---------------------------------------------------------------------------

    Effective October 1, 2018, FINRA 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 proposed Exchange Rule 1900, 
Interpretation and Policy .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 301.\30\ Further, if the Exchange determines that an 
associated person has violated the SIE Rules of Conduct or the Rules of 
Conduct for representative and principal examinations, the associated 
person may forfeit the results of the examination and may be subject to 
disciplinary action by the Exchange.
---------------------------------------------------------------------------

    \30\ Exchange Rule 301, Just and Equitable Principles of Trade, 
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 
Exchange Rule 301.
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    Proposed Exchange Rule 1900, Interpretation and Policy .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 shall be prohibited and shall 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 
Exchange Rule 1900, Interpretation and Policy .05, would prohibit an 
applicant from receiving assistance while taking the examination, and 
require the applicant to certify that no assistance was given to or 
received by him or her during the examination.\31\
---------------------------------------------------------------------------

    \31\ The Exchange does not propose to adopt portions of FINRA 
Rule 1210.05, which apply to non-associated persons, over whom the 
Exchange would in any event have no jurisdiction.
---------------------------------------------------------------------------

G. Waiting Periods for Retaking a Failed Examination (Proposed Exchange 
Rule 1900, Interpretation and Policy .06)
    The Exchange proposes to adopt new Exchange Rule 1900, 
Interpretation and Policy .06, which provides that any person who fails 
to pass a qualification examination prescribed by the Exchange may 
retake that examination again after a period of 30 calendar days from 
the date of the person's last attempt to pass that examination.\32\ 
Proposed Exchange Rule 1900, Interpretation and Policy .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 has elapsed from the 
date of the person's last attempt to pass that examination. These 
waiting periods would apply to the SIE and the representative and 
principal examinations.\33\
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    \32\ Proposed Exchange Rule 1900, Interpretation and Policy .06, 
has no counterpart in existing Exchange rules.
    \33\ FINRA Rule 1210.06 requires individuals taking the SIE who 
are not associated persons to agree to be subject to the same 
waiting periods for retaking the SIE. The Exchange does not propose 
to include this language in proposed Exchange Rule 1900, 
Interpretation and Policy .06, as the Exchange will not apply the 
proposed 1900 Series of rules in any event to individuals who are 
not associated persons of Members.
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H. Continuing Education (``CE'') Requirements (Proposed Exchange Rule 
1900, Interpretation and Policy .07)
    Pursuant to Exchange Rule 203, Interpretation and Policy .04, each 
individual required to register under Exchange Rule 203 is required to 
satisfy the continuing education requirements set forth in Exchange 
Rule 1304, Continuing Education for Registered Persons, or any other 
applicable continuing education requirements as prescribed by the 
Exchange. Under Exchange Rule 1304, the CE requirements applicable to 
registered persons consist of a Regulatory Element \34\ and a Firm 
Element.\35\ The Regulatory Element applies to registered persons and 
must be completed within prescribed time frames.\36\ Pursuant to 
current Exchange Rule 1304, Interpretation and Policy .01, a 
``registered person'' means any Member, representative or other person 
registered or required to be registered under the Exchange's rules.\37\ 
The Firm Element consists of annual, member-developed and administered 
training programs designed to keep covered registered persons current 
regarding securities products, services and strategies offered

[[Page 72031]]

by the Member. For purposes of the Firm Element, the term ``covered 
registered persons'' is defined as any registered person who has direct 
contact with customers in the conduct of the Member's securities sales, 
trading or investment banking activities, and to the immediate 
supervisors of such persons.\38\
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    \34\ See Exchange Rule 1304(a)
    \35\ See Exchange Rule 1304(b).
    \36\ Pursuant to Rule 1304(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 1304(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.
    \37\ See Exchange Rule 1304, Interpretation and Policy .01.
    \38\ See Exchange Rule 1304(b)(1).
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    The Exchange proposes to delete Exchange Rule 203, Interpretation 
and Policy .04, which CE requirements the Exchange proposes to 
reorganize, renumber and adopt as proposed Exchange Rule 1903. 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 proposes to adopt Exchange 
Rule 1900, Interpretation and Policy .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 Exchange Rule 1903, as discussed below.\39\ 
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 Exchange Rule 1900, Interpretation and Policy .07, 
would also provide that if a person registered with a Member has a CE 
deficiency with respect to that registration, such person shall not be 
permitted to be registered in another registration category with the 
Exchange under proposed Exchange Rule 1901 with that Member or to be 
registered in any registration category with the Exchange under 
proposed Exchange Rule 1901 with another Member, until the person has 
satisfied the deficiency.
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    \39\ The Exchange proposes to delete Exchange Rule 203, 
Interpretation and Policy .04, in connection with the adoption of 
proposed Exchange Rule 1900, Interpretation and Policy .07.
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I. Lapse of Registration and Expiration of SIE (Proposed Exchange Rule 
1900, Interpretation and Policy .08)
    Current Exchange Rule 203(h) 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. Any person who last passed the SIE or who was last 
registered as a Representative, whichever occurred last, four or more 
years immediately preceding the date of receipt by the Exchange of a 
new application for registration as a Representative shall be required 
to pass the SIE in addition to a representative qualification 
examination appropriate to his or her category of registration. The two 
year period is calculated from the termination date to the date the 
Exchange receives a new application for registration. The Exchange 
proposes to delete Exchange Rule 203(h), and replace it with proposed 
Exchange Rule 1900, Interpretation and Policy .08, Lapse of 
Registration and Expiration of SIE.
    Proposed Exchange Rule 1900, Interpretation and Policy .08, 
contains language comparable to that of Exchange Rule 203(h) 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 Exchange Rule 
1900, Interpretation and Policy .08, also sets forth the expiration 
period of the SIE. Based on the content covered on the SIE, the 
Exchange proposes 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-level and principal-level 
registrations. The representative-level 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 Exchange Rule 1900, 
Interpretation and Policy .09)
    The Exchange proposes to adopt Exchange Rule 1900, Interpretation 
and Policy .09, to provide a process whereby individuals working for a 
financial services industry affiliate of a Member \40\ would be able to 
terminate their registrations with the Member and 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.\41\ 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 return to the firm.\42\
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    \40\ Proposed Exchange Rule 1900, Interpretation and Policy .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 Commission, Commodity 
Futures Trading Commission (``CFTC''), state securities authorities, 
federal or state banking authorities, state insurance authorities, 
or substantially equivalent foreign regulatory authorities.
    \41\ There is no counterpart to proposed Exchange Rule 1900, 
Interpretation and Policy .09, in the Exchange's existing rules. 
FINRA Rule 1210.09 was adopted as a new waiver process for FINRA 
registration, as part of the FINRA Rule Changes. See supra note 11.
    \42\ See supra note 11.
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    Under the waiver process in proposed Exchange Rule 1900, 
Interpretation and Policy .09, 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.\43\ An

