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]
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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
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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
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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 (https://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).
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Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–ISE–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
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CFR 200.30–3(a)(12).
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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
https://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.’’
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2 17
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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.
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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.
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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
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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
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
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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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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.
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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.
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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.
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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
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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.
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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.
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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.
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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
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who has been designated as an FSAeligible person by a Member would not
be able to take additional examinations
to gain additional registrations while
working for a financial services affiliate
of a Member.
K. Status of Persons Serving in the
Armed Forces of the United States
(Proposed 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.
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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
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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).
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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.
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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
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‘‘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
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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.
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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.
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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
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.
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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
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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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.
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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
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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
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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 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.
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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))
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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.
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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.
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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
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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.
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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
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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.
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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.
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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
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date of the proposed rule change would
be qualified to register in the proposed
corresponding registration categories
without having to take any additional
examinations.
N. Associated Persons Exempt From
Registration (Proposed 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.
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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.
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appropriately registered. However, the
proposed rule provides that an
associated person is not accepting a
customer order where occasionally,
when an appropriately registered person
is unavailable, the associated person
transcribes the order details and the
registered person contacts the customer
to confirm the order details before
entering the order.
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O. Changes to 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.
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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
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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
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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
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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
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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
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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.
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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).
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20:00 Dec 27, 2019
U.S.C. 78f(b)(5).
80 Id.
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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
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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.
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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:
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20:00 Dec 27, 2019
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(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 (https://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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
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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
https://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
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]]>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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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 https://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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
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\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.
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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\
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\29\ See FINRA Sanction Guidelines (March 2019), VII.
Qualification and Membership, pg. 38, at https://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.
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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.
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\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\
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\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.
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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.
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An individual designated as an FSA-eligible person would be subject
to the Regulatory Element of CE while working for a financial services
industry affiliate of a Member. The individual would be subject to a
Regulatory Element program that correlates to his or her most recent
registration category, and CE would be based on the same cycle had the
individual remained registered. If the individual fails to complete the
prescribed Regulatory Element during the 120-day window for taking the
session, he or she would lose FSA eligibility (i.e., the individual
would have the standard two-year period after termination to re-
register without having to retake an examination). The Exchange 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.
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(1) Prior to the individual's initial designation as an FSA-
eligible person, the individual was registered for a total of five
years within the most recent 10-year period, including for the most
recent year with the Member that initially designated the individual as
an FSA-eligible person;
(2) The waiver request is made within seven years of the
individual's initial designation as an FSA-eligible person by a Member;
(3) The initial designation and any subsequent designation(s) were
made concurrently with the filing of the individual's related Form U5;
(4) The individual continuously worked for the financial services
affiliate(s) of a Member since the last Form U5 filing;
(5) The individual has complied with the Regulatory Element of CE;
and
(6) The individual does not have any pending or adverse regulatory
matters, or terminations, that are reportable on the Form U4, and has
not otherwise been subject to a statutory disqualification while the
individual was designated as an FSA-eligible person with a Member.
Following the Form U5 filing, an individual could move between the
financial services affiliates of a Member so long as the individual is
continuously working for an affiliate. Further, a Member could submit
multiple waiver requests for the individual, provided that the waiver
requests are made during the course of the seven-year period.\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).
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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.
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1. Definitions (Proposed Exchange Rule 1901(a)) \53\
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\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.
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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.
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\54\ See also supra note 6.
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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).
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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.
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\62\ Proposed Exchange Rule 1901(c)(3), discussed below,
provides for representative-level registration in the ``Securities
Trader'' category.
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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.
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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.
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Each person seeking to register as a General Securities Sales
Supervisor would be required, prior to or concurrent with such
registration, to become registered pursuant to 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\
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\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.
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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.
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\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.
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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\
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\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).
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[[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.
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\72\ See supra note 12.
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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 (https://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 (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal 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
