81 FR 93986 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Approving Proposed Rule Change To Amend Phlx Rule 748, Supervision

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 246 (December 22, 2016)

Page Range		93986-93988
FR Document		2016-30794
Federal Register, Volume 81 Issue 246 (Thursday, December 22, 2016)
[Federal Register Volume 81, Number 246 (Thursday, December 22, 2016)]
[Notices]
[Pages 93986-93988]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-30794]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79583; File No. SR-Phlx-2016-104]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Approving 
Proposed Rule Change To Amend Phlx Rule 748, Supervision

December 16, 2016.

I. Introduction

    On October 14, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend several provisions of 
Rule 748 in order to modernize, upgrade, and strengthen the Exchange's 
rules pertaining to supervisory obligations of its members and member 
organizations.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on November 3, 2016.\3\ The public comment period closed on 
November 25, 2016. The Commission received no comments in response to 
the Notice.
---------------------------------------------------------------------------

    \3\ See Exchange Act Release No. 79185 (Oct. 28, 2016), 81 FR 
76637 (Nov. 3, 2016) (File No. SR-Phlx-2016-104) (``Notice'').
---------------------------------------------------------------------------

    This order grants approval of the proposed rule change.

II. Description of the Proposed Rule Change \4\
---------------------------------------------------------------------------

    \4\ The subsequent description of the proposed rule change is 
substantially excerpted from the Exchange's description in the 
Notice.
---------------------------------------------------------------------------

Rule 748(a)

    Rule 748(a) currently provides in the first paragraph that each 
office, location, department, or business activity of a member or 
member organization (including foreign incorporated branch offices) 
shall be under the supervision and control of the member or member 
organization establishing it and of an appropriately qualified 
supervisor. The Exchange is amending the first paragraph of Rule 748(a) 
to clarify and state clearly that each trading system and internal 
surveillance system of a member or member organization (including 
foreign incorporated branch offices) shall, inasmuch as they are 
aspects of their business activity, be under the supervision and 
control of the member or member organization establishing it and of an 
appropriately qualified supervisor.

Rule 748(b)

    Rule 748(b), Designation of Supervisor by Member Organizations, 
currently provides in relevant part that the general partners or 
directors of each member organization shall provide for appropriate 
supervisory control and shall designate a general partner or principal 
executive officer to assume overall authority and responsibility for 
internal supervision and control of the organization and compliance 
with securities' (sic) laws and regulations, including the By-Laws and 
Rules of the Exchange. It provides that the designated person shall 
delegate to qualified principals or qualified employees responsibility 
and authority for supervision and control of each office, location, 
department, or business activity, (including foreign incorporated 
branch offices), and provide for appropriate written procedures of 
supervision and control. The Exchange proposes to amend Rule 748(b) to 
provide that the delegated person shall likewise delegate to qualified 
principals or qualified employees responsibility and authority for 
supervision and control of each trading system and internal 
surveillance system.\5\
---------------------------------------------------------------------------

    \5\ The Exchange also proposes to delete the extraneous 
apostrophe following the word ``securities.''
---------------------------------------------------------------------------

Rule 748(c)

    Rule 748(c) currently provides that each person with supervisory 
control, as described in paragraphs (a) and (b) of Rule 748, must meet 
the Exchange's qualification requirements for supervisors, including 
successful completion of the appropriate examination. The Exchange 
proposes to add to Rule 748(c) a new requirement that each member or 
member organization must make reasonable efforts to determine that each 
person with supervisory control, as described in paragraphs (a) and (b) 
of Rule 748, is qualified by virtue of experience or training to carry 
out his or her assigned responsibilities.

Rule 748(g)

    Rule 748(g), Office Inspections, currently provides that each 
member or member organization for which the Exchange is the Designated 
Examining Authority shall inspect each office or location (including 
foreign incorporated branch offices) of the member or member 
organization according to a cycle that shall be established in its 
written supervisory procedures. In establishing such inspection cycle, 
the member or member organization shall give consideration to the 
nature and complexity of the securities activities for which the office 
or location is responsible, the volume of business done, and the number 
of registered representatives, employees, and associated persons at 
each office or location. Rule 748(g) is proposed to be amended to 
provide that an inspection may not be conducted by any person within 
that office or location who has supervisory responsibilities or by any 
individual who is directly or indirectly supervised by such person. The 
Exchange also proposes to add language requiring the examination 
schedule and an explanation of the factors considered in determining 
the frequency of the examinations in the cycle to be set forth in the 
member or member organization's written supervisory procedures. It also 
proposes to require that the inspection be reasonably designed to 
assist in preventing and detecting violations of, and achieving 
compliance with, applicable securities laws and regulations, and with 
applicable Exchange rules.