[[Page 72032]]

individual would have to satisfy these preconditions only for purposes 
of his or her initial designation as an FSA-eligible person, and not 
for any subsequent FSA designation(s). Thereafter, the individual would 
be eligible for a waiver for up to seven years from the date of initial 
designation \44\ 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.\45\
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    \43\ 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.
    \44\ 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.
    \45\ 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.
---------------------------------------------------------------------------

    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 also 
proposes to make corresponding changes in proposed Exchange Rule 1903 
(which the Exchange proposes will replace current Exchange Rule 1304, 
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,\46\ 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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    \46\ The Exchange would consider a waiver of the representative-
level qualification examination(s), the principal-level 
qualification examination(s) and the SIE, as applicable.
---------------------------------------------------------------------------

    (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.\47\ 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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    \47\ 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 Exchange Rule 1900, Interpretation and Policy .10)
    The Exchange proposes to adopt Exchange Rule 1900, Interpretation 
and Policy .10, Status of Persons Serving in the Armed Forces of the 
United States.\48\ Proposed Exchange Rule 1900, Interpretation and 
Policy .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 may 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 
Exchange Rule 1903 during the pendency of such inactive status.\49\
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    \48\ There is no counterpart to proposed Exchange Rule 1900, 
Interpretation and Policy .10, in the Exchange's current rules.
    \49\ The relief provided in proposed Exchange Rule 1900, 
Interpretation and Policy .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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[[Page 72033]]

    Pursuant to proposed Exchange Rule 1900, Interpretation and Policy 
.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 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.
    Pursuant to proposed Exchange Rule 1900, Interpretation and Policy 
.10(c), 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 Exchange Rule 
1900, Interpretation and Policy .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 
proposed Exchange Rule 1900, Interpretation and Policy .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.
    Further, under proposed Exchange Rule 1900, Interpretation and 
Policy .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 proposed Exchange Rule 1900, Interpretation and Policy .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 
proposed Exchange Rule 1900, Interpretation and Policy .08.\50\
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    \50\ See Nasdaq Stock Market, General 4 Regulation, Section 1 
Registration, Qualification and Continuing Education, Rule 
1.1210.10(c).
---------------------------------------------------------------------------

L. Impermissible Registrations (Proposed Exchange Rule 1900, 
Interpretation and Policy .11)
    Current Exchange Rule 203(a) prohibits a Member 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. This 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 Exchange Rule 203(a).
    In light of proposed Exchange Rule 1900, Interpretation and Policy 
.02, Permissive Registrations, discussed above, the Exchange proposes 
to delete these provisions of current Exchange Rule 203(a) and instead 
adopt proposed Exchange Rule 1900, Interpretation and Policy .11, 
prohibiting a Member from registering or maintaining the registration 
of a person unless the registration is consistent with the requirements 
of proposed Exchange Rule 1900.\51\
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    \51\ As discussed above, the Exchange also proposes to adopt 
Exchange Rule 1900, Interpretation and Policy .12, Application for 
Registration and Jurisdiction, which is not included in FINRA Rule 
1210. Proposed Exchange Rule 1900, Interpretation and Policy .12, is 
based upon portions of current Exchange Rules 203 and 1301. See also 
supra note 16.
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M. Registration Categories (Proposed Exchange Rule 1901)
    The Exchange proposes to adopt new and revised registration 
category rules and related definitions in proposed Exchange Rule 1901, 
Registration Categories.\52\
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    \52\ For ease of reference, the Exchange proposes to adopt as 
Exchange Rule 1901, Interpretation and Policy .07, in chart form, a 
Summary of Qualification Requirements for each of the Exchange's 
permitted registration categories discussed below.
---------------------------------------------------------------------------

1. Definitions (Proposed Exchange Rule 1901(a)) \53\
---------------------------------------------------------------------------

    \53\ The Exchange notes that proposed Exchange Rule 1901 differs 
from the Nasdaq Stock Market rule filing in that the Exchange has 
consolidated the definitions for various registration categories 
into one section, proposed Exchange Rule 1901(a), whereas the Nasdaq 
Stock Market filing includes the registration category definition in 
each individual section pertaining to that specific registration 
category type. See supra note 14.
---------------------------------------------------------------------------

    The Exchanges proposes to adopt Exchange Rule 1901(a) to define 
certain registration categories and terms used throughout the 
Exchange's new proposed 1900s Series of rules. First, the Exchange 
proposes to adopt a definition for the term ``actively engaged in the 
management of the Member's securities business,'' which is used to 
describe the functions of a ``principal,'' as more fully discussed 
below.\54\ The Exchange proposes that the term ``actively engaged in 
the management of the Member's securities business'' means the 
management of, and the implementation of corporate policies related to, 
such business, as well as managerial decision-making authority

[[Page 72034]]

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.
---------------------------------------------------------------------------

    \54\ See also supra note 6.
---------------------------------------------------------------------------

