83_FR_51177 83 FR 50981 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend, Reorganize and Enhance Membership, Registration and Qualification Rules and To Make Conforming Changes to Certain Other Rules

83 FR 50981 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend, Reorganize and Enhance Membership, Registration and Qualification Rules and To Make Conforming Changes to Certain Other Rules

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 196 (October 10, 2018)

Page Range50981-50999
FR Document2018-21902

Federal Register, Volume 83 Issue 196 (Wednesday, October 10, 2018)
[Federal Register Volume 83, Number 196 (Wednesday, October 10, 2018)]
[Notices]
[Pages 50981-50999]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-21902]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84352; File No. SR-Phlx-2018-61]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend, 
Reorganize and Enhance Membership, Registration and Qualification Rules 
and To Make Conforming Changes to Certain Other Rules

October 3, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 27, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II, below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend, reorganize and enhance its 
membership, registration and qualification rules and to make conforming 
changes to certain other rules.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

[[Page 50982]]

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
    The Exchange has adopted registration requirements to ensure that 
associated persons of member organizations attain and maintain 
specified levels of competence and knowledge pertinent to their 
function. In general, the current rules require that persons engaged in 
a member organization's investment banking or securities business who 
are to function as representatives or principals register with the 
Exchange in the category of registration appropriate to their functions 
by passing one or more qualification examinations \3\ and exempt 
specified associated persons from the registration requirements.\4\ 
They also prescribe ongoing continuing education requirements for 
registered persons.\5\ The Exchange now proposes to amend, reorganize 
and enhance its rules regarding registration, qualification 
examinations and continuing education, as described below.\6\
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    \3\ See Phlx Rules 611, Principal Registration Requirements, and 
613, Representative Registration.
    \4\ See Phlx Rule 614, Persons Exempt from Registration.
    \5\ See Phlx Rule 640, Continuing Education for Registered 
Persons.
    \6\ The Exchange's rules governing these matters were 
extensively updated and amended in 2012. See Securities Exchange Act 
Release No. 66840 (April 20, 2012), 77 FR 25003 (April 26, 2012) 
(SR-Phlx-2012-23).
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    Recently, the Commission approved a Financial Industry Regulatory 
Authority (``FINRA'') proposed rule change adopting rules relating to 
qualification and registration requirements in the Consolidated FINRA 
Rulebook,\7\ restructuring the FINRA representative-level qualification 
examinations, creating a general knowledge examination and specialized 
knowledge examinations, allowing permissive registration, establishing 
an exam waiver process for persons working for a financial services 
affiliate of a member, and amending certain Continuing Education 
(``CE'') requirements (collectively, the ``FINRA Rule Changes'').\8\ 
The FINRA Rule Changes will become effective on October 1, 2018.
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    \7\ The current FINRA rulebook consists of: (1) FINRA rules; (2) 
NASD rules; and (3) rules incorporated from the New York Stock 
Exchange (``NYSE'') (the ``Incorporated NYSE rules''). While the 
NASD rules generally apply to all FINRA members, the Incorporated 
NYSE rules apply only to those members of FINRA that are also 
members of the NYSE.
    \8\ See Securities Exchange Act Release No. 81098 (July 7, 
2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-
FINRA-2017-007). See also FINRA Regulatory Notice 17-30 (SEC 
Approves Consolidated FINRA Registration Rules, Restructured 
Representative-Level Qualification Examinations and Changes to 
Continuing Education Requirements) (October 2017). FINRA articulated 
its belief that the proposed rule change would streamline, and bring 
consistency and uniformity to, its registration rules, which would, 
in turn, assist FINRA members and their associated persons in 
complying with the rules and improve regulatory efficiency. FINRA 
also determined to enhance the overall efficiency of its 
representative-level examinations program by eliminating redundancy 
of subject matter content across examinations, retiring several 
outdated representative-level registrations, and introducing a 
general knowledge examination that could be taken by all potential 
representative-level registrants and the general public. FINRA 
amended certain aspects of its continuing education rule, including 
by codifying existing guidance regarding the effect of failing to 
complete the Regulatory Element on a registered person's activities 
and compensation.
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    The Exchange now proposes to amend, reorganize and enhance its own 
membership, registration and qualification rules in part in response to 
the FINRA Rule Changes, and also in order to conform the Exchange's 
rules more closely to those of its affiliated exchanges in the interest 
of uniformity and to facilitate compliance with membership, 
registration and qualification regulatory requirements by members of 
multiple Nasdaq-affiliated exchanges including Phlx. Last, the Exchange 
proposes to enhance its registration rules by adding a new registration 
requirement applicable to developers of algorithmic trading systems 
similar to a requirement adopted by FINRA pursuant to a 2016 FINRA 
proposed rule change.\9\
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    \9\ See Securities Exchange Act Release No. 77551 (April 7, 
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007). In its proposed rule change FINRA addressed the 
increasing significance of algorithmic trading strategies by 
amending its rules to require registration, as Securities Traders, 
of associated persons primarily responsible for the design, 
development or significant modification of algorithmic trading 
strategies, or who are responsible for the day-to-day supervision or 
direction of such activities.
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    As part of this proposed rule change, current Rules 53, Liability 
for Dues Until Transfer or Military Service; 611, Principal 
Registration Requirements; 612, Categories of Principal Registration; 
613, Representative Registration; 614, Persons Exempt from 
Registration; 615, Waiver of Requirements; 616, Electronic Filing 
Requirements for Uniform Forms; 623, Fingerprinting; and 640, 
Continuing Education for Registered Persons, are proposed to be 
deleted. Rule 620, Trading Floor Registration, is proposed to be 
renumbered and amended.\10\
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    \10\ The Exchange also proposes conforming amendments to Rules 
1, Definitions; 1024, Conduct of Accounts for Options Trading; 1090, 
Clerks; 3202, Application of Other Rules of the Exchange; 9630, 
Appeal; Equity Floor Procedure Advice A-7, Failure to Timely Submit 
Amendments to Form U4, Form U5 and Form BD; Options Floor Procedure 
Advice F-34, Failure to Timely Submit Amendments to Form U4, Form U5 
and Form BD; and Section VII.C., FINRA Fees, of the Exchange's 
Pricing Schedule, and the addition of new Rule 2040, Nonregistered 
Foreign Finders. The Exchange is also proposing to amend the two 
Floor Procedure Advices to delete references to the ``Department of 
Market Regulation,'' which refer to FINRA's former Department of 
Market Regulation. FINRA amended its rules recently to reflect an 
internal reorganization of its Enforcement Operations. See 
Securities Exchange Act Release No. 83781 (August 6, 2018), 83 FR 
39802 (August 10, 2018). In July 2017, FINRA announced its plan to 
consolidate its existing enforcement functions into a unified 
Department of Enforcement. FINRA's recent rule change makes 
technical and other non-substantive changes to FINRA Rules 9000 
Series Code of Procedure to reflect the single Department of 
Enforcement, which the Exchange is mirroring in the two Floor 
Procedure Advices which will now refer only to FINRA's Department of 
Enforcement.
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    In place of the deleted rules and rule sections the Exchange 
proposes to adopt a new 1200 Series of rules captioned Registration, 
Qualification and Continuing Education generally conforming to and 
based upon FINRA's new 1200 Series of rules resulting from the FINRA 
Rule Changes, but with a number of Exchange-specific variations.\11\ 
The proposed new 1200 Series is also being proposed for adoption by 
Phlx's affiliated exchanges in order to facilitate compliance with 
membership, registration and qualification requirements by members of 
two or more of those affiliated exchanges.\12\ In the new 1200 Series 
of

[[Page 50983]]

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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    \11\ The proposed Phlx 1200 Series of Rules would consist of 
Rule 1210, Registration Requirements; Rule 1220, Registration 
Categories; Rule 1230, Associated Persons Exempt from Registration; 
Rule 1240, Continuing Education Requirements; Rule 1250, Electronic 
Filing Requirements for Uniform Forms; and Rule 1260, Trading Floor 
Registration.
    \12\ The Exchange's five affiliated exchanges, The Nasdaq Stock 
Market LLC (``Nasdaq''), Nasdaq BX, Inc. (``BX''); Nasdaq ISE, LLC 
(``ISE''); Nasdaq GEMX, LLC (``GEMX''); and Nasdaq MRX, LLC 
(``MRX'') (together with Phlx, the ``Nasdaq Affiliated Exchanges'') 
are also submitting proposed rule changes to adopt the 1200 Series 
of rules. See SR-NASDAQ-2018-078, SR-BX-2018-047, SR-ISE-2018-82, 
SR-GEMX-2018-33 and SR-MRX-2018-31. The Exchange recently added a 
shell structure to its rulebook with the purpose of improving 
efficiency and readability and to align its rules closer to those of 
the other Nasdaq Affiliated Exchanges. See Securities Exchange Act 
Release No. 82169 (November 29, 2017), 82 FR 57508 (December 5, 
2017) (SR-Phlx-2017-97). Ultimately, the Exchange intends to submit 
another proposed rule change to transfer the Exchange's 1200 Series 
of rules into the new shell structure. The Phlx 1200 Series of rules 
would differ slightly from the 1200 Series of the other Nasdaq 
Affiliated Exchanges given Phlx's trading floor and its unique 
membership structure which features the concept of a ``member 
organization.'' The Phlx 1200 Series would therefore include a Rule 
1260, Trading Floor Registration. Additionally, each of the new Phlx 
1200 Series of rules (except Rule 1260) would contain a statement 
that references to a ``member'' in that rule shall be deemed to be 
references to a ``member organization.''
    \13\ See Securities Exchange Act Release No. 77551 (April 7, 
2016), 81 FR 21914 (April 13, 2016) (order approving SR-FINRA-2016-
007). In its proposed rule change to adopt this registration 
requirement, FINRA addressed the increasing significance of 
algorithmic trading strategies by proposing to require registration, 
as Securities Traders, of associated persons primarily responsible 
for the design, development or significant modification of 
algorithmic trading strategies, or who are responsible for the day-
to-day supervision or direction of such activities.
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    The proposed rule change would become operative October 1, 2018 
with the exception of the new registration requirement for developers 
of algorithmic trading strategies which would become operative April 1, 
2019.
Proposed Rules
A. Registration Requirements (Proposed Rule 1210)
    Exchange Rules 613(a) and 611(a) currently require that persons 
engaged, or to be engaged, in the investment banking or securities 
business of a member who are to function as representatives or 
principals register with the Exchange in the category of registration 
appropriate to their functions as specified in Exchange Rules 613 and 
612.\14\ The Exchange is proposing to consolidate and streamline 
provisions of Exchange Rules 613(a) and 611(a) and to adopt them as 
Exchange Rule 1210, subject to several changes.\15\
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    \14\ Section (a) of Rule 613 includes an exception for members 
whose activities are limited to the Exchange's options trading floor 
and who are registered pursuant to Rule 620(a), as well as for 
associated persons whose activities are limited to the Exchange's 
options trading floor and are registered pursuant to Rule 620(b). As 
discussed below, the Exchange proposes to preserve this exception as 
new section (c) of proposed Rule 1260.
    \15\ In general the 1200 Series would conform the Exchange's 
rules to FINRA's rules as revised in the FINRA Rule Changes, with 
modifications tailored to the business of the Exchange and of the 
other Nasdaq Affiliated Exchanges. However, the Exchange also 
proposes to adopt Rule 1210, Supplementary Material .12, which is 
not based upon a FINRA rule but instead on current Nasdaq Rule 
1031(c), (d) and (e), which Nasdaq is proposing in SR-Nasdaq-2018-
078 to relocate to Rule 1210, Supplementary Material .12 in the 
Nasdaq rulebook. These provisions govern the process for applying 
for registration and amending the registration application, as well 
as for notifying the Exchange of termination of the member's 
association with a person registered with the Exchange. The Exchange 
proposes to adopt Rule 1210, Supplemental Material .12, in order to 
have uniform processes and requirements in this area across the 
Nasdaq Affiliated Exchanges.
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    Proposed Rule 1210 provides that each person engaged in the 
securities business of a member must register with the Exchange as a 
representative or principal in each category of registration 
appropriate to his or her functions and responsibilities as specified 
in proposed Rule 1220, unless exempt from registration pursuant to 
proposed Rule 1230. Unlike current Rules 613(a) and 611(a), proposed 
Rule 1210 would not require persons engaged in the investment banking 
business of a member to register with the Exchange since a member's 
investment banking business is not the primary concern of the Exchange 
or the focus of its operations.\16\ Proposed Rule 1210 also provides 
that such person is not qualified to function in any registered 
capacity other than that for which the person is registered, unless 
otherwise stated in the rules.
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    \16\ Miami International Securities Exchange LLC (``MIAX'') Rule 
203(a) and current ISE Rule 313(a)(1) likewise require registration 
of associated persons of members engaged in the member's securities 
business, but do not require registration with the exchanges of 
associated persons of members who engage in the member's investment 
banking business. Because the Exchange's proposed registration rules 
focus solely on securities trading activity, the proposed rules 
differ from the FINRA Rule Changes by omitting references to 
investment banking in proposed Rules 1210, 1210.03, 1210.10, 
1220(a)(1), 1220(a)(2)(B), 1220(b), and 1240(b)(1), and also by 
omitting as unnecessary from Rule 1220(a)(10) a limitation on the 
qualification of a General Securities Sales Supervisor to supervise 
the origination and structuring of an underwriting.
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B. Minimum Number of Registered Principals (Proposed Rule 1210.01)
    Existing Rule 611(e), Requirement of Two Registered Principals, at 
section (i) requires members other than sole proprietorships to have at 
least two officers or partners who are registered as principals with 
respect to each aspect of the member organization's investment banking 
and securities business pursuant to the applicable provisions of Rule 
611; provided, however, that a proprietary trading firm with 25 or 
fewer registered representatives is only required to have one officer 
or partner who is registered as a principal.\17\ Under Rule 611(e)(ii) 
the Exchange may waive the provisions of paragraph (e)(i) in situations 
that indicate conclusively that only one person should be required to 
register as a principal. Additionally, Rule 611(e)(iii) requires an 
applicant for membership to have at least one person qualified for 
registration as a Limited Principal--Financial and Operations, pursuant 
to Rule 612(b)(i).\18\
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    \17\ Rule 611(e)(i)(A)-(D) defines the term ``proprietary 
trading firm''. Because the Exchange is proposing to delete Rule 611 
in its entirety, Rule 611(e)(i) (A)-(D) would be reworded and 
relocated to Rule 1, Definitions, Section (kk) as a defined term.
    \18\ The Exchange's rules currently refer to various categories 
of limited principal registration as ``Limited Principal--'' 
followed by the name of the registration category. In this proposed 
rule change, the Exchange will no longer employ the term ``Limited 
Principal--'' in discussing various principal registration 
categories. No substantive change is intended; shortening the names 
of the various principals simply improves readability of the rules.
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    The Exchange is proposing to delete these requirements and in their 
place to adopt new Rule 1210.01. The new rule would provide firms that 
limit the scope of their business with flexibility in satisfying the 
two-principal requirement. In particular, proposed Rule 1210.01 
requires that a member have a minimum of two General Securities 
Principals, provided that a member that is limited in the scope of its 
activities may instead have two officers or partners who are registered 
in a principal category that corresponds to the scope of the member's 
activities.\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, Exchange 
Rule 1210.01 provides that any member with only one associated person 
is excluded from the two principal requirement. Proposed Rule 1210.01 
would provide that existing members as well as new applicants may 
request a waiver of the two-principal requirement, consistent with 
current Exchange Rule 611(e)(ii). Finally, the Exchange is proposing to 
retain the existing rule's provision permitting a proprietary trading 
firm with 25 or fewer registered representatives to have just one 
registered principal. The FINRA Rule Changes do not include this 
provision.\20\ The Financial and