[[Page 93987]]

Rule 748(h)

    Rule 748(h) in the first paragraph currently requires each member 
or member organization to establish, maintain, and enforce written 
supervisory procedures, and a system for applying such procedures, to 
supervise the types of business(es) in which the member or member 
organization engages and to supervise the activities of all registered 
representatives, employees, and associated persons. The written 
supervisory procedures and the system for applying such procedures 
shall reasonably be expected to prevent and detect, insofar as 
practicable, violations of the applicable securities laws and 
regulations, including the By-Laws and Rules of the Exchange. The 
Exchange proposes to substitute the word ``designed'' for the word 
``expected.''
    Rule 748(h) in the second paragraph currently requires that the 
written supervisory procedures set forth the supervisory system 
established by the member or member organization and include the name, 
title, registration status, and location of all supervisory personnel 
required by this rule, the dates for which supervisory designations 
were or are effective, and the responsibilities of supervisory 
personnel as these relate to the types of business(es) the member or 
member organization engages in, and securities laws and regulations, 
including the By-Laws and Rules of the Exchange. The Exchange proposes 
to add a requirement that this record be preserved for a period of not 
less than three years, the first two in an easily accessible place.
    Rule 748(h) in the third paragraph currently requires a copy of the 
written supervisory procedures to be kept and maintained at each 
location where supervisory activities are conducted on behalf of the 
member or member organization. It requires each member or member 
organization to amend its written supervisory procedures as appropriate 
within a reasonable time after changes occur in supervisory personnel 
or supervisory procedures, and to communicate such changes throughout 
its organization within a reasonable time. The Exchange proposes to 
amend Rule 748(h) to likewise amend and communicate changes to its 
written supervisory procedures as appropriate within a reasonable time 
after changes occur in applicable securities laws and regulations and 
Exchange rules.

III. Comment Summary

    As noted above, the Commission received no comments on the proposed 
rule change.

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposal. Based on its 
review of the record, the Commission finds that the proposal is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange.\6\ Specifically, the Commission finds that the rule change is 
consistent with Section 6(b)(5) of the Exchange Act,\7\ which requires, 
among other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \6\ In approving this rule change, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As stated in the Notice, the Exchange believes that ``[r]equiring 
increased comprehensive supervision by members and member organizations 
of their activities should promote the Exchange's ability to enforce 
compliance by members and member organizations with the [Exchange] Act 
and the regulations thereunder.'' \8\ With respect to the proposed 
amendments of Rule 748(a) and (b), the Exchange believes that these 
amendments ``should protect investors and the public interest by 
specifically requiring supervision and control'' of trading systems and 
internal surveillance systems to be supervised and controlled by ``an 
appropriately qualified individual.'' \9\ The Exchange believes that 
the proposed amendments to Rule 748(c) ``should protect investors and 
the public interest by requiring that each person with supervisory 
control as described in Rules 748(a) and (b) to be qualified by virtue 
of experience or training to carry out his or her assigned 
responsibilities, such that the individual has the actual capacity to 
fulfill those responsibilities.'' \10\
---------------------------------------------------------------------------

    \8\ Notice at 76638.
    \9\ Id.
    \10\ Id.
---------------------------------------------------------------------------

    Further, the Exchange believes that the proposed amendments to Rule 
748(g) will ``minimiz[e] the potential for conflicts of interest in the 
conduct of office inspections'' by prohibiting those inspections ``from 
being conducted by any person within that office or location who has 
supervisory responsibilities or by any individual who is directly or 
indirectly supervised by such a person who may be incentivized to 
minimize any compliance issues identified in the inspection.'' \11\ The 
Exchange also believes ``[t]he proposed amendments to Rule 748(g) 
concerning the examination schedule and specifically requiring that the 
inspection be reasonably designed to assist in preventing and detecting 
violations of, and achieving compliance with, applicable securities 
laws and regulations and with applicable Exchange rules should assure 
that inspections take place with a predictable and adequate frequency 
and are reasonably designed to identify violations of applicable law 
and rules.'' \12\
---------------------------------------------------------------------------

    \11\ Id. at 76638-39.
    \12\ Id. at 76639.
---------------------------------------------------------------------------