    Next, the Exchange proposes to adopt a definition for the term 
``Financial and Operations Principal,'' which the Exchange proposes to 
mean 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.
    Next, the Exchange proposes to adopt a definition for the term 
``principal'' and include it in newly proposed Exchange Rule 1901(a). 
The Exchange proposes to adopt a definition of ``principal,'' which 
would mean 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 shall include, among other persons, a Member's chief executive 
officer and chief financial officer (or equivalent officers). The term 
``principal'' also includes 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 under Exchange 
rules.
    Finally, the Exchange proposes to adopt a definition for the term 
``representative'' in proposed Exchange Rule 1901(a). Currently, the 
Exchange's rules do not define the term ``representative,'' although 
Exchange Rule 1302(b) states 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. The Exchange now proposes to delete Exchange Rule 1302(b), as 
more fully discussed herein, and adopt a definition of the term 
``representative'' in proposed Exchange Rule 1901(a). Proposed Exchange 
Rule 1901(a) 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.
2. Principal Registration Categories (Proposed Exchange Rule 1901(b))
i. General Securities Principal (Proposed Rule 1901(b)(1))
    The Exchange currently does not impose a General Securities 
Principal registration obligation. The Exchange proposes to adopt 
Exchange Rule 1901(b)(1), which would establish an obligation to 
register as a General Securities Principal, subject to certain 
exceptions.\55\ Proposed Exchange Rule 1901(b)(1) states that each 
principal 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 those 
categories.\56\ Proposed Exchange Rule 1901(b)(1)(i)(C) 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, however, 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.\57\
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    \55\ There is no counterpart to proposed Exchange Rule 
1901(b)(1) in the Exchange's current rules.
    \56\ The Exchange proposes to recognize the General Securities 
Principal registration category for the first time in this proposed 
rule change.
    \57\ See Nasdaq Stock Market, General 4, Regulation, Section 1, 
Registration, Qualification and Continuing Education, Rule 
1.1220(a)(2)(A)(i)-(iv). Proposed Exchange Rule 1901(b)(1) deviates 
somewhat from the counterpart FINRA rule in that it does not offer 
various limited registration categories provided for in FINRA Rule 
1220(a)(2)(A). The Exchange therefore proposes to reserve Exchange 
Rules 1901(b)(1)(i)(B) and (D).
---------------------------------------------------------------------------

    Proposed Exchange Rule 1901(b)(1)(ii) 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.
    The Exchange does not propose to adopt FINRA Rule 1220(a)(2)(B), 
which permits 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.\58\
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    \58\ Proposed Exchange Rule 1901(b)(1) 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 
1901(b)(1)(i)(A) 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.''
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ii. Compliance Official (Proposed Exchange Rule 1901(b)(2))
    Currently, Exchange Rule 203(f) requires each Member and Member 
organization that is a registered broker-dealer 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.\59\
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    \59\ Exchange Rule 203(f) 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: (1) Any 
statutory disqualification as defined in Section 3(a)(39) of the 
Act; (2) a suspension; (3) 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, or securities self-regulatory 
organization; or (4) the imposition of a fine of $5,000 or more by 
any such regulatory or self-regulatory organization in connection 
with a disciplinary proceeding; shall be required to register in 
this heightened category of registration as prescribed by the 
Exchange, but shall be exempt from the requirement to pass the 
heightened qualification examination as prescribed by the Exchange.

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[[Page 72035]]

    The Exchange proposes to delete Exchange Rule 203(f) and adopt 
Exchange Rule 1901(b)(2) in its place. Proposed Exchange Rule 
1901(b)(2) would provide 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. However, pursuant to Exchange Rule 
1901(b)(2)(iii), an individual designated as a Chief Compliance Officer 
on Schedule A of Form BD of a Member that is engaged in limited 
securities business may be registered in a principal category under 
proposed Exchange Rule 1901(b) that corresponds to the limited scope of 
the Member's business.
    Additionally, proposed Exchange Rule 1901(b)(2)(iv) would provide 
that an individual designated as a Chief Compliance Officer on Schedule 
A of Form BD may register and qualify as a Securities Trader Compliance 
Officer if, with respect to transactions in equity, preferred or 
convertible debt securities, or options such person is engaged in 
proprietary trading, the execution of transactions on an agency basis, 
or the direct supervision of such activities other than a person 
associated with a Member whose trading activities are conducted 
principally on behalf of an investment company that is registered with 
the SEC pursuant to the Investment Company Act and that controls, is 
controlled by, or is under common control with a Member. All 
individuals registering as Securities Trader Compliance Officers would 
be required to first become registered pursuant to paragraph (c)(3) as 
a Securities Trader, and to pass the Compliance Official qualification 
exam.\60\
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    \60\ Proposed Exchange Rule 1901(b)(2) differs from FINRA Rule 
1220(a)(3), Compliance Officer, as 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 
Exchange Rule 1901(b)(2), 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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iii. Financial and Operations Principal (Proposed Exchange Rule 
1901(b)(3))
    Current Exchange Rule 203(e) provides that each Member subject to 
Rule 15c3-1 of the Act 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 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). It further provides that each Financial/
Operations Principal designated by a 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 proposes to delete Exchange Rule 203(e) and adopt in 
its place Exchange Rule 1901(b)(3). Under the new rule, every Member of 
the Exchange that is operating pursuant to the provisions of Rules 
15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8) of the Commission, shall 
designate at least one Financial and Operations Principal who shall be 
responsible for performing the duties described in paragraph (a) of 
proposed Exchange Rule 1901. 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.
    Proposed Exchange Rule 1901(b)(3)(ii) 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, proposed Exchange Rule 
1901(b)(3)(iii) 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 paragraph (a) of the rule for a Financial and Operations 
Principal.\61\
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    \61\ FINRA Rule 1220(a)(4) differs from proposed Exchange Rule 
1901(b)(3) in that it includes an Introducing Broker-Dealer 
Financial and Operations Principal registration requirement. 
Additionally, proposed Exchange Rule 1901(b)(3) 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 does not propose to adopt 
a Principal Financial Officer or Principal Operations Officer 
requirement similar to FINRA Rule 1220(a)(4)(B), as it believes the 
Financial and Operations Principal requirement is sufficient.
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iv. Investment Banking Principal (Proposed Exchange Rule 1901(b)(4))
    The Exchange does not recognize the Investment Banking Principal 
registration category and proposes to reserve Exchange Rule 1901(b)(4), 
retaining the caption solely to facilitate comparison with FINRA's 
rules.
v. Research Principal (Proposed Exchange Rule 1901(b)(5))
    The Exchange does not recognize the Research Principal registration 
category and proposes to reserve Exchange Rule 1901(b)(5), retaining 
the caption solely to facilitate comparison with FINRA's rules.
vi. Securities Trader Principal (Proposed Exchange Rule 1901(b)(6))
    Current Exchange Rule 203(c) provides that Members that are 
individuals and associated persons of Members included within the 
definition of Option Principal in Exchange Rule 100 and who will have 
supervisory responsibility over the securities trading activities 
described in Exchange Rule 203(d) shall become qualified and registered 
as a Securities Trader Principal. To qualify for registration as a 
Securities Trader Principal, such person shall become qualified and 
registered as a Securities Trader under Rule 1302(e) and pass the SIE 
and General Securities Principal qualification examination (Series 24). 
A person who is qualified and registered as a Securities Trader 
Principal under this provision may only have supervisory responsibility 
over the Securities Trader activities specified in Exchange Rule 
203(d), unless such person is separately qualified and registered in 
another appropriate principal registration category, such as the 
General Securities Principal registration category. Current Exchange 
Rule 203(c)(2) provides that a person who is registered as a General 
Securities Principal shall not be qualified to supervise the trading 
activities described in Exchange Rule 203(d), unless such person has 
also become qualified and registered as a Securities Trader under 
Exchange Rule 1302(e) and become registered as a Securities Trader 
Principal.
    The Exchange proposes to delete Exchange Rule 203(c) and adopt in 
its place Exchange Rule 1901(b)(6), Securities Trader Principal. 
Proposed Exchange Rule 1901(b)(6) would require