[[Page 50984]]

Operations Principal requirement of current Rules 611(e)(i) and 
612(b)(i), which it references, would be revised and relocated to 
proposed Rule 1220(a)(4)(A).
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    \19\ The principal registration categories are described in 
greater detail below.
    \20\ The Exchange is not proposing provisions conforming to the 
new FINRA Rule 1210.01 requirements that all FINRA members are 
required to have a Principal Financial Officer and a Principal 
Operations Officer, because it believes that its proposed Rule 
1220(a)(4), Financial and Operations Principal, which requires 
member firms operating pursuant to certain provisions of SEC rules 
to designate at least one Financial and Operations Principal, is 
sufficient. Further, the Exchange is not adopting the FINRA Rule 
1210.01 requirements that (1) a member engaged in investment banking 
activities have an Investment Banking Principal, (2) a member 
engaged in research activities have a Research Principal, or (3) a 
member engaged in options activities with the public have a 
Registered Options Principal. The Exchange does not recognize the 
Investment Banking Principal or the Research Principal registration 
categories, and the Registered Options Principal registration 
requirement is set forth in Rule 1210.08 and its inclusion is 
therefore unnecessary in Rule 1210.01.
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C. Permissive Registrations (Proposed Rule 1210.02)
    Current Rule 611(a) prohibits member organizations from maintaining 
a principal registration with the Exchange for any person (A) who is no 
longer active in the member organization's investment banking or 
securities business, (B) who is no longer functioning as a principal, 
or (C) where the sole purpose is to avoid the examination requirement 
of the rule. A member organization may not make application for the 
registration of any person as principal where there is no intent to 
employ such person in the member organization's investment banking or 
securities business. However, a member organization may maintain or 
make application for the registration as a principal of a person who 
performs legal, compliance, internal audit, back-office operations, or 
similar duties for the member organization or a person engaged in the 
investment banking or securities business of a foreign securities 
affiliate or subsidiary of the member organization. Exchange Rule 
613(b) is a parallel provision applicable to representatives.
    The Exchange is proposing to replace these provisions with new Rule 
1210.02. The Exchange is also proposing to expand the scope of 
permissive registrations and to clarify a member's obligations 
regarding individuals who are maintaining such registrations.
    Specifically, proposed Rule 1210.02 allows any associated person to 
obtain and maintain any registration permitted by the member. For 
instance, an associated person of a member working solely in a clerical 
or ministerial capacity, such as in an administrative capacity, would 
be able to obtain and maintain a General Securities Representative 
registration with the member. As another example, an associated person 
of a member who is registered, and functioning solely, as a General 
Securities Representative would be able to obtain and maintain a 
General Securities Principal registration with the member. Further, 
proposed Rule 1210.02 allows an individual engaged in the securities 
business of a foreign securities affiliate or subsidiary of a member to 
obtain and maintain any registration permitted by the member.
    The Exchange is proposing to permit the registration of such 
individuals for several reasons. First, a member may foresee a need to 
move a former representative or principal who has not been registered 
for two or more years back into a position that would require such 
person to be registered. Currently, such persons are required to 
requalify (or obtain a waiver of the applicable qualification 
examinations) and reapply for registration. Second, the proposed rule 
change would allow members to develop a depth of associated persons 
with registrations in the event of unanticipated personnel changes. 
Third, allowing registration in additional categories encourages 
greater regulatory understanding. Finally, the proposed rule change 
would eliminate an inconsistency in the current rules, which permit 
some associated persons of a member to obtain permissive registrations, 
but not others who equally are engaged in the member's business.
    Individuals maintaining a permissive registration under the 
proposed rule change would be considered registered persons and subject 
to all Exchange rules, to the extent relevant to their activities. For 
instance, an individual working solely in an administrative capacity 
would be able to maintain a General Securities Representative 
registration and would be considered a registered person for purposes 
of rules relating to borrowing from or lending to customers, but the 
rule would have no practical application to his or her conduct because 
he or she would not have any customers.
    Consistent with the Exchange's supervision rules, members would be 
required to have adequate supervisory systems and procedures reasonably 
designed to ensure that individuals with permissive registrations do 
not act outside the scope of their assigned functions.\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 day-to-day supervisor may be a nonregistered person. 
Members would be required to assign a registered supervisor to this 
person who would be responsible for periodically contacting such 
individual's day-to-day supervisor to verify that the individual is not 
acting outside the scope of his or her assigned functions. If such 
individual is permissively registered as a representative, the 
registered supervisor must be registered as a representative or 
principal. If the individual is permissively registered as a principal, 
the registered supervisor must be registered as a principal.\22\
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    \21\ The FINRA Proposed Rules at Rule 1210.02 cite FINRA's own 
supervision rule, by number. Because the 1200 Series of rules is 
intended to apply to the Exchange as well as to its affiliates which 
have different supervision rules, proposed Rule 1210.02 refers 
generally to the supervision rules rather than identifying them by 
number.
    \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.
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D. Qualification Examinations and Waivers of Examinations (Proposed 
Rule 1210.03)
    Current Rule 611(a) provides that before a registration can become 
effective, persons who are to function as principals must pass a 
qualification examination for principals appropriate to the category of 
registration as specified in the rule. Rule 613(d) provides that no 
member organization shall permit any member or person associated with 
it to engage in the investment banking or securities business unless 
the member organization determines that such person satisfies the 
qualification requirements established by the Board and is not subject 
to statutory disqualification as defined in Section 3(a)(39) \23\ of 
the Act. The Exchange is proposing to replace these provisions with new 
Rule 1210.03.
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    \23\ 15 U.S.C. 78c(a)(39).
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    In addition, as part of the FINRA Rule Changes FINRA has adopted a 
restructured representative-level qualification examination program 
whereby representative-level registrants would be required to take a 
general knowledge examination (the Securities Industry Essentials Exam 
or ``SIE'') and a specialized knowledge examination appropriate to 
their job functions at the firm with which they are associating. 
Therefore, proposed Rule 1210.03 provides that before the registration 
of a person as a representative can become effective under proposed 
Rule 1210, such person must pass the SIE and an appropriate 
representative-level qualification examination as specified in proposed 
Rule 1220. Proposed Rule 1210.03 also provides that before the 
registration of a person as a principal

[[Page 50985]]

can become effective under proposed Rule 1210, such person must pass an 
appropriate principal-level qualification examination as specified in 
proposed Rule 1220.
    Further, proposed 1210.03 provides that if the job functions of a 
registered representative other than an individual registered as an 
Order Processing Assistant Representative, change and he or she needs 
to become registered in another representative-level category, he or 
she would not need to pass the SIE again. Rather, the registered person 
would need to pass only the appropriate representative-level 
qualification examination.\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.
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    \24\ The exception for Order Processing Assistant 
Representatives and Foreign Associates was adopted by FINRA in FINRA 
Rule 1210.03, and is included in proposed Exchange Rule 1210.03 
without the reference to Foreign Associates which is a registration 
category the Nasdaq Affiliated Exchanges do not recognize. FINRA has 
stated that the SIE would assess basic product knowledge; the 
structure and function of the securities industry markets, 
regulatory agencies and their functions; and regulated and 
prohibited practices. Proposed Rule 1210.03 provides that all 
associated persons, such as associated persons whose functions are 
solely and exclusively clerical or ministerial, are eligible to take 
the SIE. Proposed Rule 1210.03 also provides that individuals who 
are not associated persons of firms, such as members of the general 
public, are eligible to take the SIE. FINRA has stated its belief 
that expanding the pool of individuals who are eligible to take the 
SIE would enable prospective securities industry professionals to 
demonstrate to prospective employers a basic level of knowledge 
prior to submitting a job application. Further, this approach would 
allow for more flexibility and career mobility within the securities 
industry. While all associated persons of firms as well as 
individuals who are not associated persons would be eligible to take 
the SIE pursuant to proposed Rule 1210.03, passing the SIE alone 
would not qualify them for registration with the Exchange. Rather, 
to be eligible for registration with the Exchange, an individual 
would be required to pass an applicable representative or principal 
qualification examination and complete the other requirements of the 
registration process.
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    The proposed rule change solely impacts the representative-level 
qualification requirements. The proposed rule change does not change 
the scope of the activities 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 other than an individual 
registered as an Order Processing Assistant Representative, would be 
considered to have passed the SIE in the CRD system, and thus if they 
wish to register in any other representative category after the 
operative date of the proposed rule change, they could do so by taking 
only the appropriate specialized knowledge examination.\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 is proposing a four-year 
expiration period for the SIE.
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    In addition, individuals, with the exception of Order Processing 
Assistant Representatives, who had been registered as representatives 
two or more years, but less than four years, prior to the operative 
date of the proposed rule change would also be considered to have 
passed the SIE and designated as such in the CRD system. Moreover, if 
such individuals re-register with a firm after the operative date of 
the proposed rule change and within four years of having been 
previously registered, they would only need to pass the specialized 
knowledge examination associated with that registration position. 
However, if they do not register within four years from the date of 
their last registration, their SIE status in the CRD system would be 
administratively terminated. Similar to the current process for 
registration, firms would continue to use the CRD system to request 
registrations for representatives. An individual would be able to 
schedule both the SIE and specialized knowledge examinations for the 
same day, provided the individual is able to reserve space at one of 
FINRA's designated testing centers.
    Finally, under current Rule 615, the Exchange may, in exceptional 
cases and where good cause is shown, waive the applicable qualification 
examination and accept other standards as evidence of an applicant's 
qualifications for registration. The Exchange is proposing to replace 
Rule 615 with proposed Rule 1210.03 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- or principal-level registration category. Moreover, 
proposed Rule 1210.03 states that the Exchange will consider waivers of 
the SIE alone or the SIE and the representative- and principal-level 
examination(s) for such individuals.
E. Requirements for Registered Persons Functioning as Principals for a 
Limited Period (Proposed Rule 1210.04)
    Current Rule 611(d) provides that any person associated with a 
member organization as a registered representative whose duties are 
changed by the member organization so as to require registration in any 
principal classification is allowed a period of 90 calendar days 
following the change in his or her duties during which to pass the 
appropriate qualification examination for principals. It further 
provides that any person not presently associated with a member 
organization as registered representative seeking registration as a 
principal shall submit the appropriate application for registration and 
any required registration and examination fees. Such person shall be 
allowed a period of 90 days after all applicable prerequisites are 
fulfilled to pass the appropriate qualification examination for 
principals. A person who has never been registered does not qualify for 
this exception. This provision specifically applies to a person 
associated with a member organization of another registered national 
securities exchange or association who is required to register in a 
principal classification under

[[Page 50986]]