    The Exchange believes that the proposed amendments to Rule 748(h), 
which address the design and maintenance of written supervisory 
procedures, will ``facilitate identification of instances where the 
procedures were not followed'' and also ``clarif[y] the affirmative 
nature of the member or member organization's obligations under the 
rule when creating such procedures.'' \13\ Finally, the Exchange 
believes that the proposed amendment to Rule 748(h) with respect to 
updating written supervisory procedures ``should promote the continued 
usefulness of the procedures in the context of ongoing changes in the 
regulatory environment in which members and member organizations 
conduct their business.'' \14\
---------------------------------------------------------------------------

    \13\ Id.
    \14\ Id.
---------------------------------------------------------------------------

    The Commission notes that the proposal received no comments from 
the public. Taking into consideration the Exchange's views about the 
proposed amendments, the Commission believes that the proposal will 
help protect investors and the public interest by strengthening and 
clarifying the supervisory obligations of Exchange members and member 
organizations. The Commission believes that the approach proposed by 
the Exchange is appropriate and designed to protect investors and the 
public interest, consistent with Section 6(b)(5) of the Exchange Act. 
For these reasons, the Commission finds that the proposed rule change 
is consistent with the Exchange Act and the rules and regulations 
thereunder.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \15\ of the 
Exchange Act,\16\ that the proposed rule change

[[Page 93988]]

(SR-Phlx-2016-104) be, and hereby is, approved.
---------------------------------------------------------------------------

    \15\ Id.
    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30794 Filed 12-21-16; 8:45 am]
 BILLING CODE 8011-01-P
93986 Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices

submission, all subsequent The proposed rule change was or qualified employees responsibility
amendments, all written statements published for comment in the Federal and authority for supervision and
with respect to the proposed rule Register on November 3, 2016.3 The control of each trading system and
change that are filed with the public comment period closed on internal surveillance system.5
Commission, and all written November 25, 2016. The Commission
Rule 748(c)
communications relating to the received no comments in response to
proposed rule change between the the Notice. Rule 748(c) currently provides that
Commission and any person, other than This order grants approval of the each person with supervisory control, as
those that may be withheld from the proposed rule change. described in paragraphs (a) and (b) of
public in accordance with the Rule 748, must meet the Exchange’s
II. Description of the Proposed Rule qualification requirements for
provisions of 5 U.S.C. 552, will be
Change 4 supervisors, including successful
available for Web site viewing and
printing in the Commission’s Public Rule 748(a) completion of the appropriate
Reference Room, 100 F Street NE., examination. The Exchange proposes to
Rule 748(a) currently provides in the
Washington, DC 20549, on official add to Rule 748(c) a new requirement
first paragraph that each office, location,
business days between the hours of that each member or member
department, or business activity of a
10:00 a.m. and 3:00 p.m. Copies of the organization must make reasonable
member or member organization
filing also will be available for efforts to determine that each person
(including foreign incorporated branch
inspection and copying at the principal with supervisory control, as described
offices) shall be under the supervision
office of the Exchange. All comments in paragraphs (a) and (b) of Rule 748, is
and control of the member or member
received will be posted without change; qualified by virtue of experience or
organization establishing it and of an
the Commission does not edit personal training to carry out his or her assigned
appropriately qualified supervisor. The
identifying information from responsibilities.
Exchange is amending the first
submissions. You should submit only paragraph of Rule 748(a) to clarify and Rule 748(g)
information that you wish to make state clearly that each trading system
available publicly. All submissions Rule 748(g), Office Inspections,
and internal surveillance system of a currently provides that each member or
should refer to File Number SR–Phlx– member or member organization
2016–119 and should be submitted on member organization for which the
(including foreign incorporated branch Exchange is the Designated Examining
or before January 12, 2017. offices) shall, inasmuch as they are Authority shall inspect each office or
For the Commission, by the Division of aspects of their business activity, be location (including foreign incorporated
Trading and Markets, pursuant to delegated under the supervision and control of the branch offices) of the member or
authority.27 member or member organization member organization according to a
Eduardo A. Aleman, establishing it and of an appropriately cycle that shall be established in its
Assistant Secretary. qualified supervisor. written supervisory procedures. In
[FR Doc. 2016–30795 Filed 12–21–16; 8:45 am] establishing such inspection cycle, the
Rule 748(b)
BILLING CODE 8011–01–P member or member organization shall
Rule 748(b), Designation of
give consideration to the nature and
Supervisor by Member Organizations,
complexity of the securities activities
SECURITIES AND EXCHANGE currently provides in relevant part that
for which the office or location is
COMMISSION the general partners or directors of each
responsible, the volume of business
member organization shall provide for
done, and the number of registered
[Release No. 34–79583; File No. SR-Phlx- appropriate supervisory control and
2016–104] representatives, employees, and
shall designate a general partner or
associated persons at each office or
principal executive officer to assume
Self-Regulatory Organizations; location. Rule 748(g) is proposed to be
overall authority and responsibility for
NASDAQ PHLX LLC; Order Approving amended to provide that an inspection
internal supervision and control of the
Proposed Rule Change To Amend Phlx may not be conducted by any person
organization and compliance with
Rule 748, Supervision within that office or location who has
securities’ (sic) laws and regulations,
supervisory responsibilities or by any
December 16, 2016. including the By-Laws and Rules of the
individual who is directly or indirectly
Exchange. It provides that the
I. Introduction supervised by such person. The
designated person shall delegate to
Exchange also proposes to add language
On October 14, 2016, NASDAQ PHLX qualified principals or qualified
requiring the examination schedule and
LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with employees responsibility and authority
an explanation of the factors considered
the Securities and Exchange for supervision and control of each
in determining the frequency of the
Commission (‘‘SEC’’ or ‘‘Commission’’), office, location, department, or business
examinations in the cycle to be set forth
pursuant to Section 19(b)(1) of the activity, (including foreign incorporated
in the member or member organization’s
Securities Exchange Act of 1934 branch offices), and provide for
written supervisory procedures. It also
(‘‘Exchange Act’’) 1 and Rule 19b-4 appropriate written procedures of
proposes to require that the inspection
thereunder,2 a proposed rule change to supervision and control. The Exchange
be reasonably designed to assist in
amend several provisions of Rule 748 in proposes to amend Rule 748(b) to
preventing and detecting violations of,
provide that the delegated person shall
sradovich on DSK3GMQ082PROD with NOTICES