[[Page 72036]]

that a principal responsible for supervising the securities trading 
activities specified in proposed Exchange Rule 1901(c)(3) \62\ register 
as a Securities Trader Principal. The proposed rule requires 
individuals registering as Securities Trader Principals to be 
registered as Securities Traders and to pass the General Securities 
Principal qualification examination.
---------------------------------------------------------------------------

    \62\ Proposed Exchange Rule 1901(c)(3), discussed below, 
provides for representative-level registration in the ``Securities 
Trader'' category.
---------------------------------------------------------------------------

vii. Registered Options Principal (Proposed Exchange Rule 1901(b)(7))
    The Exchange proposes to adopt Exchange Rule 1901(b)(7), Registered 
Options Principal, which would require that each Member that is engaged 
in transactions in options with the public have at least one Registered 
Options Principal.\63\ Currently, Exchange Rule 100, Definitions, 
provides a definition for an ``Options Principal.'' In accordance with 
the proposal to adopt Exchange Rule 1901(b)(7), Registered Options 
Principal, the Exchange proposes to delete the definition for ``Options 
Principal'' in Exchange Rule 100. As discussed below, the Exchange 
proposes to adopt a corresponding definition for a ``Registered Options 
Principal'' in Exchange Rule 100, which would refer to proposed 
Exchange Rule 1901(b)(7). In addition, each principal as defined in 
proposed Exchange Rule 1901(a) 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, with one 
exception, as follows. 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 (b)(9) of this Rule 
in lieu of registering as a Registered Options Principal.\64\
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    \63\ Proposed Exchange Rule 1901(b)(7) differs from FINRA Rule 
1220(a)(8) in that it omits certain references to other specific 
FINRA rules.
    \64\ Current Exchange Rule 1301(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. Persons engaged 
in the supervision of options sales practices or a person to whom 
the designated general partner or executive officer (pursuant to 
Rule 1308) or another Registered Options Principal delegates the 
authority to supervise options sales practices shall be designated 
as Options Principals. Exchange Rule 1301(e) provides that 
individuals who are delegated responsibility pursuant to Rule 1308 
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 SIE, the General Securities Representative 
qualification examination (Series 7) and the Registered Options 
Principal Qualification Examination (Series 4). The foregoing 
provisions of Exchange Rule 1301 are specific to conducting an 
options business with the public and are not proposed to be amended 
in this proposed rule change, other than conforming all references 
to ``Options Principal'' with ``Registered Options Principal,'' as 
more fully discussed herein. However, Exchange Rules 1301(b) and (c) 
contain provisions regarding submission of Forms U4 and U5 to WebCRD 
that are duplicative of the proposed 1900 Series of rules, in 
particular proposed Exchange Rule 1900, Interpretation and Policy 
.12, Application for Registration and Jurisdiction, and proposed 
Exchange Rule 1904, Electronic Filing Requirements for Electronic 
Forms, and are therefore proposed to be deleted. Current Exchange 
Rule 1301(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 Exchange Rule 
1901(b)(7). Exchange Rule 203(g), which merely serves as a cross-
reference to Exchange Rules 1301 and 1302, is unnecessary and is 
therefore proposed to be deleted with the rest of Exchange Rule 203.
---------------------------------------------------------------------------

    Pursuant to proposed Exchange Rule 1901(b)(7)(ii), subject to the 
lapse of registration provisions in proposed Exchange Rule 1900, 
Interpretation and Policy .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 
proposed Exchange Rule 1901(c)(1) as a General Securities 
Representative and pass the Registered Options Principal qualification 
examination.\65\
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    \65\ Although the Exchange does not currently list security 
futures products, it also proposes to adopt Exchange Rule 1901, 
Interpretation and Policy .02, which provides that each person who 
is registered with the Exchange as a General Securities 
Representative, Registered Options Principal, 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 Exchange Rule 1903 
that addresses security futures products before such person engages 
in security futures activities. Unlike FINRA Rule 1220.02, proposed 
Exchange Rule 1901, Interpretation and Policy .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 also proposes to adopt 
Exchange Rule 1901, Interpretation and Policy .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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viii. Government Securities Principal (Proposed Exchange Rule 
1901(b)(8))
    The Exchange does not recognize the Government Securities Principal 
registration category and proposes to reserve Exchange Rule 1901(b)(8), 
retaining the caption solely to facilitate comparison with FINRA's 
rules.
ix. General Securities Sales Supervisor (Proposed Exchange Rules 
1901(b)(9) and Interpretation and Policy .04)
    The Exchange proposes to adopt Exchange Rule 1901(b)(9), General 
Securities Sales Supervisor, as well as Interpretation and Policy .04 
to Exchange Rule 1901, which explains the purpose of the General 
Securities Sales Supervisor registration category.\66\ Proposed 
Exchange Rule 1901(b)(9) provides that each principal, as defined in 
proposed paragraph (a) of this Rule, 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 Exchange Act 
record-keeping rules. Further, a person registered solely as a General 
Securities Sales Supervisor would not be qualified to perform any of 
the following activities: (i) Supervision of market making commitments; 
(ii) supervision of the custody of broker-dealer or customer funds or 
securities for purposes of Exchange Act Rule 15c3-3; or (iii) 
supervision of overall compliance with financial responsibility rules 
for broker-dealers promulgated pursuant to the provisions of the 
Exchange Act.\67\
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    \66\ Proposed Exchange Rule 1901(b)(9) has no counterpart in the 
Exchange's current rules.
    \67\ Proposed Exchange Rule 1901(b)(9), 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 1900 Series of rules.
---------------------------------------------------------------------------