Exchange rules but who is not required to be so registered under the 
rules of the other exchange or association, as well as to a person 
associated with a member organization who was not required to register 
with the Exchange as a principal prior to the adoption of Exchange Rule 
611.
    The Exchange is proposing to adopt these requirements of Rule 
611(d) as new Rule 1210.04, subject to certain changes. Proposed Rule 
1210.04 states that a member may designate any person currently 
registered, or who becomes registered, with the member as a 
representative to function as a principal for a limited period, 
provided that such person has at least 18 months of experience 
functioning as a registered representative within the five-year period 
immediately preceding the designation 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\ This 
change is intended to ensure that representatives designated to 
function as principals for the limited period under the proposed rule 
have an appropriate level of registered representative experience. The 
proposed rule clarifies that the requirements of the rule apply to any 
principal category, including those categories that are not subject to 
a prerequisite representative-level registration requirement, such as 
the Financial and Operations Principal registration category. 
Similarly, the rule would permit a member to designate any person 
currently registered, or who becomes registered, with the member as a 
principal to function in another principal category for a period of 120 
calendar days prior to passing an appropriate qualification examination 
as specified under Rule 1220. Proposed Rule 1210.04 would increase the 
existing rule's 90 day period to 120 days, to provide additional 
flexibility for representatives functioning as principals for a limited 
period of time.
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    \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 registration category.
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    The Exchange is not conserving in new Rule 1210.04 the language in 
existing Rule 611 that the provisions apply to a person associated with 
a member organization of another registered national securities 
exchange or association who is required to register in a principal 
classification under Exchange rules but who is not required to be so 
registered under the rules of the other exchange or association, as 
well as to a person associated with a member organization who was not 
required to register with the Exchange as a Principal prior to the 
adoption of Exchange Rule 611. The Exchange believes this language to 
be superfluous as the applicability to various individuals of proposed 
Rule 1210.04 speaks for itself and requires no elaboration.\28\
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    \28\ Proposed Rule 1210.04 omits FINRA Rule 1210.04's reference 
to Foreign Associates, which is a registration category not 
recognized by the Nasdaq Affiliated Exchanges, but otherwise tracks 
the language of FINRA Rule 1210.04.
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F. Rules of Conduct for Taking Examinations and Confidentiality of 
Examinations (Proposed Rule 1210.05)
    Before taking an examination, FINRA currently requires each 
candidate to agree to the Rules of Conduct for taking a qualification 
examination. Among other things, the examination Rules of Conduct 
require each candidate to attest that he or she is in fact the person 
who is taking the examination. These Rules of Conduct also require that 
each candidate agree that the examination content is the intellectual 
property of FINRA and that the content cannot be copied or 
redistributed by any means. If FINRA discovers that a candidate has 
violated the Rules of Conduct for taking a qualification examination, 
the candidate may forfeit the results of the examination and may be 
subject to disciplinary action by FINRA. For instance, for cheating on 
a qualification examination, FINRA's Sanction Guidelines recommend a 
bar.\29\
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    \29\ See SR-FINRA-2017-007, pp. 26-27.
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    Effective October 1, 2018, FINRA has codified the requirements 
relating to the Rules of Conduct for examinations under FINRA Rule 
1210.05. FINRA also adopted Rules of Conduct for taking the SIE for 
associated persons and non-associated persons who take the SIE.
    The Exchange proposes to adopt its own version of Rule 1210.05, 
which would provide that associated persons taking the SIE are subject 
to the SIE Rules of Conduct, and that associated persons taking any 
representative or principal examination are subject to the Rules of 
Conduct for representative and principal examinations. Under the 
proposed rule, a violation of the SIE Rules of Conduct or the Rules of 
Conduct for representative and principal examinations by an associated 
person would be deemed to be a violation of Exchange rules requiring 
observance of high standards of commercial honor or just and equitable 
principles of trade, such as Exchange Rule 707.\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 707 prohibits members, member organizations 
or persons associated with or employed by a member or member 
organization from engaging in acts or practices inconsistent with 
just and equitable principles of trade. FINRA Rule 1210.05 cites 
FINRA Rule 2010, which is a comparable rule.
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    Proposed Rule 1210.05 also states that the Exchange considers all 
of the qualification examinations' content to be highly confidential. 
The removal of examination content from an examination center, 
reproduction, disclosure, receipt from or passing to any person, or use 
for study purposes of any portion of such qualification examination or 
any other use that would compromise the effectiveness of the 
examinations and the use in any manner and at any time of the questions 
or answers to the examinations would be prohibited and would be deemed 
to be a violation of Exchange rules requiring observance of high 
standards of commercial honor or just and equitable principles of 
trade. Finally, proposed Rule 1210.05 would prohibit an applicant from 
receiving assistance while taking the examination, and require the 
applicant to certify that no assistance was given to or received by him 
or her during the examination.\31\
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    \31\ The Exchange is not adopting portions of FINRA's Rule 
1210.05 which apply to non-associated persons, over whom the 
Exchange would in any event have no jurisdiction.
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G. Waiting Periods for Retaking a Failed Examination (Proposed Rule 
1210.06)
    The Exchange proposes to adopt new Rule 1210.06, which provides 
that a person who fails an examination may retake that examination 
after 30 calendar days from the date of the person's last attempt to 
pass that examination.\32\ Proposed Rule 1210.06 further provides that 
if a person fails an examination three or more times in succession 
within a two-year period, the person is prohibited from retaking that 
examination until 180 calendar days from the date of the person's last 
attempt to pass it. These waiting periods would apply to the SIE and 
the representative- and principal-level examinations.\33\
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    \32\ Proposed Rule 1210.06 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 is not including 
this language in proposed Rule 1210.06, as the Exchange will not 
apply the 1200 Series of rules in any event to individuals who are 
not associated persons of members.

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[[Page 50987]]

H. CE Requirements (Proposed Rule 1210.07)
    Pursuant to current Exchange Rule 640, no member organization shall 
permit any registered person to continue to, and no registered person 
shall continue to, perform duties as a registered person, unless such 
person has complied with the continuing education requirements of 
paragraph (a) of Rule 640. Under the rule 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\ For 
purposes of the Regulatory Element, a ``registered person'' is defined 
in current Rule 640 as any member, registered representative or other 
person registered or required to be registered under Exchange Rules, 
but does not include such person whose activities are limited solely to 
the transaction of business on the Exchange's trading floor, with 
members or registered broker-dealers.\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 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 organization's securities sales, trading or investment 
banking activities, and to the immediate supervisors of such 
persons.\38\
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    \34\ See Rule 640(a).
    \35\ See Rule 640(b).
    \36\ Pursuant to Rule 640(a), each registered person is required 
to complete the Regulatory Element on the occurrence of their second 
registration anniversary date(s), and every three years thereafter 
or as otherwise prescribed by the Exchange. On each occasion, the 
Regulatory Element must be completed within 120 days after the 
person's registration anniversary date.
    \37\ See Rule 640, Commentary .01.
    \38\ See Rule 640(b)(1).
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    The Exchange proposes to delete current Rule 640. The CE 
requirements set forth in Rule 640 are proposed to be reorganized and 
renumbered, and to be adopted as new Rule 1240. The Exchange believes 
that all persons registered pursuant to Rule 1210, 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.\39\ Therefore, the Exchange is proposing Rule 
1210.07, to clarify that all ``covered persons'' as defined in Rule 
1240(a)(5), including those who solely maintain a permissive 
registration, are required to satisfy the Regulatory Element, as 
specified in proposed new Rule 1240, discussed below.\40\ Individuals 
who have passed the SIE but not a representative or principal-level 
examination and do not hold a registered position would not be subject 
to any CE requirements. Consistent with current practice, proposed Rule 
1210.07 would also provide that a registered person of a member who 
becomes CE inactive would not be permitted to be registered in another 
registration category with that member or be registered in any 
registration category with another member, until the person has 
satisfied the Regulatory Element.
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    \39\ The Exchange notes that Rule 625 also may require 
individuals who are not required to register pursuant to Rule 1210 
to complete mandatory training. The rule provides that all members 
and persons employed by or associated with such member or a member 
organization shall successfully complete mandatory training, as 
required by the Exchange. Training topics include, but are not 
limited to, training related to that person's function at the 
Exchange, changes in existing automated systems or any new 
technology that is utilized by the Exchange, compliance with 
Exchange Rules and federal securities laws, and issues related to 
conduct, health and safety on the trading floor. In addition, floor 
members shall complete mandatory training programs, on at least a 
semi-annual basis, that address compliance with the federal 
securities laws and the Exchange's Rules in place to prevent and 
deter unlawful trading by floor members.
    \40\ Current Rule 640 would be deleted, replaced by proposed 
Rule 1240. Rule 1240(a)(5) would define the term ``covered person'' 
as any person registered with the Exchange pursuant to Rule 1210, 
including any person who is permissively registered pursuant to Rule 
1210.02, and any person who is designated as eligible for a waiver 
pursuant to Rule 1210.09.
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    Individuals whose activities are limited solely to the transaction 
of business on the Exchange's trading floor, with members or registered 
broker-dealers, would continue to be excluded from the CE 
requirement.\41\ Pursuant to proposed Rule 1260, Section (c), members 
whose activities are limited to the Exchange's options trading floor 
and who are registered pursuant to proposed Rule 1260(a) as well as 
associated persons whose activities are limited to the Exchange's 
options trading floor and who are registered pursuant to proposed Rule 
1260(b) would be exempt from the representative registration 
requirements of proposed Rules 1210 and 1220. The CE requirements of 
proposed Rule 1240 would apply only to ``covered persons,'' defined in 
turn in proposed Rule 1240 as persons registered pursuant to Rule 1210.
---------------------------------------------------------------------------

    \41\ See existing Rule 640, Commentary .01, which excludes such 
individuals from the term ``registered person'' as it is used in 
Rule 640.
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I. Lapse of Registration and Expiration of SIE (Proposed Rule 1210.08)
    Existing Rule 611(c) states that any person whose registration has 
been revoked by the Exchange as a disciplinary sanction or whose most 
recent registration as principal has been terminated for two or more 
years immediately preceding the date of receipt by the Exchange of a 
new application is required to pass a qualification examination for 
Principals appropriate to the category of registration as specified in 
Rule 611. The two year period is calculated from the termination date 
to the date the Exchange receives a new application for registration. A 
comparable provision applicable to representatives is found in Rule 
613(c). The Exchange is proposing to delete existing Rules 611(c) and 
613(c), and to replace them with Rule 1210.08, Lapse of Registration 
and Expiration of SIE.
    Proposed Rule 1210.08 contains language comparable to that of 
existing Rules 611(c) and 613(c) but also clarifies that, for purposes 
of the proposed rule, an application would not be considered to have 
been received by the Exchange if that application does not result in a 
registration. Proposed Rule 1210.08 also sets forth the expiration 
period of the SIE. Based on the content covered on the SIE, the 
Exchange is proposing that a passing result on the SIE be valid for 
four years. Therefore, under the proposed rule change, an individual 
who passes the SIE and is an associated person of a firm at the time 
would have up to four years from the date he or she passes the SIE to 
pass a representative-level examination to register as a representative 
with that firm, or a subsequent firm, without having to retake the SIE. 
In addition, an individual who passes the SIE and is not an associated 
person at the time would have up to four years from the date he or she 
passes the SIE to become an associated person of a firm, pass a 
representative-level examination and register as a representative 
without having to retake the SIE.
    Moreover, an individual holding a representative-level registration 
who leaves the industry after the operative date of the proposed rule 
change would have up to four years to re-associate with a firm and 
register as a representative without having to retake the SIE. However, 
the four-year expiration period in the proposed rule change extends 
only to the SIE, and not the representative- and principal-level

[[Page 50988]]

registrations. The representative- and principal-level registrations 
would continue to be subject to a two year expiration period as is the 
case today.
J. Waiver of Examinations for Individuals Working for a Financial 
Services Industry Affiliate of a Member (Proposed Rule 1210.09)
    The Exchange is proposing Rule 1210.09 to provide a new process 
whereby individuals who would be working for a financial services 
industry affiliate of a member \42\ would terminate their registrations 
with the member and would be granted a waiver of their requalification 
requirements upon re-registering with a member, provided the firm that 
is requesting the waiver and the individual satisfy the criteria for a 
Financial Services Affiliate (``FSA'') waiver.\43\ The purpose of the 
FSA waiver is to provide a firm greater flexibility to move personnel, 
including senior and middle management, between the firm and its 
financial services affiliate(s) so that they may gain organizational 
skills and better knowledge of products developed by the affiliate(s) 
without the individuals having to requalify by examination each time 
they returned to the firm.
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    \42\ Proposed Rule 1210.09 defines a ``financial services 
industry affiliate of a member'' as a legal entity that controls, is 
controlled by or is under common control with a member and is 
regulated by the SEC, Commodity Futures Trading Commission 
(``CFTC''), state securities authorities, federal or state banking 
authorities, state insurance authorities, or substantially 
equivalent foreign regulatory authorities.
    \43\ There is no counterpart to proposed Rule 1210.09 in the 
Exchange's existing rules. FINRA Rule 1210.09 was recently adopted 
as a new waiver process for FINRA registrants, as part of the FINRA 
Rule Changes.
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    Under the proposed waiver process, the first time a registered 
person is designated as eligible for a waiver based on the FSA 
criteria, the member with which the individual is registered would 
notify the Exchange of the FSA designation. The member would 
concurrently file a full Form U5 terminating the individual's 
registration with the firm, which would also terminate the individual's 
other SRO and state registrations.
    To be eligible for initial designation as an FSA-eligible person by 
a member, an individual must have been registered for a total of five 
years within the most recent 10-year period prior to the designation, 
including for the most recent year with that member.\44\ An individual 
would have to satisfy these preconditions only for purposes of his or 
her initial designation as an FSA-eligible person, and not for any 
subsequent FSA designation(s). Thereafter, the individual would be 
eligible for a waiver for up to seven years from the date of initial 
designation \45\ 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.\46\
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    \44\ 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.
    \45\ 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.
    \46\ The following examples illustrate this point:
    Example 1. Firm A designates an individual as an FSA-eligible 
person by notifying the Exchange and files a Form U5. The individual 
joins Firm A's financial services affiliate. Firm A does not submit 
a waiver request for the individual. After working for Firm A's 
financial services affiliate for three years, the individual 
directly joins Firm B's financial services affiliate for three 
years. Firm B then submits a waiver request to register the 
individual.
    Example 2. Same as Example 1, but the individual directly joins 
Firm B after working for Firm A's financial services affiliate, and 
Firm B submits a waiver request to register the individual at that 
point in time.
    Example 3. Firm A designates an individual as an FSA-eligible 
person by notifying the Exchange and files a Form U5. The individual 
joins Firm A's financial services affiliate for three years. Firm A 
then submits a waiver request to reregister the individual. After 
working for Firm A in a registered capacity for six months, Firm A 
re-designates the individual as an FSA-eligible person by notifying 
FINRA and files a Form U5. The individual rejoins Firm A's financial 
services affiliate for two years, after which the individual 
directly joins Firm B's financial services affiliate for one year. 
Firm B then submits a waiver request to register the individual.
    Example 4. Same as Example 3, but the individual directly joins 
Firm B after the second period of working for Firm A's financial 
services affiliate, and Firm B submits a waiver request to register 
the individual at that point in time.
---------------------------------------------------------------------------