order to modernize, upgrade, and and achieving compliance with,
strengthen the Exchange’s rules likewise delegate to qualified principals
applicable securities laws and
pertaining to supervisory obligations of regulations, and with applicable
3 See Exchange Act Release No. 79185 (Oct. 28,
its members and member organizations. Exchange rules.
2016), 81 FR 76637 (Nov. 3, 2016) (File No. SR–
Phlx–2016–104) (‘‘Notice’’).
27 17 CFR 200.30–3(a)(12). 4 The subsequent description of the proposed rule 5 The Exchange also proposes to delete the
1 15 U.S.C. 78s(b)(1). change is substantially excerpted from the extraneous apostrophe following the word
2 17 CFR 240.19b–4. Exchange’s description in the Notice. ‘‘securities.’’

VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 E:\FR\FM\22DEN1.SGM 22DEN1
Federal Register / Vol. 81, No. 246 / Thursday, December 22, 2016 / Notices 93987

Rule 748(h) IV. Discussion and Commission any compliance issues identified in the
Rule 748(h) in the first paragraph Findings inspection.’’ 11 The Exchange also
currently requires each member or The Commission has carefully believes ‘‘[t]he proposed amendments to
member organization to establish, considered the proposal. Based on its Rule 748(g) concerning the examination
maintain, and enforce written review of the record, the Commission schedule and specifically requiring that
supervisory procedures, and a system finds that the proposal is consistent the inspection be reasonably designed to
for applying such procedures, to with the requirements of the Exchange assist in preventing and detecting
supervise the types of business(es) in Act and the rules and regulations violations of, and achieving compliance
which the member or member thereunder that are applicable to a with, applicable securities laws and
organization engages and to supervise national securities exchange.6 regulations and with applicable
the activities of all registered Specifically, the Commission finds that Exchange rules should assure that
representatives, employees, and the rule change is consistent with inspections take place with a
associated persons. The written Section 6(b)(5) of the Exchange Act,7 predictable and adequate frequency and
supervisory procedures and the system which requires, among other things, that are reasonably designed to identify
for applying such procedures shall the rules of a national securities violations of applicable law and
reasonably be expected to prevent and exchange be designed to prevent rules.’’ 12
detect, insofar as practicable, violations fraudulent and manipulative acts and The Exchange believes that the
of the applicable securities laws and practices, to promote just and equitable proposed amendments to Rule 748(h),
regulations, including the By-Laws and principles of trade, and, in general, to which address the design and
Rules of the Exchange. The Exchange protect investors and the public interest. maintenance of written supervisory
proposes to substitute the word As stated in the Notice, the Exchange procedures, will ‘‘facilitate
‘‘designed’’ for the word ‘‘expected.’’ believes that ‘‘[r]equiring increased identification of instances where the
Rule 748(h) in the second paragraph comprehensive supervision by members procedures were not followed’’ and also
currently requires that the written and member organizations of their ‘‘clarif[y] the affirmative nature of the
supervisory procedures set forth the activities should promote the member or member organization’s
supervisory system established by the Exchange’s ability to enforce obligations under the rule when creating
member or member organization and compliance by members and member such procedures.’’ 13 Finally, the
include the name, title, registration organizations with the [Exchange] Act Exchange believes that the proposed
status, and location of all supervisory and the regulations thereunder.’’ 8 With amendment to Rule 748(h) with respect
personnel required by this rule, the respect to the proposed amendments of to updating written supervisory