    Each person seeking to register as a General Securities Sales 
Supervisor would be required, prior to or concurrent with such 
registration, to become registered pursuant to proposed Exchange Rule 
1901(c)(1) of the rule as a General Securities Representative and pass 
the General Securities Sales

[[Page 72037]]

Supervisor qualification examinations.\68\
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    \68\ Unlike FINRA Rule 1220.04, proposed Exchange Rule 1901, 
Interpretation and Policy .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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x. Investment Company and Variable Contracts Products Principal 
(Proposed Exchange Rule 1901(b)(10))
    The Exchange does not recognize the Investment Company and Variable 
Contracts Products Principal category and is reserving proposed 
Exchange Rule 1901(b)(10), retaining the caption solely to facilitate 
comparison with FINRA's rules.
xi. Direct Participation Programs Principal (Proposed Exchange Rule 
1901(b)(11))
    The Exchange does not recognize the Direct Participation Programs 
Principal registration category and is reserving proposed Exchange Rule 
1901(b)(11), retaining the caption solely to facilitate comparison with 
FINRA's rules.
xii. Private Securities Offerings Principal (Proposed Exchange Rule 
1901(b)(12))
    The Exchange does not recognize the Private Securities Offerings 
Principal registration category and is reserving proposed Exchange Rule 
1901(b)(12), retaining the caption solely to facilitate comparison with 
FINRA's rules.
xiii. Supervisory Analyst (Proposed Exchange Rule 1901(b)(13))
    The Exchange does not recognize the Supervisory Analyst 
registration category and is reserving proposed Exchange Rule 
1901(b)(13), retaining the caption solely to facilitate comparison with 
FINRA's rules.
3. Representative Registration Categories (Proposed Exchange Rule 
1901(c))
i. General Securities Representative (Proposed Exchange Rule 
1901(c)(1))
    The Exchange proposes to adopt Exchange Rule 1901(c)(1), General 
Securities Representative. Proposed Exchange Rule 1901(c)(1)(i) would 
state that each representative as defined in proposed Exchange Rule 
1901(a) 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 this Rule, then such person shall appropriately 
register as a Securities Trader.
    Further, consistent with the proposed restructuring of the 
representative-level examinations, proposed Exchange Rule 
1901(c)(1)(ii) 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.\69\
---------------------------------------------------------------------------

    \69\ Proposed Exchange Rule 1901(c)(1)(i) differs from FINRA 
Rule 1220(b)(2)(A) in that it omits references to various 
registration categories which FINRA recognizes but which the 
Exchange does not propose to recognize.
---------------------------------------------------------------------------

    In addition, the Exchange proposes to adopt Exchange Rule 1901, 
Interpretation and Policy .01, to provide certain individuals who are 
associated persons of firms and who hold specific 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. In 
particular, pursuant to proposed Exchange Rule 1901, Interpretation and 
Policy .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. This proposed rule would provide individuals with 
a United Kingdom or Canadian qualification more flexibility to obtain 
an Exchange representative-level registration.
ii. Operations Professional (Proposed Exchange Rule 1901(c)(2))
    The Exchange does not recognize the Operations Professional 
registration category for its associated persons. The Exchange 
therefore proposes to reserve Exchange Rule 1901(c)(2), Operations 
Professional, and related Interpretation and Policy .05 to proposed 
Exchange Rule 1901, Scope of Operations Professional Requirement, 
retaining the caption solely to facilitate comparison with FINRA's 
rules.
iii. Securities Trader (Proposed Exchange Rule 1901(c)(3))
    Pursuant to current Exchange Rule 203(d)(1) and (2), Members that 
are individuals and associated persons of Members must register with 
the Exchange as a Securities Trader if, with respect to transactions in 
equity, preferred or convertible debt securities, or foreign currency 
options on the Exchange, such person is engaged in proprietary trading, 
the execution of transactions on an agency basis, or the direct 
supervision of such activities, other than any person associated with a 
Member whose trading activities are conducted principally on behalf of 
an investment company that is registered with the Commission pursuant 
to the Investment Company Act of 1940 and that controls, is controlled 
by or is under common control, with the Member. In addition, an 
applicant must become qualified as a Securities Trader by passing the 
Securities Trader Qualification examination (Series 57) as stated in 
current Exchange Rule 1302(e).
    The Exchange proposes to delete Exchange Rule 203(d), and replace 
it with proposed Exchange Rule 1901(c)(3).\70\ Proposed Exchange Rule 
1901(c)(3) would require each representative as defined in paragraph 
(a) of this 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 Commission 
pursuant to the Investment Company Act of 1940 and that controls, is 
controlled by, or is under common control with a Member.
---------------------------------------------------------------------------

    \70\ Proposed Exchange Rule 1901(c)(3)(i) 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.
---------------------------------------------------------------------------

    Additionally, proposed Exchange Rule 1901(c)(3)(i) 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.\71\
---------------------------------------------------------------------------

    \71\ As noted above, this new registration requirement was 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) (SR-FINRA-2016-007) (Order Approving a Proposed Rule 
Change to Require Registration as Securities Traders of Associated 
Persons Primarily Responsible for the Design, Development, 
Significant Modification of Algorithmic Trading Strategies or 
Responsible for the Day-to-Day Supervision of Such Activities).