    An individual designated as an FSA-eligible person would be subject 
to the Regulatory Element of CE while working for a financial services 
industry affiliate of a member. The individual would be subject to a 
Regulatory Element program that correlates to his or her most recent 
registration category, and CE would be based on the same cycle had the 
individual remained registered. If the individual fails to complete the 
prescribed Regulatory Element during the 120-day window for taking the 
session, he or she would lose FSA eligibility (i.e., the individual 
would have the standard two-year period after termination to re-
register without having to retake an examination). The Exchange is 
making corresponding changes to Rule 640, Continuing Education 
(proposed to be renumbered as Rule 1240).
    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,\47\ 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:
---------------------------------------------------------------------------

    \47\ The Exchange would consider a waiver of the representative-
level qualification examination(s), the principal-level 
qualification examination(s) and the SIE, as applicable.
---------------------------------------------------------------------------

    (1) Prior to the individual's initial designation as an FSA-
eligible person, the individual was registered for a total of five 
years within the most recent 10- year period, including for the most 
recent year with the member that initially designated the individual as 
an FSA-eligible person;
    (2) The waiver request is made within seven years of the 
individual's initial designation as an FSA-eligible person by a member;
    (3) The initial designation and any subsequent designation(s) were 
made concurrently with the filing of the individual's related Form U5;
    (4) The individual continuously worked for the financial services 
affiliate(s) of a member since the last Form U5 filing;
    (5) The individual has complied with the Regulatory Element of CE; 
and
    (6) The individual does not have any pending or adverse regulatory 
matters, or terminations, that are reportable on the Form U4, and has 
not otherwise been subject to a statutory disqualification while the 
individual was designated as an FSA-eligible person with a member.
    Following the Form U5 filing, an individual could move between the 
financial services affiliates of a member so long as the individual is 
continuously working for an affiliate. Further, a member could submit 
multiple waiver requests for the individual, provided that the waiver 
requests are made during the course of the seven-year period.\48\ An 
individual

[[Page 50989]]

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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    \48\ For example, if a member submits a waiver request for an 
FSA-eligible person who has been working for a financial services 
affiliate of the member for three years and re-registers the 
individual, the member could subsequently file a Form U5 and re-
designate the individual as an FSA-eligible person. Moreover, if the 
individual works with a financial services affiliate of the member 
for another three years, the member could submit a second waiver 
request and re-register the individual upon returning to the member.
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K. Status of Persons Serving in the Armed Forces of the United States 
(Proposed Rule 1210.10)
    Current Rule 53, Inactive Status of Currently Registered Persons, 
provides specific relief to registered persons serving in the Armed 
Forces of the United States. Among other things, the rule permits a 
registered person of a member or member organization 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, upon inactive 
status and remain eligible to receive ongoing transaction-related 
compensation. The rule also includes specific provisions regarding the 
deferment of the lapse of registration requirements in Rules 611, 613 
and 3228 for formerly registered person serving in the Armed Forces of 
the United States.
    The Exchange is proposing to adopt Rule 53 as Rule 1210.10 with 
certain changes. To enhance the efficiency of the current notification 
process for registered persons serving in the Armed Forces, proposed 
Rule 1210.10 requires that the member with which such person is 
registered promptly notify the Exchange of such person's return to 
employment with the member. A sole proprietor must similarly notify the 
Exchange of his or her return to participation in the securities 
business. Further, proposed Rule 1210.10 provides that the Exchange 
would also defer the lapse of the SIE for formerly registered persons 
serving in the Armed Forces of the United States.\49\
---------------------------------------------------------------------------

    \49\ Proposed Rule 1210.10 tracks FINRA Rule 1210.10 except for 
the statement that inactive registered persons are not to be 
included within the definition of ``Personnel'' for purposes of dues 
or assessments as provided in Article VI of the FINRA By-Laws. 
Instead, proposed Rule 1210.10 incorporates language from existing 
Nasdaq and BX IM-1002-2, stating that inactive persons under the 
rule are not included within the scope of fees, if any, charged by 
the Exchange with respect to registered persons.
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L. Impermissible Registrations (Proposed Rule 1210.11)
    Existing Rule 611(a) and 613(a) prohibit a member organization from 
maintaining a principal or representative registration with the 
Exchange for any person who is no longer active in the member 
organization's investment banking or securities business, who is no 
longer functioning in the registered capacity, or where the sole 
purpose is to avoid an examination requirement. The rules also prohibit 
a member organization from applying for the registration of a person as 
representative or principal where the member organization does not 
intend to employ the person in its investment banking or securities 
business. These prohibitions do not apply to the current permissive 
registration categories identified in Rules 611(a) and 613(a).\50\
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    \50\ Rules 611(a) allows for permissive principal registration 
of individuals who perform legal, compliance, internal audit, back-
office operations, or similar duties for the member organization or 
a person engaged in the investment banking or securities business of 
a foreign securities affiliate or subsidiary of the member 
organization. Rule 613(a) permits permissive registration as a 
representative of an individual who performs legal, compliance, 
internal audit, back-office operations, or similar responsibilities 
for the member organization, or a person who performs administrative 
support functions for registered personnel, or a person engaged in 
the investment banking or securities business of a foreign 
securities affiliate or subsidiary of the member organization.
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    In light of proposed Rule 1210.02, Permissive Registrations, 
discussed above the Exchange is proposing to delete these provisions of 
Rule 611(a) and 613(a) and instead adopt Rule 1210.11 prohibiting a 
member from registering or maintaining the registration of a person 
unless the registration is consistent with the requirements of proposed 
Rule 1210.\51\
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    \51\ As discussed above, the Exchange is also proposing Rule 
1210, Supplementary Material .12, Application for Registration and 
Jurisdiction, which is not included in FINRA Rule 1210. Proposed 
Exchange Rule 1210, Supplementary Material .12, is based upon 
portions of existing Nasdaq Rule 1031.
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M. Registration Categories (Proposed Rule 1220)
    The Exchange is proposing to adopt new and revised registration 
category rules and related definitions in proposed Rule 1220, 
Registration Categories.\52\
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    \52\ For ease of reference, the Exchange proposes to adopt as 
Rule 1220, Supplementary Material .07, in chart form, a Summary of 
Qualification Requirements in chart form for each of the Exchange's 
permitted registration categories discussed below.
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1. Definition of Principal (Proposed Rule 1220(a)(1))
    Current Rule 611(b) defines ``principal'' to include sole 
proprietors, officers, partners, managers of offices of supervisory 
jurisdiction and directors who are actively engaged in the management 
of the member organization's investment banking or securities business, 
such as supervision, solicitation, conduct of business or the training 
of persons associated with a member organization for any of these 
functions. The Exchange is proposing to streamline and adopt Rule 
611(b) as Rule 1220(a)(1).
    For the reason discussed above in connection with proposed Rule 
1210, proposed Rule 1220(a)(1) would not apply to individuals who are 
not engaged in the management of the member's securities business even 
if they are engaged in the management of the member's investment 
banking business. Proposed Rule 1220(a)(1) clarifies that a member's 
chief executive officer (``CEO'') and chief financial officer (``CFO'') 
(or equivalent officers) are considered principals based solely on 
their status. The proposed rule further clarifies that the term 
``principal'' includes any other associated person who is performing 
functions or carrying out responsibilities that are required to be 
performed or carried out by a principal under Exchange rules. In 
addition, the proposed rule provides that the phrase ``actively engaged 
in the management of the member's securities business'' includes the 
management of, and the implementation of corporate policies related to, 
such business as well as managerial decision-making authority with 
respect to the member's securities business and management-level 
responsibilities for supervising any aspect of such business, such as 
serving as a voting member of the member's executive, management or 
operations committees.
2. General Securities Principal (Proposed Rule 1220(a)(2))
    Current Rule 612(a) currently requires that an associated person 
who meets the definition of ``principal'' under Rule 611 and each 
person designated as Chief Compliance Officer (``CCO'') on Schedule A 
of the member's Form BD (Uniform Application for Broker-Dealer 
Registration) register as a General Securities Principal. A person 
registering as a General Securities Principal must pass the General 
Securities Principal examination. The rule, however, provides that such 
person is not required to register as a General Securities Principal if 
the person's activities are so limited as to qualify such person for 
one or more of the limited principal categories specified in Rules 
611(b)-(e). Further, the rule does not preclude individuals registered 
in a limited principal category from registering as General Securities 
Principals. Rule 612(a) also

[[Page 50990]]

includes transitioning and grandfathering provisions for CCO's.
    Rule 612(a) requires individuals seeking to register and qualify as 
a General Securities Principal, prior to or concurrent with such 
registration, to become registered as a General Securities 
Representative. It also includes a grandfathering provision for persons 
who were registered as principals before the adoption of the General 
Securities Principal registration category. Finally, it provides that 
an associated person registered solely as a General Securities 
Principal is not qualified to function as a Limited Principal--
Financial and Operations, Limited Principal--General Securities Sales 
Supervisor or Securities Trader Principal.
    The Exchange is proposing to more clearly set forth the obligation 
to register as a General Securities Principal. Specifically, proposed 
Rule 1220(a)(2)(A) states that each principal as defined in proposed 
Rule 1220(a)(1) is required to register with the Exchange as a General 
Securities Principal, except that if a principal's activities are 
limited to the functions of a Compliance Official, a Financial and 
Operations Principal, a Securities Trader Principal, a Securities 
Trader Compliance Officer, or a Registered Options Principal, then the 
principal shall appropriately register in one or more of these 
categories.\53\ Proposed Rule 1220(a)(2)(A) further provides that if a 
principal's activities are limited solely to the functions of a General 
Securities Sales Supervisor, then the principal may appropriately 
register in that category in lieu of registering as a General 
Securities Principal, provided that if the principal is engaged in 
options sales activities he or she would be required to register as a 
General Securities Sales Supervisor or as a Registered Options 
Principal.\54\
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    \53\ The Exchange is proposing to recognize the Compliance 
Official and Securities Trader Compliance Officer registration 
categories for the first time as a result of this proposed rule 
change.
    \54\ The Exchange's proposed Rule 1220(a)(2)(A) deviates 
somewhat from the counterpart FINRA rule in that it does not offer 
various limited registration categories provided for in FINRA's new 
Rule 1220(a)(2)(A). It therefore proposes to reserve Rules 
1220(a)(2)(A)(ii) and (iv).
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    Proposed Rule 1220(a)(2)(B) requires that an individual registering 
as a General Securities Principal satisfy the General Securities 
Representative prerequisite registration and pass the General 
Securities Principal qualification examination.
    In conjunction with the elimination of the Corporate Securities 
Representative registration category by FINRA, the Exchange is 
proposing that Rule 1220(a)(2)(B) provide that, subject to the lapse of 
registration provisions in proposed Rule 1210.08, General Securities 
Principals who obtained the Corporate Securities Representative 
prerequisite registration on the Exchange in lieu of the General 
Securities Representative prerequisite registration and individuals who 
had been registered as such within the past two years prior to the 
operative date of the proposed rule change, may continue to supervise 
corporate securities activities as currently permitted.\55\ Proposed 
Rule 1220(a)(2)(B) requires all other individuals registering as 
General Securities Principals after October 1, 2018, to first become 
registered as a General Securities Representative pursuant to Rule 
1220(b)(2).\56\
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    \55\ The Exchange itself does not recognize the Corporate 
Securities Representative registration category, but understands 
that FINRA and Nasdaq currently accept Corporate Securities 
Representative registration as a prerequisite to General Securities 
Principal registration.
    \56\ The Exchange is not adopting the FINRA Rule 1220(a)(2)(B) 
language permitting an individual registering as a General 
Securities Principal after October 1, 2018 to register as a General 
Securities Sales Supervisor and to pass the General Securities 
Principal Sales Supervisor Module qualification examination. The 
Exchange believes that individuals registering as General Securities 
Principals should be required to demonstrate their competence for 
that role by passing the General Securities Principal qualification 
examination.
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    The Exchange is also proposing to eliminate the grandfathering 
provision for individuals who were registered as principals prior to 
the adoption of the General Securities Principal registration category 
because it no longer has any practical application. Finally, the 
Exchange is proposing to delete the provision that persons eligible for 
registration in other principal categories are not precluded from 
registering as General Securities Principals because it is 
superfluous.\57\
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    \57\ Proposed Rule 1220(a)(2) generally tracks FINRA Rule 
1220(a)(2), except that it omits references to a number of 
registration categories which FINRA recognizes but that the Exchange 
does not, and it includes a reference to the Securities Trader 
Compliance Officer category which the Exchange proposes to 
recognize, but which FINRA does not. Additionally, proposed Rule 
1220(a)(2)(A)(i) extends that provision's exception to the General 
Securities Principal registration requirement to certain principals 
whose activities are ``limited to'' (rather than ``include'') the 
functions of a more limited principal. The Exchange believes that 
activities ``limited to'' expresses the intent of that exception 
more accurately than activities that ``include.'' Finally, proposed 
Rule 1220(a)(2)(B) specifies that registration as a Corporate 
Securities Representative must be with the Exchange in order to 
fulfill the Corporate Securities Representative registration 
prerequisite for General Securities Principal registration pursuant 
to that rule.
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3. Compliance Official (Proposed Rule 1220(a)(3))
    Current Rule 612(a) provides that each person designated as a Chief 
Compliance Officer on Schedule A of Form BD of a member organization to 
which Rule 611 applies, be required to register with the Exchange as a 
General Securities Principal and shall pass the Series 24 examination 
before such registration may become effective, unless such person's 
activities are so limited as to qualify such person for one or more of 
the limited categories of principal registration specified Rule 612(b)-
(e).\58\ The Exchange proposes to delete this provision.
---------------------------------------------------------------------------