dates for which supervisory Rule 748(a) and (b), the Exchange procedures ‘‘should promote the
designations were or are effective, and believes that these amendments ‘‘should continued usefulness of the procedures
the responsibilities of supervisory protect investors and the public interest in the context of ongoing changes in the
personnel as these relate to the types of by specifically requiring supervision regulatory environment in which
business(es) the member or member and control’’ of trading systems and members and member organizations
organization engages in, and securities internal surveillance systems to be conduct their business.’’ 14
laws and regulations, including the By- supervised and controlled by ‘‘an The Commission notes that the
Laws and Rules of the Exchange. The appropriately qualified individual.’’ 9 proposal received no comments from
Exchange proposes to add a requirement The Exchange believes that the the public. Taking into consideration
that this record be preserved for a proposed amendments to Rule 748(c) the Exchange’s views about the
period of not less than three years, the ‘‘should protect investors and the public proposed amendments, the Commission
first two in an easily accessible place. interest by requiring that each person believes that the proposal will help
Rule 748(h) in the third paragraph with supervisory control as described in protect investors and the public interest
currently requires a copy of the written Rules 748(a) and (b) to be qualified by by strengthening and clarifying the
supervisory procedures to be kept and virtue of experience or training to carry supervisory obligations of Exchange
maintained at each location where out his or her assigned responsibilities, members and member organizations.
supervisory activities are conducted on such that the individual has the actual The Commission believes that the
behalf of the member or member capacity to fulfill those approach proposed by the Exchange is
organization. It requires each member or responsibilities.’’ 10 appropriate and designed to protect
member organization to amend its Further, the Exchange believes that investors and the public interest,
written supervisory procedures as the proposed amendments to Rule consistent with Section 6(b)(5) of the
appropriate within a reasonable time 748(g) will ‘‘minimiz[e] the potential for Exchange Act. For these reasons, the
after changes occur in supervisory conflicts of interest in the conduct of Commission finds that the proposed
personnel or supervisory procedures, office inspections’’ by prohibiting those rule change is consistent with the
and to communicate such changes inspections ‘‘from being conducted by Exchange Act and the rules and
throughout its organization within a any person within that office or location regulations thereunder.
reasonable time. The Exchange proposes who has supervisory responsibilities or
to amend Rule 748(h) to likewise amend by any individual who is directly or V. Conclusion
and communicate changes to its written indirectly supervised by such a person It is therefore ordered, pursuant to
supervisory procedures as appropriate who may be incentivized to minimize Section 19(b)(2) 15 of the Exchange
sradovich on DSK3GMQ082PROD with NOTICES

within a reasonable time after changes Act,16 that the proposed rule change
occur in applicable securities laws and 6 In approving this rule change, the Commission

regulations and Exchange rules. has considered the rule’s impact on efficiency,
11 Id. at 76638–39.
competition, and capital formation. See 15 U.S.C.
III. Comment Summary 78c(f). 12 Id. at 76639.
7 15 U.S.C. 78f(b)(5). 13 Id.
As noted above, the Commission 8 Notice at 76638. 14 Id.

received no comments on the proposed 9 Id. 15 Id.

rule change. 10 Id. 16 15 U.S.C. 78s(b)(2).

VerDate Sep<11>2014 17:40 Dec 21, 2016 Jkt 241001 PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 E:\FR\FM\22DEN1.SGM 22DEN1
Document Created: 2016-12-21 23:52:40
Document Modified: 2016-12-21 23:52:40
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 93986