---------------------------------------------------------------------------

[[Page 72038]]

    For purposes of this proposed new registration requirement an 
``algorithmic trading strategy'' would be 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.\72\ 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.
---------------------------------------------------------------------------

    \72\ See supra note 12.
---------------------------------------------------------------------------

    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 Exchange Rule 1901(c)(3)(ii), 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.
    Further, the Exchange proposes to delete Exchange Rule 1302(e) in 
connection with its proposal to adopt Exchange Rule 1901(c)(3), which 
defines the requirements and qualifications for a Securities Trader, as 
well as its proposal to amend Exchange Rule 100 to insert definitions 
for ``proprietary trading'' and ``proprietary trading firm,'' as 
described below. Accordingly, Exchange Rule 1302(e) is repetitive and 
no longer necessary in light of the Exchange's other proposed changes.
iv. Investment Banking Representative (Proposed Exchange Rule 
1901(c)(4))
    The Exchange does not recognize the Investment Banking 
Representative registration category for its associated persons. The 
Exchange therefore proposes to reserve Exchange Rule 1901(c)(4), 
Investment Banking Representative, retaining the caption solely to 
facilitate comparison with FINRA's rules.
v. Research Analyst (Proposed Exchange Rule 1901(c)(5))
    The Exchange does not recognize the Research Analyst registration 
category for its associated persons. The Exchange therefore proposes to 
reserve Exchange Rule 1901(c)(5), Research Analyst, retaining the 
caption solely to facilitate comparison with FINRA's rules.
vi. Investment Company and Variable Products Representative (Proposed 
Exchange Rule 1901(c)(6))
    The Exchange does not recognize the Investment Company and Variable 
Products Representative registration category for its associated 
persons. The Exchange therefore proposes to reserve Exchange Rule 
1901(c)(6), Investment Company and Variable Products Representative, 
retaining the caption solely to facilitate comparison with FINRA's 
rules.
vii. Direct Participation Programs Representative (Proposed Exchange 
Rule 1901(c)(7))
    The Exchange does not recognize the Direct Participation Programs 
Representative registration category for its associated persons. The 
Exchange therefore proposes to reserve Exchange Rule 1901(c)(7), Direct 
Participation Programs Representative, retaining the caption solely to 
facilitate comparison with FINRA's rules.

[[Page 72039]]

viii. Private Securities Offerings Representative (Proposed Exchange 
Rule 1901(c)(8))
    The Exchange does not recognize the Private Securities Offerings 
Representative registration category for its associated persons. The 
Exchange therefore proposes to reserve Exchange Rule 1901(c)(8), 
Private Securities Offerings Representative, retaining the caption 
solely to facilitate comparison with FINRA's rules.
4. Eliminated Registration Categories (Proposed Exchange Rule 1901, 
Interpretation and Policy .06)
    Proposed Exchange Rule 1901, Interpretation and Policy .06, has no 
practical relevance to the Exchange, but is included because the 
Exchange proposes to adopt rules similar to FINRA's 1200 Series, on a 
near uniform basis. Accordingly, proposed Exchange Rule 1901, 
Interpretation and Policy .06, provides that, subject to the lapse of 
registration provisions in proposed Exchange Rule 1900, Interpretation 
and Policy .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.
5. Grandfathering Provisions
    In addition to the grandfathering provisions in proposed Exchange 
Rule 1901(b)(1)(ii) (relating to General Securities Principals) and 
proposed Exchange Rule 1901, Interpretation and Policy .06 (relating to 
the eliminated registration categories), the Exchange proposes to 
include grandfathering provisions in proposed Exchange Rule 1901(b)(7) 
(Registered Options Principal), Exchange Rule 1901(c)(1) (General 
Securities Representative), and Exchange Rule 1901(c)(3) (Securities 
Trader). Specifically, the proposed grandfathering provisions provide 
that, subject to the lapse of registration provisions in proposed 
Exchange Rule 1900, Interpretation and Policy .08, individuals who are 
registered in specified registration categories on the operative date 
of the proposed rule change and individuals who had been registered in 
such categories within the past two years prior to the operative date 
of the proposed rule change would be qualified to register in the 
proposed corresponding registration categories without having to take 
any additional examinations.
N. Associated Persons Exempt From Registration (Proposed Exchange Rules 
1902 and 1902, Interpretation and Policy .01)
    Current Exchange Rule 203(b) currently provides that the following 
individual Members and individual associated persons of Members are not 
required to register:
    (1) Individual associated persons whose functions are solely and 
exclusively clerical or ministerial;
    (2) individual Members and individual associated persons who are 
not actively engaged in the securities business;
    (3) individual associated persons whose functions are related 
solely and exclusively to the Member's need for nominal corporate 
officers or for capital participation;
    (4) 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 securities 
exchange and who are registered floor members with such exchange.
    The Exchange proposes to delete Exchange Rule 203(b) and adopt 
provisions of Exchange Rule 203(b) in the newly proposed Exchange Rule 
1902, subject to certain changes. Current Exchange Rule 203(b)(2) 
exempts from registration those individual Members and individual 
associated persons of Members who are not actively engaged in the 
securities business. Exchange Rule 203(b)(3) 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.\73\ 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 individual 
Members and individual 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.\74\ The Exchange therefore proposes to delete 
these exemptions. Exchange Rule 203(b)(4)(iii) 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 Exchange Rule 1902 
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.\75\ Additionally, the Exchange proposes to adopt 
paragraph (c) of proposed Exchange Rule 1902, 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.\76\
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    \73\ 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.
    \74\ The Exchange also proposes to delete Exchange Rule 203, 
Interpretation and Policy .06, which specifies circumstances in 
which the Exchange considers an individual Member or an individual 
associated person to be engaged in the securities business of a 
Member or Member organization. The Exchange believes these 
determinations may be made on case by case basis, depending upon 
facts and circumstances.
    \75\ Proposed Exchange Rule 1902 differs from FINRA Rule 1230 in 
that it contains a number of additional exemptions, based upon 
current Nasdaq Stock Market Rule 1.1230, which are not included in 
FINRA Rule 1230. See Nasdaq Stock Market, General 4, Regulations, 
Section 1, Registration, Qualification and Continuing Education, 
Rule 1.1230.
    \76\ Individuals described by paragraph (c) of proposed Exchange 
Rule 1902 who are associated with FINRA members may be registered 
with FINRA as Foreign Associates pursuant to FINRA Rule 1220.06. 
FINRA eliminated this registration category effective October 1, 
2018, and the Exchange never recognized it.
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    The Exchange proposes to adopt Exchange Rule 1902, Interpretation 
and Policy .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