    \58\ The limited registration categories identified in Rule 
612(b)-(e) are Limited Principal--Financial and Operations, Limited 
Principal--General Securities Sales Supervisor, Limited Principal--
Registered Options Principal, and Securities Trader Principal.
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    In its place, the Exchange proposes to adopt Rule 1220(a)(3) 
providing that each person designated as a Chief Compliance Officer on 
Schedule A of Form BD shall be required to register with the Exchange 
as a General Securities Principal, provided that such person may 
instead register as a Compliance Official if his or her duties do not 
include supervision of trading. All individuals registering as 
Compliance Official would be required, prior to or concurrent with such 
registration, to pass the Compliance Official qualification 
examination. An individual designated as a Chief Compliance Officer on 
Schedule A of Form BD of a member that is engaged in limited securities 
business could also be registered in a principal category under Rule 
1220(a) that corresponds to the limited scope of the member's business.
    Additionally, Rule 1220(a)(3) would provide that an individual 
designated as a Chief Compliance Officer on Schedule A of Form BD may 
register and qualify as a Securities Trader Compliance Officer if, with 
respect to transactions in equity, preferred or convertible debt 
securities, or options such person is engaged in proprietary trading, 
the 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

[[Page 50991]]

pursuant to paragraph (b)(4) as a Securities Trader, and to pass the 
Compliance Official qualification exam.\59\
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    \59\ Proposed Rule 1220(a)(3) differs from FINRA Rule 
1220(a)(3), Compliance Officer. The Exchange does not recognize the 
Compliance Officer registration category. Similarly, FINRA does not 
recognize the Compliance Official or the Securities Trader 
Compliance Officer registration categories which the Exchange 
proposes to recognize. However, FINRA Rule 1220(a)(3), like proposed 
Rule 1220(a)(3), offers an exception pursuant to which a Chief 
Compliance Officer designated on Schedule A of Form BD may register 
in a principal category that corresponds to the limited scope of the 
member's business.
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4. Financial and Operations Principal (Proposed Rule 1220(a)(4))
    Existing Rule 612(b) provides that every member organization to 
which Rule 611 applies and that is operating pursuant to the provisions 
of SEC Rule 15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8) shall designate as 
Limited Principal--Financial and Operations those persons associated 
with it, at least one of whom shall be its chief financial officer, who 
perform the duties described in Rule 612(b)(ii).\60\ It requires each 
person associated with a member organization who performs such duties 
to be registered as a Limited Principal--Financial and Operations with 
the Exchange and to pass the Series 27 examination before such 
registration may become effective.
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    \60\ Those duties include (A) final approval and responsibility 
for the accuracy of financial reports submitted to any duly 
established securities industry regulatory body; (B) final 
preparation of such reports; (C) supervision of individuals who 
assist in the preparation of such reports; (D) supervision of and 
responsibility for individuals who are involved in the actual 
maintenance of the member organization's books and records from 
which such reports are derived; (E) supervision and/or performance 
of the member organization's responsibilities under all financial 
responsibility rules promulgated pursuant to the provisions of the 
Act; (F) overall supervision of and responsibility for the 
individuals who are involved in the administration and maintenance 
of the member organization's back office operations; or (G) any 
other matter involving the financial and operational management of 
the member organization. A person registered solely as a Limited 
Principal--Financial and Operations shall not be qualified to 
function in a Principal capacity with responsibility over any other 
area of business activity.
---------------------------------------------------------------------------

    The Exchange is proposing to delete Rule 612(b) and to adopt in its 
place Rule 1220(a)(4), substituting the word ``and'' for the current 
word ``or'' found in Rule 612(b)(ii)(F) in order to conform to FINRA 
Rule 1220(a)(4)(A) in describing the duties of a Financial and 
Operations Principal.\61\
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    \61\ FINRA Rule 1220(a)(4) differs from proposed Rule 1220(a)(4) 
in that it includes an Introducing Broker-Dealer Financial and 
Operations Principal registration requirement. Additionally, 
proposed Rule 1220(a)(4) contains a requirement, which the FINRA 
rule does not, that each person associated with a member who 
performs the duties of a Financial and Operations Principal must 
register as such with the Exchange. Further, as discussed above, the 
Exchange is not adopting a Principal Financial Officer or Principal 
Operations Officer requirement like FINRA Rule 1220(a)(4)(B), as it 
believes the Financial and Operations Principal requirement is 
sufficient. Finally, proposed Rule 1220(a)(4)(B)(v) and (vi) contain 
minor wording variations from the FINRA rule.
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5. Investment Banking Principal (Proposed Rule 1220(a)(5))
    The Exchange does not recognize the Investment Banking Principal 
registration category and is reserving Rule 1220(a)(5), retaining the 
caption solely to facilitate comparison with FINRA's rules.
6. Research Principal (Proposed Rule 1220(a)(6))
    The Exchange does not recognize the Research Principal registration 
category and is reserving Rule 1220(a)(6), retaining the caption solely 
to facilitate comparison with FINRA's rules.
7. Securities Trader Principal (Proposed Rule 1220(a)(7))
    Existing Rule 612(e) provides that each person associated with a 
member who is included within the definition of principal in Rule 
611(b) and who will have supervisory responsibility over the securities 
trading activities described in Rule 613(f) shall become qualified and 
registered as a Securities Trader Principal. To qualify for 
registration as a Securities Trader Principal, such person must become 
qualified and registered as a Securities Trader under Rule 613(f) and 
pass the General Securities Principal qualification examination. 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 Rule 613(f), unless such 
person is separately qualified and registered in another appropriate 
principal registration category, such as the General Securities 
Principal registration category. Conversely, a person who is registered 
as a General Securities Principal is not qualified to supervise the 
trading activities described in Rule 613(f), unless such person has 
also become qualified and registered as a Securities Trader under Rule 
613(f) by passing the Securities Trader qualification examination and 
become registered as a Securities Trader Principal.
    The Exchange is proposing to delete Rule 612(e) and to adopt in its 
place Rule 1220(a)(7), Securities Trader Principal. Proposed Rule 
1220(a)(7) requires that a principal responsible for supervising the 
securities trading activities specified in proposed Rule 1220(b)(4) 
\62\ register as a Securities Trader Principal. The proposed rule 
requires individuals registering as Securities Trader Principals to be 
registered as Securities Traders and to pass the General Securities 
Principal qualification examination.
---------------------------------------------------------------------------

    \62\ Proposed Rule 1220(b)(4), discussed below, provides for 
registration in the representative-level ``Securities Trader'' 
category.
---------------------------------------------------------------------------

8. Registered Options Principal (Proposed Rules 1220(a)(8))
    Rule 612(d) provides that each person associated with a member 
organization to which Rule 611 applies and who is included in the 
definition of principal in Rule 611 may register with the Exchange as a 
Limited Principal--Registered Options Principal if: (A) His or her 
supervisory responsibilities in the investment banking and securities 
business are limited exclusively to the options activities of a member 
organization, (B) he or she is registered pursuant to Exchange rules as 
a General Securities Representative, and (C) he or she is qualified to 
be so registered by passing the Series 4 examination. It also provides 
that a person registered in this category solely on the basis of having 
passed the Series 4 examination for Limited Principal--Registered 
Options Principal shall not be qualified to function in a principal 
capacity with responsibility over any area of business activity not 
described in paragraph (d)(i)(A).
    The Exchange is proposing to delete Rule 612(d) and to adopt Rule 
1220(a)(8)(A), Registered Options Principal, which would require under 
its section (a)(8)(A) that each member that is engaged in transactions 
in options with the public to have at least one Registered Options 
Principal.\63\
---------------------------------------------------------------------------

    \63\ Proposed Rule 1220(a)(8) differs from FINRA Rule 1220(a)(8) 
in that it omits certain references to other specific FINRA rules.
---------------------------------------------------------------------------

    In addition, each principal as defined in paragraph (a)(1) of the 
rule who is responsible for supervising a member's options sales 
practices with the public would be required to register with the 
Exchange as a Registered Options Principal, subject to the following 
exception. If a principal's options activities are limited solely to 
those activities that may be supervised by a General Securities Sales 
Supervisor, then such person may register as a General Securities Sales 
Supervisor pursuant to paragraph (a)(10) of the Rule in lieu of 
registering as a Registered Options Principal.\64\
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    \64\ Current Exchange Rule 1024, Conduct of Accounts for Options 
Trading, provides that members, member organizations and individuals 
associated with member organizations shall not be approved to 
transact options business with the public until such persons, who 
are designated as Options Principals, have been approved by and 
registered with the Exchange. Further, persons engaged in the 
supervision of options sales practice or a person to whom the 
designated general partner or executive officer (pursuant to Rule 
1025) or another Registered Options Principal delegates the 
authority to supervise options sales practices shall be designated 
as options principals. Rule 1024, Commentary .06 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 Principal 
Qualification Examination (Series 4) or the Sales Supervisor 
Qualification Examination (Series 9/10), and is proposed to be 
deleted in view of new Rule 1220(a)(8)(a). Under Rule 1024.07, 
individuals who are delegated responsibility pursuant to Rule 1025 
for the acceptance of discretionary accounts, for approving 
exceptions to a member's criteria or standards for uncovered options 
accounts, and for approval of communications, shall be designated as 
Options Principals and are required to qualify as an Options 
Principal by passing the Registered Options Principal Qualification 
Examination (Series 4). Further, Exchange Rule 1024.08 states that a 
person accepting orders from non-member customers (unless such 
customer is a broker-dealer registered with the Securities and 
Exchange Commission) is required to register with the Exchange and 
to be qualified by passing the General Securities Registered 
Representative Examination (Series 7). Except for Rule 1024, 
Commentary .06, the foregoing provisions of Rule 1024 are specific 
to conducting an options business with the public and are not 
proposed to be amended in this proposed rule change. However, Rule 
1024(a) also contains provisions regarding submission of Forms U4 
and U5 to WebCRD that are duplicative of the proposed 1200 Series of 
rules, in particular proposed Rules 1210.12, Application for 
Registration and Jurisdiction, and 1250, Electronic Filing 
Requirements for Electronic Forms, and are therefore proposed to be 
deleted.

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[[Page 50992]]

    Pursuant to proposed Rule 1220(a)(8)(B), subject to the lapse of 
registration provisions in Rule 1210.08, each person registered 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 paragraph 
Rule 1220(b)(2) of the Rule as a General Securities Representative and 
pass the Registered Options Principal qualification examination.\65\
---------------------------------------------------------------------------

    \65\ The Exchange is also proposing to adopt Rule 1220, 
Supplementary Material .02, which provides that each person who is 
registered with the Exchange as a Registered Options Principal (or 
as a General Securities Representative, Options Representative, or 
General Securities Sales Supervisor) shall be eligible to engage in 
security futures activities as a principal provided that such 
individual completes a Firm Element program as set forth in proposed 
Rule 1240 that addresses security futures products before such 
person engages in security futures activities. Unlike FINRA Rule 
1220.02, proposed Exchange Rule 1220.02 omits references to United 
Kingdom Securities Representatives and Canada Securities 
Representatives, which are registration categories the Exchange does 
not recognize. In any event, the Exchange does not currently offer 
security futures products for trading. In addition, the Exchange is 
also proposing to adopt Rule 1220, Supplementary Material .03 which 
requires notification to the Exchange in the event such person 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.
---------------------------------------------------------------------------