[[Page 72040]]

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 Exchange Rule 
1903)
    As described above, current Exchange Rule 1304, 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 Exchange Rule 1304 have been 
reorganized and renumbered, and are now proposed to be adopted with 
amendments as proposed Exchange Rule 1903.\77\
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    \77\ Proposed Exchange Rule 1903 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 proposes to replace the term ``registered person'' in 
current Exchange Rule 1304(a) with the term ``covered person'' and make 
conforming changes to proposed Exchange Rule 1903(a). For purposes of 
the Regulatory Element, the Exchange proposes to define the term 
``covered person'' in proposed Exchange Rule 1903(a)(5), as any person 
registered pursuant to proposed Exchange Rule 1900, including any 
person who is permissively registered pursuant to proposed Exchange 
Rule 1900, Interpretation and Policy .02, and any person who is 
designated as eligible for an FSA waiver pursuant to proposed Exchange 
Rule 1900, Interpretation and Policy .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 Exchange Rule 1900, Interpretation and Policy .09. In 
addition, consistent with proposed Exchange Rule 1900, Interpretation 
and Policy .09, proposed Exchange Rule 1903(a)(1) 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 proposes to add a rule to address the impact 
of failing to complete the Regulatory Element on a registered person's 
activities and compensation. Specifically, proposed Exchange Rule 
1903(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 Exchange Rule 1903(b)(2)(ii), 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 Requirements for Uniform Rules (Proposed Exchange 
Rule 1904)
    Current Exchange Rule 203, Interpretations and Policies .01-.03, 
state that each individual required to register shall electronically 
file a Uniform Application for Securities Industry Registration (``Form 
U4'') through the Central Registration Depository system (``Web CRD'') 
operated by FINRA and to electronically submit to Web CRD any required 
amendments to Form U4. Further, any Member or Member organization 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 Form 
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 Exchange Rules 1301, 1302, and 1303.
    The Exchange proposes to delete current Exchange Rule 203, 
Interpretations and Policies .01-.03, and the electronic filing 
requirements of Exchange Rules 1301, 1302 and 1303, and to replace them 
with proposed Exchange Rule 1904, Electronic Filing Requirements for 
Uniform Forms, which will consolidate Form U4 and Form U5 electronic 
filing requirements into a single rule. The proposed rule provides that 
all forms required to be filed under the Exchange's registration rules 
including the Exchange Rule 1900 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 proposed Exchange Rule 1904(b), each Member 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 or she is filing this 
information on behalf of the Member and the Member's associated 
persons. Under proposed Exchange Rule 1904, Interpretation and Policy 
.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 proposed Exchange Rule 1904(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.
    Pursuant to proposed Exchange Rule 1904(c)(1), every initial and 
transfer electronic Form U4 filing 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 Exchange Act Rule

[[Page 72041]]

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. Proposed Exchange 
Rule 1904(c)(2) and Interpretations and Policies .03 and .04 to 
proposed Exchange Rule 1904, provide for the electronic filing of Form 
U4 amendments without the individual's manual signature, subject to 
certain safeguards and procedures.
    Proposed Exchange Rule 1904(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 this proposed 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 1901. Upon application 
and a showing of good cause, the Exchange could extend the 30-day 
period.
    Proposed Exchange Rule 1904(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 Exchange Rule 1904, Interpretation and 
Policy .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. Exchange Rule 100, Definitions
    The Exchange proposes to amend Exchange Rule 100, Definitions, to 
amend the term ``associated person'' or ``person associated with a 
Member.'' Currently, the term associated person or person associated 
with a Member means any partner, officer, director, or branch manager 
of a Member (or any person occupying a similar status or performing 
similar functions), any person directly or indirectly controlling, 
controlled by, or under common control with a Member, or any employee 
of a Member.
    The Exchange proposes to amend the term associated person or person 
associated with a Member to insert, at the end of the definition, the 
phrase ``except that any person associated with a Member whose 
functions are solely clerical or ministerial shall not be included in 
the meaning of such term for purposes of these Rules.'' With the 
proposed change, the definition for associated person or person 
associated with a Member would be as follows:

    The term ``associated person'' or ``person associated with a 
Member'' means any partner, officer, director, or branch manager of 
a Member (or any person occupying a similar status or performing 
similar functions), any person directly or indirectly controlling, 
controlled by, or under common control with a Member, or any 
employee of a Member, except that any person associated with a 
Member whose functions are solely clerical or ministerial shall not 
be included in the meaning of such term for purposes of these Rules.