9. Government Securities Principal. [sic] (Rule 1220(a)(9))
    The Exchange does not recognize the Government Securities Principal 
registration category and is reserving Rule 1220(a)(9), retaining the 
caption solely to facilitate comparison with FINRA's rules.
10. General Securities Sales Supervisor (Proposed Rules 1220(a)(10) and 
1220.04)
    Current Rule 612(c) provides that each person associated with a 
member organization to which Rule 611 applies and who is included in 
the definition of Principal in Rule 611 may register with the Exchange 
as a Limited Principal--General Securities Sales Supervisor if: (A) His 
or her supervisory responsibilities in the investment banking and 
securities business are limited to the securities sales activities of a 
member organization, including the training of sales and sales 
supervisory personnel and the maintenance of records of original entry 
and/or ledger accounts of the member organization required to be 
maintained in branch offices by SEC record keeping rules; (B) he or she 
is registered pursuant to Exchange Rules as a General Securities 
Representative; and (C) he or she is qualified to be so registered by 
passing the Series 9 or Series 10 examination. Under the rule a person 
registered in this category solely on the basis of having passed the 
Series 9 or Series 10 examination for Limited Principal--General 
Securities Sales Supervisor is not qualified to: (A) Function in a 
Principal capacity with responsibility over any area of business 
activity not described in paragraph (c)(i)(A); (B) be included for 
purposes of the Principal numerical requirements of Rule 611(e); or (C) 
perform for a member organization any or all of the following 
activities: (1) Supervision of the origination and structuring of 
underwritings; (2) supervision of market making commitments; (3) final 
approval of advertisements as these are defined in Rule 605; (4) 
supervision of the custody of firm or customer funds and/or securities 
for purposes of SEC Rule 15c3-3; or (5) supervision of overall 
compliance with financial responsibility rules for broker/dealers 
promulgated pursuant to the provisions of the Act. Rule 612(c)(iii) 
explains the purpose of the General Securities Sales Supervisor 
registration category.
    The Exchange is proposing to adopt Rule 612(c)(i) and (ii) and Rule 
612(c)(iii), with changes, as Rules 1220(a)(10) and 1220.04, 
respectively.\66\ Rule 1220(a)(10), however, omits the current Rule 
1022(g) prohibition against supervision of the origination and 
structuring of underwritings, as that activity does not fall within the 
new, more limited scope of ``securities trading'' covered by the new 
1200 Series of rules.
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    \66\ The Exchange is not proposing to carry over into proposed 
Rule 1220(a)(10) the current Rule 612(c)(ii)(C)(3) prohibition 
against final approval of advertisements by General Securities Sales 
Supervisors. The Exchange notes that FINRA removed this prohibition 
several years ago from NASD Rule 1022(g) (Limited Principal--General 
Securities Sales Supervisor) and NASD IM-1022-2 (Limited Principal--
General Securities Sales Supervisor). See Securities Exchange Act 
Release No. 68918 (February 13, 2013), 78 FR 11925 (February 20, 
2013) (SR-FINRA-2013-014). Also, unlike FINRA Rule 1220.04, proposed 
Exchange Rule 1220.04 refers to ``multiple exchanges'' rather than 
listing the various exchanges where a sales principal might be 
required to qualify in the absence of the General Securities Sales 
Supervisor registration category. It also omits FINRA internal 
cross-references.
---------------------------------------------------------------------------

    Each person seeking to register as a General Securities Sales 
Supervisor would be required, prior to or concurrent with such 
registration, to become registered pursuant to Rule 1220(b)(2) of the 
rule as a General Securities Representative and pass the General 
Securities Sales Supervisor qualification examinations.
11. Investment Company and Variable Contracts Products Principal and 
Direct Participation Programs Principal (Rules 1220(a)(11) and (a)(12))
    The Exchange does not recognize the Investment Company and Variable 
Contracts Products Principal and the Direct Participation Programs 
Principal registration categories and is reserving Rule 1220(a)(11) and 
(a)(12), retaining the captions solely to facilitate comparison with 
FINRA's rules.
12. Private Securities Offerings Principal (Rule 1220(a)(13))
    The Exchange does not recognize the Private Securities Offerings 
Principal registration category and is reserving Rule 1220(a)(13), 
retaining the caption solely to facilitate comparison with FINRA's 
rules.

[[Page 50993]]

13. Supervisory Analyst (Rule 1220(a)(14))
    The Exchange does not recognize the Supervisory Analyst 
registration category and is reserving Rule 1220(a)(14), retaining the 
caption solely to facilitate comparison with FINRA's rules.
14. Definition of Representative (Proposed Rule 1220(b)(1))
    Current Rule 1(a)(ee) defines ``Representative'' as a member or an 
associated person of a registered broker or dealer, including assistant 
officers other than principals, who is engaged in the investment 
banking or securities business for the member organization including 
the functions of supervision, solicitation or conduct of business in 
securities or who is engaged in the training of persons associated with 
a broker or dealer for any of these functions.
    The Exchange now proposes to amend Exchange Rule 1(a)(ee) to 
incorporate by reference a new definition of ``representative'' in 
proposed Rule 1220(b)(1). Proposed 1220(b)(1) would define the term 
representative as any person associated with a member, including 
assistant officers other than principals, who is engaged in the 
member's securities business, such as supervision, solicitation, 
conduct of business in securities or the training of persons associated 
with a member for any of these functions.
15. General Securities Representative (Proposed Rule 1220(b)(2))
    Under Rule 613(a), except for members whose activities are limited 
to the Exchange's options trading floor and who are registered pursuant 
to Rule 620(a) as well as associated persons whose activities are 
limited to the Exchange's options trading floor and who are registered 
pursuant to Rule 620(b), all persons engaged or to be engaged in the 
investment banking or securities business of a member organization who 
are to function as representatives shall be registered as such with the 
Exchange through WebCRD under PHLX in the category of registration 
appropriate to the function to be performed as specified in paragraph 
(e),\67\ Categories of Representative Registration--General Securities 
Representative or (f), Securities Trader.
---------------------------------------------------------------------------

    \67\ Rule 613(e) provides that individuals required to register 
with the Exchange as a General Securities Representative under the 
rule must pass the Series 7 examination before such registration may 
become effective.
---------------------------------------------------------------------------

    The Exchange proposes to delete those provisions of Rule 613(a) and 
to adopt new Rule 1220(b)(2), General Securities Representative. 
Proposed Rule 1220(b)(2)(A) states that each representative as defined 
in proposed Rule 1220(b)(1) is required to register with the Exchange 
as a General Securities Representative, subject to the exception that 
if a representative's activities include the functions of a Securities 
Trader, as specified in Rule 1220(b)(2), then such person shall 
appropriately register as a Securities Trader.
    Further, consistent with the proposed restructuring of the 
representative-level examinations, proposed Rule 1220(b)(2)(B) would 
require that individuals registering as General Securities 
Representatives pass the SIE and the General Securities Representative 
examination except that individuals registered as a General Securities 
Representatives within two years prior to October 1, 2018 would be 
qualified to register as General Securities Representatives without 
passing any additional qualification examinations.\68\
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    \68\ Proposed Rule 1220(b)(2)(B) differs from FINRA Rule 
1220(b)(2)(B) in that it omits references to various registration 
categories which FINRA recognizes but which the Exchange does not 
propose to recognize.
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    In addition, the Exchange is proposing to adopt Rule 1220.01 to 
provide individuals who are associated persons of firms and who hold 
foreign registrations an alternative, more flexible, process to obtain 
an Exchange representative-level registration. The Exchange believes 
that there is sufficient overlap between the SIE and these foreign 
qualification requirements to permit them to act as exemptions to the 
SIE. Under proposed Rule 1220.01, individuals who are in good standing 
as representatives with the Financial Conduct Authority in the United 
Kingdom or with a Canadian stock exchange or securities regulator would 
be exempt from the requirement to pass the SIE, and thus would be 
required only to pass a specialized knowledge examination to register 
with the Exchange as a representative. The proposed approach would 
provide individuals with a United Kingdom or Canadian qualification 
more flexibility to obtain an Exchange representative-level 
registration.
16. Operations Professional, Securities Trader, Investment Banking 
Representative, Research Analyst, Investment Company and Variable 
Contracts Products Representative, Direct Participation Programs 
Representative and Private Securities Offerings Representative (Rules 
1220(b)(3), 1220(b)(4), 1220(b)(5), 1220(b)(6), 1220(b)(7), 1220(b)(8), 
1220(b)(9) and 1220.05)
    Operations Professional, Investment Banking Representative, 
Research Analyst, Investment Company and Variable Products 
Representative, Direct Participation Programs Representative and 
Private Securities Offerings Representative. The Exchange does not 
recognize these registration categories for its associated persons. The 
Exchange is therefore reserving Rules 1220(b)(3)--Operations 
Professional, and related Rule 1220.05, Scope of Operations 
Professional Requirement; 1220(b)(5)--Investment Banking 
Representative; 1220(b)(6)--Research Analyst; 1220(b)(7)--Investment 
Company and Variable Products Representative; 1220(b)(8)--Direct 
Participation Programs Representative; and 1220(b)(9)--Private 
Securities Offerings Representative, retaining the captions for each of 
them solely to facilitate comparison with FINRA's rules.
    Securities Trader--Proposed Rule 1220(b)(4). Pursuant to current 
Exchange Rule 613(f)(1) and (2), associated persons must pass the 
qualification examination for Securities Trader (the Series 57 
examination) and 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.\69\
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    \69\ Rule 613(f)(3) provides that a person registered as a 
Securities Trader is not qualified to function in any other 
registration category, unless he or she is also qualified and 
registered in such other registration category.
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    The Exchange now proposes to delete Exchange Rule 613(f) and to 
replace it with proposed Rule 1220(b)(4).\70\ Rule

[[Page 50994]]

1220(b)(4) would require each representative as defined in Rule 
1220(b)(1) of the rule to register with the Exchange as a Securities 
Trader if, with respect to transactions in equity, preferred or 
convertible debt securities, or options \71\ 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. Rule 
1220(b)(4) would require individuals registering as Securities Traders 
to pass the SIE as well as the Securities Trader qualification exam.
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    \70\ Proposed Rule 1220(b)(4)(A) differs from FINRA Rule 
1220(b)(4)(A) in that it applies to trading on the Exchange while 
the FINRA rule is limited to the specified trading which is 
``effected otherwise than on a securities exchange.'' Additionally, 
the FINRA rule does not specifically extend to options trading.
    \71\ Current Rule 613(f) refers to transactions in foreign 
currency options. Proposed Rule 1220(b)(4) would instead refer to 
``options'' generally, to clarify that equity options as well as 
foreign currency options are products with respect to which 
Securities Trader registration requirements would apply.
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    Additionally, proposed Rule 1220(b)(4)(A) would require each person 
associated with a member who is: (i) Primarily responsible for the 
design, development or significant modification of an algorithmic 
trading strategy relating to equity, preferred or convertible debt 
securities or options; or (ii) responsible for the day-to-day 
supervision or direction of such activities to register with the 
Exchange as a Securities Trader.\72\
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    \72\ As noted above, this new registration requirement was 
recently added to the FINRA rulebook. The Exchange has determined to 
add a parallel requirement to its own rules, but also to add options 
to the scope of products within the proposed rule's coverage. See 
Securities Exchange Act Release No. 77551 (April 7, 2016), 81 FR 
21914 (April 13, 2016) (Order Approving File No. SR-FINRA-2016-007).
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    For purposes of this proposed new registration requirement an 
``algorithmic trading strategy'' is an automated system that generates 
or routes orders (or order-related messages) but does not include an 
automated system that solely routes orders received in their entirety 
to a market center. The proposed registration requirement applies to 
orders and order related messages whether ultimately routed or sent to 
be routed to an exchange or over the counter. An order router alone 
would not constitute an algorithmic trading strategy. However, an order 
router that performs any additional functions would be considered an 
algorithmic trading strategy. An algorithm that solely generates 
trading ideas or investment allocations--including an automated 
investment service that constructs portfolio recommendations--but that 
is not equipped to automatically generate orders and order-related 
messages to effectuate such trading ideas into the market--whether 
independently or via a linked router--would not constitute an 
algorithmic trading strategy.\73\
---------------------------------------------------------------------------

    \73\ See Securities Exchange Act Release No. 77551 (April 7, 
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007).
---------------------------------------------------------------------------

    The associated persons covered by the expanded registration 
requirement would be required to pass the requisite qualification 
examination and be subject to the same continuing education 
requirements that are applicable to individual Securities Traders. The 
Exchange believes that potentially problematic conduct stemming from 
algorithmic trading strategies--such as failure to check for order 
accuracy, inappropriate levels of messaging traffic, and inadequate 
risk management controls--could be reduced or prevented, in part, 
through improved education regarding securities regulations for the 
specified individuals involved in the algorithm design and development 
process.
    The proposal is intended to ensure the registration of one or more 
associated persons that possesses knowledge of, and responsibility for, 
both the design of the intended trading strategy and the technological 
implementation of the strategy, sufficient to evaluate whether the 
resulting product is designed to achieve regulatory compliance in 
addition to business objectives. For example, a lead developer who 
liaises with a head trader regarding the head trader's desired 
algorithmic trading strategy and is primarily responsible for the 
supervision of the development of the algorithm to meet such objectives 
must be registered under the proposal as the associated person 
primarily responsible for the development of the algorithmic trading 
strategy and supervising or directing the team of developers. 
Individuals under the lead developer's supervision would not be 
required to register under the proposal if they are not primarily 
responsible for the development of the algorithmic trading strategy or 
are not responsible for the day-to-day supervision or direction of 
others on the team. Under this scenario, the person on the business 
side that is primarily responsible for the design of the algorithmic 
trading strategy, as communicated to the lead developer, also would be 
required to register. In the event of a significant modification to the 
algorithm, members, likewise, would be required to ensure that the 
associated person primarily responsible for the significant 
modification (or the associated person supervising or directing such 
activity), is registered as a Securities Trader.
    A member employing an algorithm is responsible for the algorithm's 
activities whether the algorithm is designed or developed in house or 
by a third-party. Thus, in all cases, robust supervisory procedures, 
both before and after deployment of an algorithmic trading strategy, 
are a key component in protecting against problematic behavior stemming 
from algorithmic trading. In addition, associated persons responsible 
for monitoring or reviewing the performance of an algorithmic trading 
strategy must be registered, and a member's trading activity must 
always be supervised by an appropriately registered person. Therefore, 
even where a firm purchases an algorithm off-the-shelf and does not 
significantly modify the algorithm, the associated person responsible 
for monitoring or reviewing the performance of the algorithm would be 
required to be registered.
    Pursuant to proposed Rule 1220(b)(4)(B) each person registered as a 
Securities Trader on October 1, 2018 and each person who was registered 
as a Securities Trader within two years prior to October 1, 2018 would 
be qualified to register as a Securities Trader without passing any 
additional qualification examinations. All other individuals 
registering as Securities Traders after October 1, 2018 would be 
required, prior to or concurrent with such registration, to pass the 
SIE and the Securities Trader qualification examination.
17. Eliminated Registration Categories (Proposed Rule 1220.06)
    Proposed Rule 1220.06 has no practical relevance to the Exchange, 
but is included because the Nasdaq Affiliated Exchanges are also 
proposing to adopt the new 1200 Series, on a uniform basis. Proposed 
Rule 1220.06 will be relevant to Nasdaq and BX which, unlike the 
Exchange, are proposing to eliminate a number of existing registration 
categories that are not currently recognized by the Exchange.\74\
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    \74\ See SR-Nasdaq-2018-078.
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    Proposed Rule 1220.06 provides that, subject to the lapse of 
registration provisions in proposed Rule 1210.08, individuals who are 
registered with the Exchange in any capacity recognized by

[[Page 50995]]

the Exchange immediately prior to October 1, 2018, and each person who 
was registered with the Exchange in such categories within two years 
prior to October 1, 2018, shall be eligible to maintain such 
registrations with the Exchange. However, if individuals registered in 
such categories terminate their registration with the Exchange and the 
registration remains terminated for two or more years, they would not 
be able to re-register in that category. In addition, proposed Rule 
1220.06 would include the current restrictions to which Order 
Processing Assistant Representatives are subject under Nasdaq 
rules.\75\ As stated above, Rule 1220.06 would have no application to 
the Exchange as a practical matter.\76\
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    \75\ See Nasdaq Rule 1042.
    \76\ Proposed Exchange Rule 1220.06 omits references to a number 
of registration categories it does not propose to recognize, but 
which FINRA refers to in its own Rule 1220.06.
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18. Grandfathering Provisions
    In addition to the grandfathering provisions in proposed Rule 
1220(a)(2) (relating to General Securities Principals) and proposed 
Rule 1220.06 (relating to the eliminated registration categories), the 
Exchange is proposing to include grandfathering provisions in proposed 
Rule 1220(a)(8) (Registered Options Principal), 1220(b)(2) (General 
Securities Representative), and 1220(b)(4) (Securities Trader). 
Specifically, the proposed grandfathering provisions provide that, 
subject to the lapse of registration provisions in proposed Rule 
1210.08, individuals who are registered in specified registration 
categories on the operative date of the proposed rule change and 
individuals who had been registered in such categories within the past 
two years prior to the operative date of the proposed rule change would 
be qualified to register in the proposed corresponding registration 
categories without having to take any additional examinations.
N. Associated Persons Exempt From Registration (Proposed Rules 1230 and 
1230.01)
    Existing Rule 614 currently provides that the following persons 
associated with a member organization are not required to register:
    (i) Persons associated with a member organization whose functions 
are solely and exclusively clerical or ministerial;
    (ii) persons associated with a member organization who are not 
actively engaged in the investment banking or securities business;
    (iii) persons associated with a member organization whose functions 
are related solely and exclusively to the member organization's need 
for nominal corporate officers or for capital participation; and
    (iv) persons associated with a member organization whose functions 
are related solely and exclusively to effecting transactions on the 
floor of another national securities exchange and who are registered as 
floor members with such exchange; transactions in municipal securities; 
transactions in commodities; transactions in security futures, provided 
that any such person is registered with FINRA or a registered futures 
association; transactions in variable contracts and insurance premium 
funding programs and other contracts issued by an insurance company; 
transactions in direct participation programs; transactions in 
government securities; or effecting sales as part of a primary offering 
of securities not involving a public offering pursuant to Section 3(b), 
4(2), or 4(6) of the Securities Act of 1933 and the rules and 
regulations thereunder.
    The Exchange is proposing to adopt Rule 614 as Rule 1230 subject to 
certain changes. Rule 614 exempts from registration those associated 
persons who are not actively engaged in the securities business. It 
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.\77\ The Exchange 
believes that the determination of whether an associated person is 
required to register must be based on an analysis of the person's 
activities and functions in the context of the various registration 
categories. The Exchange does not believe that categorical exemptions 
for associated persons who are not ``actively engaged'' in a member's 
securities business, associated persons whose functions are related 
only to a member's need for nominal corporate officers or associated 
persons whose functions are related only to a member's need for capital 
participation is consistent with this analytical framework. The 
Exchange therefore is proposing to delete these exemptions. Rule 
614(a)(iv)(a) further exempts from registration associated persons 
whose functions are related solely and exclusively to effecting 
transactions on the floor of another national securities exchange as 
long as they are registered as floor members with such exchange. 
Because exchanges have registration categories other than the floor 
member category, proposed Rule 1230 clarifies that the exemption 
applies to associated persons solely and exclusively effecting 
transactions on the floor of another national securities exchange, 
provided they are appropriately registered with such exchange.\78\ 
Additionally, the Exchange proposes to add Section 3 of Rule 1230, 
pursuant to which persons associated with a member that are not 
citizens, nationals, or residents of the United States or any of its 
territories or possessions, that will conduct all of their securities 
activities in areas outside the jurisdiction of the United States, and 
that will not engage in any securities activities with or for any 
citizen, national or resident of the United States need not register 
with the Exchange.\79\
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    \77\ 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.
    \78\ Proposed Rule 1230 differs from FINRA Rule 1230 in that it 
includes a number of exemptions based upon current Nasdaq Rule 
1060(a) which are not found in FINRA Rule 1230.
    \79\ Individuals described by Section 3 of Rule 1230 who are 
associated with FINRA members may be registered with FINRA as 
Foreign Associates pursuant to FINRA Rule 1220.06. FINRA is 
eliminating this registration category effective October 1, 2018, 
and the Exchange has never recognized it.
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    The Exchange proposes to adopt Rule 1230.01 to clarify that the 
function of accepting customer orders is not considered a clerical or 
ministerial function and that associated persons who accept customer 
orders under any circumstances are required to be appropriately 
registered. However, the proposed rule provides that an associated 
person is not accepting a customer order where occasionally, when an 
appropriately registered person is unavailable, the associated person 
transcribes the order details and the registered person contacts the 
customer to confirm the order details before entering the order.
O. Changes to Continuing Education Requirements (Proposed Rule 1240)
    As described above, existing Rule 640, Continuing Education for 
Registered Persons, includes a Regulatory Element and a Firm Element. 
The Regulatory Element applies to registered persons and consists of 
periodic computer-based training on regulatory, compliance, ethical, 
supervisory subjects and sales practice standards. The Firm Element 
consists of at least annual, member-developed and administered training 
programs designed to keep covered registered persons current regarding 
securities products, services and strategies offered by the member. The 
CE requirements set forth in Rule 640 have been reorganized and 
renumbered,

[[Page 50996]]

and are now proposed to be adopted with amendments as new Rule 
1240.\80\
---------------------------------------------------------------------------

    \80\ Proposed Rule 1240 also differs slightly from FINRA Rule 
1240 in that it omits references to certain registration categories 
which the Exchange does not recognize as well as an internal cross 
reference to FINRA Rule 4517.
---------------------------------------------------------------------------

1. Regulatory Element
    The Exchange is proposing to replace the term ``registered person'' 
in current Rule 640 with the term ``covered person'' and make 
conforming changes to proposed Rule 1240(a). For purposes of the 
Regulatory Element, the Exchange is proposing to define the term 
``covered person'' in Rule 1240(a)(5) as any person registered pursuant 
to proposed Rule 1210, including any person who is permissively 
registered pursuant to proposed Rule 1210.02, and any person who is 
designated as eligible for an FSA waiver pursuant to proposed Rule 
1210.09. The purpose of this change is to ensure that all registered 
persons, including those with permissive registrations, keep their 
knowledge of the securities industry current. The inclusion of persons 
designated as eligible for an FSA waiver under the term ``covered 
persons'' corresponds to the requirements of proposed Rule 1210.09. In 
addition, consistent with proposed Rule 1210.09, proposed Rule 1240(a) 
provides that an FSA-eligible person would be subject to a Regulatory 
Element program that correlates to his or her most recent registration 
category, and CE would be based on the same cycle had the individual 
remained registered. The proposed rule also provides that if an FSA-
eligible person fails to complete the Regulatory Element during the 
prescribed time frames, he or she would lose FSA eligibility.
    Further, the Exchange is proposing to add a rule to address the 
impact of failing to complete the Regulatory Element on a registered 
person's activities and compensation. Specifically, proposed Rule 
1240(a)(2) provides that any person whose registration has been deemed 
inactive under the rule may not accept or solicit business or receive 
any compensation for the purchase or sale of securities. However, like 
the FINRA rule, the proposed rule provides that such person may receive 
trail or residual commissions resulting from transactions completed 
before the inactive status, unless the member with which the person is 
associated has a policy prohibiting such trail or residual commissions.
2. Firm Element
    The Exchange believes that training in ethics and professional 
responsibility should apply to all covered registered persons. 
Therefore, proposed Rule 1240(b)(2)(B), which provides that the Firm 
Element training programs must cover applicable regulatory 
requirements, would also require that a firm's training program cover 
training in ethics and professional responsibility.
P. Electronic Filing Rules
    Existing Rule 616 states that forms required to be filed under the 
Rule 600 Series shall be filed electronically through WebCRD, including 
initial filings and amendments of Forms U4 and U5. It also provides for 
prompt filing of amendments, and that records of filed documents be 
retained for a period of not less than three years, the first two years 
in an easily accessible place, in accordance with Exchange Act Rule 
17a-4. Electronic filing requirements are also found in a number of 
other rules.
    The Exchange is proposing to delete existing Rule 616 and to 
replace it with new Rule 1250, Electronic Filing Requirements for 
Uniform Forms, which will consolidate Form U4 and U5 electronic filing 
requirements in a single location.\81\ The new rule provides that all 
forms required to be filed under the Exchange's registration rules 
including the Rule 1200 series shall be filed through an electronic 
process or such other process as the Exchange may prescribe to the 
Central Registration Depository. It also would impose certain new 
requirements.
---------------------------------------------------------------------------

    \81\ Proposed Rule 1250 is based upon current Nasdaq Rule 1140.
---------------------------------------------------------------------------

    Under Rule 1250(b) members would be required to designate 
registered principal(s) or corporate officer(s) who are responsible for 
supervising a firm's electronic filings. The registered principal(s) or 
corporate officer(s) who has or have the responsibility to review and 
approve the forms filed pursuant to the rule would be required to 
acknowledge, electronically, that he is filing this information on 
behalf of the member and the member's associated persons. Under Rule 
1250, Supplementary Material .01, the registered principal(s) or 
corporate officer(s) could delegate filing responsibilities to an 
associated person (who need not be registered) but could not delegate 
any of the supervision, review, and approval responsibilities mandated 
in Rule 1250(b). The registered principal(s) or corporate officer(s) 
would be required to take reasonable and appropriate action to ensure 
that all delegated electronic filing functions were properly executed 
and supervised.
    Under Rule 1250(c)(1), initial and transfer electronic Form U4 
filings and any amendments to the disclosure information on Form U4 
must be based on a manually signed Form U4 provided to the member or 
applicant for membership by the person on whose behalf the Form U4 is 
being filed. As part of the member's recordkeeping requirements, it 
would be required to retain the person's manually signed Form U4 or 
amendments to the disclosure information on Form U4 in accordance with 
Rule 17a-4(e)(1) under the Act and make them available promptly upon 
regulatory request. An applicant for membership must also retain every 
manually signed Form U4 it receives during the application process and 
make them available promptly upon regulatory request. Rule 1250(c)(2) 
and Supplementary Material .03 and 04 provide for the electronic filing 
of Form U4 amendments without the individual's manual signature, 
subject to certain safeguards and procedures.
    Rule 1250(d) provides that upon filing an electronic Form U4 on 
behalf of a person applying for registration, a member must promptly 
submit fingerprint information for that person and that the Exchange 
may make a registration effective pending receipt of the fingerprint 
information.\82\ It further provides that if a member fails to submit 
the fingerprint information within 30 days after filing of an 
electronic Form U4, the person's registration will be deemed inactive, 
requiring the person to immediately cease all activities requiring 
registration or performing any duties and functioning in any capacity 
requiring registration. Under the rule the Exchange must 
administratively terminate a registration that is inactive for a period 
of two years. A person whose registration is administratively 
terminated could reactivate the registration only by reapplying for 
registration and meeting the qualification requirements of the 
applicable provisions of proposed Exchange Rule 1220. Upon application 
and a showing of good cause, the Exchange could extend the 30-day 
period.
---------------------------------------------------------------------------

    \82\ Proposed Rule 1250(d) covers the same subject matter as 
current Rules 616, Electronic Filing Requirements for Uniform Forms, 
and 623, Fingerprinting, which would be deleted.
---------------------------------------------------------------------------

    Rule 1250(e) would require initial filings and amendments of Form 
U5 to be submitted electronically. As part of the member's 
recordkeeping requirements, it would be required to retain such records 
for a period of not less than three years, the first two years