    Additionally, the Exchange proposes to amend Exchange Rule 100, 
Definitions to adopt definitions for the following terms: Person, 
proprietary trading, and proprietary trading firm. The Exchange 
proposes that the term ``person'' shall refer to a natural person, 
corporation, partnership (general or limited), limited liability 
company, association, joint stock company, trust, trustee of a trust 
fund, or any organized group of persons whether incorporated or not and 
a government or agency or political subdivision thereof.
    The Exchange proposes that the term ``proprietary trading'' for the 
purpose of proposed Exchange Rule 1900, means trading done by a Member 
having the following characteristics: (i) The Member is not required by 
Section 15(b)(8) of the Act to become a FINRA member but is a Member of 
another registered securities exchange not registered solely under 
Section 6(g) of the Act; (ii) all funds used or proposed to be used by 
the Member are the trading member's own capital, traded through the 
Member's own accounts; (iii) the Member does not, and will not, have 
customers; and (iv) all persons registered on behalf of the Member 
acting or to be acting in the capacity of a trader must be owners of, 
employees of, or contractors to the Member.
    The Exchange proposes that the term ``proprietary trading firm'' 
for the purpose of proposed Exchange Rule 1900, means a Member 
organization or applicant with the following characteristics: (i) The 
applicant is not required by Section 15(b)(8) of the Act to become a 
FINRA Member but is a Member of another registered securities exchange 
not registered solely under Section 6(g) of the Act; (ii) all funds 
used or proposed to be used by the applicant for trading are the 
applicant's own capital, traded through the applicant's own accounts; 
(iii) the applicant does not, and will not have customers; and (iv) all 
principals and representatives of the applicant acting or to be acting 
in the capacity of a trader must be owners of, employees of, or 
contractors to the applicant.
    As described above, in connection with the Exchange's proposal to 
adopt Exchange Rule 1901(b)(7), Registered Options Principal, the 
Exchange proposes to delete the definition for ``Options Principal'' 
from Exchange Rule 100 in order to provide consistency and clarity 
within the rule text. In proposed Exchange Rule 1901(b)(7), the 
Exchange sets forth the requirements and qualifications for a 
``Registered Options Principal,'' which incorporates, and adds to, the 
rule text for the Exchange's current definition for ``Options 
Principal.'' Accordingly, the Exchange proposes to delete the term 
``Options Principal'' and replace all references in the rule text to 
``Options Principal'' with the new proposed term ``Registered Options 
Principal.'' The proposed changes would be to references to ``Options 
Principal'' that are currently in Exchange Rules 1301, 1306, 1307, 
1309, 1310 and 1319. The Exchange also proposes to adopt a definition 
for a ``Registered Options Principal'' in Exchange Rule 100, that will 
provide a cross-reference to Exchange Rule 1901(b)(7).
R. Exchange Rule 601, Registered Options Traders
    In accordance with the proposed change to delete Exchange Rule 203 
in its entirety, revise and relocate the provisions of Exchange Rule 
203 to the newly proposed 1900 Series, the Exchange proposes to amend a 
cross-reference in Exchange Rule 601(b)(2). Currently, Exchange Rule 
601(b)(2) has a cross-reference to Exchange Rule

[[Page 72042]]

203(a). The Exchange proposes to amend that cross-reference to proposed 
Exchange Rule 1900.
S. Exchange Rule 1000, Disciplinary Jurisdiction
    In accordance with the proposed change to delete several provisions 
of Exchange Rule 1302, revise and relocate those provisions to the 
newly proposed 1900 Series, the Exchange proposes to amend a cross-
reference in Exchange Rule 1000(c). Currently, Exchange Rule 1000(c) 
has a cross-reference to Exchange Rule 1302. The Exchange proposes to 
amend that cross-reference to proposed Exchange Rule 1900, 
Interpretation and Policy .12.
T. Exchange Rule 1014, Imposition of Fines for Minor Rule Violations
    The Exchange proposes to amend the cross-references in Exchange 
Rule 1014(d)(14) that are to current Exchanges Rules 1301, 1302 and 
1303. With the proposed changes described above to delete Exchange Rule 
1303 and selection provisions of Exchange Rules 1301 and 1302, the 
Exchange proposes to amend the cross-references in Exchange 1014(d)(14) 
that are to Exchange Rules 1301, 1302 and 1303 to the newly proposed 
Exchange Rule 1904, which incorporates that deleted rule text. 
Accordingly, the Exchange proposes to amend the cross-reference in 
Exchange Rule 1014(d)(14) to now be to proposed Exchange Rule 1904.
U. Exchange Rule 1301, Registration of Options Principals
    As described above, the Exchange proposes to delete subparagraphs 
(b), (c), and (d) of Exchange Rule 1301 and relocate those provisions 
to the proposed 1900 Series of rules. In particular, subparagraphs (b) 
and (c) are incorporated into proposed Exchange Rule 1900, 
Interpretation and Policy .12. Subparagraph (d) is incorporated into 
proposed Exchange Rule 1901(b)(7). Accordingly, the Exchange proposes 
to renumber Exchange Rule 1301(e) to conform to the hierarchical 
heading scheme used throughout the Exchange's rulebook to provide 
consistency and clarity. The Exchange proposes to renumber Exchange 
Rule 1301(e) to be Exchange Rule 1301(b).
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\78\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \79\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \80\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \78\ 15 U.S.C. 78f(b).
    \79\ 15 U.S.C. 78f(b)(5).
    \80\ Id.
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    The Exchange believes that the proposed rule changes will 
streamline, and bring consistency and uniformity to, the Exchange's 
registration rules. The Exchange believes that this will, in turn, 
assist Members and their associated persons in complying with these 
rules and improve regulatory efficiency. The proposed rule changes 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 changes 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 changes 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 changes 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.
    The proposed rule changes, including additional definitions and 
changes to cross-references, make organizational changes to the 
Exchange's registration and qualification rules, 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 changes will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule changes are 
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 1900 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

[[Page 72043]]

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 
Exchange, thereby promoting uniformity of regulation across markets. 
The proposed 1900 Series of rules should in fact remove administrative 
burdens that currently exist for Members seeking to register associated 
persons on the Exchange featuring varying registration-related 
requirements. Additionally, all similarly-situated associated persons 
of Members will be treated similarly under the new 1900 Series of rules 
in terms of standards of training, experience and competence for 
persons associated with Exchange Members.
    With respect in particular to registration of developers of 
algorithmic trading strategies, the Exchange recognizes that the 
proposal would impose costs on member firms employing associated 
persons engaged in the activity subject to the registration 
requirement. Specifically, among other things, additional associated 
persons would be required to become registered under the proposal, and 
the firm would need to establish policies and procedures to monitor 
compliance with the proposed requirement on an ongoing basis. However, 
given the prevalence and importance of algorithmic trading strategies 
in today's markets, the Exchange believes that associated persons 
engaged in the activities covered by this proposal must meet a minimum 
standard of knowledge regarding the applicable securities rules and 
regulations. To mitigate the costs imposed on member firms, the 
proposed rule change limits the scope of registration requirement by 
excluding technological or development support personnel who are not 
primarily responsible for the covered activities. It also excludes 
supervisors who are not responsible for the covered activities. It also 
excludes supervisors who are not responsible for the ``day-to-day'' 
supervision or direction of the covered activities.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 
19b-4(f)(6) thereunder.
    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MIAX-2019-50 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-MIAX-2019-50. 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 (http://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 offices 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-MIAX-2019-50, and should be submitted on 
or before January 21, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\81\
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    \81\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-28089 Filed 12-27-19; 8:45 am]
BILLING CODE 8011-01-P