[[Page 50997]]

in an easily accessible place, in accordance with Rule 17a-4 under the 
Act, and to make such records available promptly upon regulatory 
request.
    Finally, under proposed Rule 1250, Supplementary Material .02, a 
member could enter into an agreement with a third party pursuant to 
which the third party agrees to file the required forms electronically 
on behalf of the member and the member's associated persons. 
Notwithstanding the existence of such an agreement, the member would 
remain responsible for complying with the requirements of the Rule.
Q. Trading Floor Registration (Rule 1260)
    Currently, Rules 620(a) and (b) govern trading floor member 
registration and non-member clerk registration. Rule 620(a) requires 
each Floor Broker, Specialist and Registered Options Trader on the 
Exchange trading floor to be registered as ``Member Exchange'' (``ME'') 
under ``PHLX'' on Form U4, and to successfully complete the appropriate 
floor trading examination(s), if prescribed by the Exchange, in 
addition to requirements imposed by other Exchange rules. Under the 
rule the Exchange may also require periodic examinations due to changes 
in trading rules, products or automated systems. Rule 620(b) requires 
all trading floor personnel, including clerks, interns, stock execution 
clerks and any other associated persons, of a member organization not 
required to register pursuant to Rule 620(a) to be registered as 
``Floor Employee'' (``FE'') under ``PHLX'' on Form U4. Under the rule 
the Exchange may require these individuals to also successfully 
complete an examination, and may require periodic examinations due to 
changes in trading rules, products or automated systems. To consolidate 
these registration rules into the new Rule 1200 series, Rule 620 is 
being renumbered as Rule 1260.\83\
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    \83\ Exhibit 5 simply reflects the proposed new rule number of 
current Rule 620 rather than the deletion of the entire rule and the 
subsequent reinsertion of the entire rule following Rule 1250. In 
the rulebook, Rule 1260 will appear immediately following Rule 1250.
---------------------------------------------------------------------------

    The Exchange proposes to adjust internal cross references as 
required by this proposed rule change, but not to make substantive 
changes to Rule 620(a) and (b). However, the Exchange proposes to adopt 
new section (c) to exempt certain individuals on the Exchange's trading 
floor from the representative registration requirements of proposed 
rules 1210 and 1220. Rule 1260(c) would provide that members \84\ whose 
activities are limited to the Exchange's options trading floor and who 
are registered pursuant to Rule 1260(a), as well as associated persons 
whose activities are limited to the Exchange's options trading floor 
and are registered pursuant to Rule 1260(b) are exempt from the 
representative registration requirements (but not the principal 
registration requirements, including any prerequisite representative 
registration requirement) of Rules 1210 and 1220. Rule 1260(c) is 
intended to preserve the current exclusion of these individuals from 
the representative registration requirements of Rule 613.\85\
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    \84\ In Rule 1260, unlike the other 1200 Series of proposed 
rules, the word ``member'' is not used to mean ``member 
organization.''
    \85\ Current Rule 613(a) imposes representative registration 
requirements upon persons engaged or to be engaged in the investment 
banking or securities business of a member organization except 
members whose activities are limited to the Exchange's options 
trading floor and who are registered pursuant to Rule 620(a), as 
well as associated persons whose activities are limited to the 
Exchange's options trading floor and are registered pursuant to Rule 
620(b).
---------------------------------------------------------------------------

R. Other Rules
    The Exchange is deleting Rule 614, Persons Exempt from 
Registration, as explained above. Rule 614(b), however, contains 
provisions dealing with Nonregistered Foreign ``Finders'' and is simply 
being relocated with nonsubstantive changes to new Rule 2040.\86\ The 
remaining rules identified above under ``Overview'' which are to be 
amended in this proposed rule change simply update citations and/or 
make technical or nonsubstantive changes to the proposed new rules.
---------------------------------------------------------------------------

    \86\ The FINRA counterpart to Rule 614(b) occupies a similar 
location in the FINRA rulebook. See FINRA Rule 2040(c), 
Nonregistered Foreign Finders.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\87\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\88\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78f(b).
    \88\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change will 
streamline, and bring consistency and uniformity to, the registration 
rules, which will, in turn, assist members and their associated persons 
in complying with these rules and improve regulatory efficiency. The 
proposed rule change will also improve the efficiency of the 
examination program, without compromising the qualification standards, 
by eliminating duplicative testing of general securities knowledge on 
examinations and by removing examinations that currently have limited 
utility. In addition, the proposed rule change will expand the scope of 
permissive registrations, which, among other things, will allow members 
to develop a depth of associated persons with registrations to respond 
to unanticipated personnel changes and will encourage greater 
regulatory understanding. Further, the proposed rule change will 
provide a more streamlined and effective waiver process for individuals 
working for a financial services industry affiliate of a member, and it 
will require such individuals to maintain specified levels of 
competence and knowledge while working in areas ancillary to the 
securities business. The proposed rule change will improve the 
supervisory structure of firms by imposing an experience requirement 
for representatives that are designated by firms to function as 
principals for a 120-day period before having to pass an appropriate 
principal qualification examination. The proposed rule change will also 
prohibit unregistered persons from accepting customer orders under any 
circumstances, which will enhance investor protection.
    The Exchange believes that, with the introduction of the SIE and 
expansion of the pool of individuals who are eligible to take the SIE, 
the proposed rule change has the potential of enhancing the pool of 
prospective securities industry professionals by introducing them to 
securities laws, rules and regulations and appropriate conduct before 
they join the industry in a registered capacity.
    The extension of the Securities Trader registration requirement to 
developers of algorithmic trading strategies requires associated 
persons primarily responsible for the design, development or 
significant modification of an algorithmic trading strategy or 
responsible for the day-to-day supervision or direction of such 
activities to register and meet a minimum standard of knowledge 
regarding the securities rules and regulations applicable to the member 
employing the algorithmic trading strategy. This minimum standard of 
knowledge is identical to the standard of knowledge currently 
applicable to traditional securities traders. The Exchange believes 
that improved

[[Page 50998]]

education of firm personnel may reduce the potential for problematic 
market conduct and manipulative trading activity.
    Finally, the proposed rule change makes organizational changes to 
the Exchange's registration and qualification rules to align them with 
registration and qualification rules of the Nasdaq Affiliated 
Exchanges, in order to prevent unnecessary regulatory burdens and to 
promote efficient administration of the rules. The change also makes 
minor updates and corrections to the Exchange's rules which improve 
readability.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change is 
designed to ensure that all associated persons of members engaged in a 
securities business are, and will continue to be, properly trained and 
qualified to perform their functions, will be supervised, and can be 
identified by regulators. The proposed new 1200 Series of rules, which 
are similar in many respects to the registration-related requirements 
adopted by FINRA effective October 1, 2018, should enhance the ability 
of member firms to comply with the Exchange's rules as well as with the 
Federal securities laws. Additionally, as described above, the Exchange 
intends the amendments described herein to eliminate inconsistent 
registration-related requirements across the Nasdaq Affiliated 
Exchanges, thereby promoting uniformity of regulation across markets. 
The new 1200 Series should in fact remove administrative burdens that 
currently exist for members seeking to register associated persons on 
multiple Nasdaq Affiliated Exchanges featuring varying registration-
related requirements. Additionally, all similarly-situated associated 
persons of members will be treated similarly under the new 1200 Series 
in terms of standards of training, experience and competence for 
persons associated with Exchange members.
    With respect 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 ``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 \89\ and Rule 19b-
4(f)(6) thereunder.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78s(b)(3)(A).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days from the date of filing. However, Rule 
19b-4(f)(6)(iii) \90\ permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange has asked the Commission to waive the 
30-day operative delay so that the proposal may become operative on 
October 1, 2018 to coincide with the effective date of FINRA's proposed 
rule change on which the proposal is based.\91\ The waiver of the 
operative delay would make the Exchange's qualification requirements 
consistent with those of FINRA, as of October 1, 2018. Therefore, the 
Commission believes that the waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest and 
hereby waives the 30-day operative delay and designates the proposal 
operative on October 1, 2018.\92\
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    \90\ 17 CFR 240.19b-4(f)(6)(iii).
    \91\ See supra note 7. As discussed above, the Exchange has 
stated that the new registration requirements for developers of 
algorithmic trading strategies would become operative on April 1, 
2019.
    \92\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2018-61 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-Phlx-2018-61. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official

[[Page 50999]]

business days between the hours of 10 a.m. and 3 p.m. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Phlx-2018-61 and should be submitted on or before October 31, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\93\
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    \93\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21902 Filed 10-9-18; 8:45 am]
 BILLING CODE 8011-01-P



                                                                        Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                                 50981

                                              that the initial and continued listing              such ETPs conforms NYSE’s rules to the                    IV. Conclusion
                                              standards contained in those rules may              corresponding provisions of the rules of
                                              apply to the trading pursuant to UTP of             NYSE National, Inc. (‘‘NYSE                                 It is therefore ordered, pursuant to
                                              such ETPs, and make related changes;                National’’).14                                            Section 19(b)(2) of the Act,18 that the
                                              and (5) amend NYSE Rule 5.1(a)(2)                      Additionally, the Commission                           proposed rule change (SR–NYSE–2018–
                                              relating to ETPs trading pursuant to                believes that the deletion of listing rules               30), as modified by Amendment No. 2,
                                              UTP to delete the requirement that the              that would be superseded by the                           be, and hereby is, approved.
                                              Exchange file with the Commission a                 proposed rule change, the proposed                          For the Commission, by the Division of
                                              Form 19b–4(e) with respect to each ETP              amendments to NYSE Rules 5.1(a), and                      Trading and Markets, pursuant to delegated
                                              it trades by UTP, and to make clear that            technical conforming changes are                          authority.19
                                              the Exchange would halt trading in an               appropriate and consistent with Section                   Eduardo A. Aleman,
                                              ETP trading pursuant to UTP as                      6(b)(5) of the Act. These changes would
                                              provided for in NYSE Rule 7.18.                                                                               Assistant Secretary.
                                                                                                  eliminate language that is no longer
                                                                                                                                                            [FR Doc. 2018–21907 Filed 10–9–18; 8:45 am]
                                              III. Discussion and Commission                      relevant and modify the Exchange rules
                                                                                                  to be more precise, thereby leading to                    BILLING CODE 8011–01–P
                                              Findings
                                                                                                  greater clarity for Exchange members,
                                                 After careful review, the Commission             regulators, investors, and the general
                                              finds that the proposed rule change, as             public.                                                   SECURITIES AND EXCHANGE
                                              amended, is consistent with the                                                                               COMMISSION
                                                                                                     In approving the proposed rule
                                              requirements of the Act and the rules
                                                                                                  change, the Commission also relies
                                              and regulations thereunder applicable to                                                                      [Release No. 34–84352; File No. SR–Phlx–
                                                                                                  upon the Exchange’s representation
                                              a national securities exchange.10 In                                                                          2018–61]
                                                                                                  that: (1) Listed ETPs would be subject to
                                              particular, the Commission finds that
                                                                                                  the existing trading surveillances
                                              the proposed rule change is consistent                                                                        Self-Regulatory Organizations; Nasdaq
                                                                                                  administered by the Exchange for ETPs
                                              with Section 6(b) of the Act,11 in                                                                            PHLX LLC; Notice of Filing and
                                              general, and furthers the objectives of             trading UTP, as well as cross-market
                                                                                                  surveillances administered by the                         Immediate Effectiveness of Proposed
                                              Section 6(b)(5) of the Act,12 in                                                                              Rule Change To Amend, Reorganize
                                              particular, in that it is designed to               Financial Industry Regulatory Authority
                                                                                                  (‘‘FINRA’’) on behalf of the Exchange,                    and Enhance Membership,
                                              prevent fraudulent and manipulative
                                                                                                  and (2) the initial and continued listing                 Registration and Qualification Rules
                                              acts and practices, to promote just and
                                                                                                  reviews of ETPs listed on the Exchange                    and To Make Conforming Changes to
                                              equitable principles of trade, to remove
                                                                                                  will be conducted in the same manner                      Certain Other Rules
                                              impediments to and perfect the
                                              mechanism of a free and open market                 as they are on NYSE’s affiliated
                                                                                                  exchange, NYSE Arca.15 Further, the                       October 3, 2018.
                                              and a national market system, and, in
                                              general, to protect investors and the               Exchange    or FINRA, on behalf of the                       Pursuant to Section 19(b)(1) of the
                                              public interest.                                    Exchange, or both, will communicate as                    Securities Exchange Act of 1934
                                                 The Commission believes that the                 needed regarding trading in ETPs, as                      (‘‘Act’’),1 and Rule 19b–4 thereunder,2
                                              Exchange’s proposed listing standards               well as certain other securities and                      notice is hereby given that on
                                              for ETPs 13 do not raise any novel issues, financial instruments underlying such                              September 27, 2018, Nasdaq PHLX LLC
                                              as they are consistent with the rules of            ETPs, with other markets and other                        (‘‘Phlx’’ or ‘‘Exchange’’) filed with the
                                              other national securities exchanges. The entities that are members of the                                     Securities and Exchange Commission
                                              proposed rules for the qualification,               Intermarket Surveillance Group (‘‘ISG’’).                 (‘‘SEC’’ or ‘‘Commission’’) the proposed
                                              listing, and trading of ETPs are                    The Exchange or FINRA, on behalf of                       rule change as described in Items I and
                                              substantially identical (other than                 the Exchange, or both, may obtain                         II, below, which Items have been
                                              certain non-substantive and technical               trading information regarding trading in                  prepared by the Exchange. The
                                              changes) to the rules of NYSE Arca and              ETPs and financial instruments from                       Commission is publishing this notice to
                                              NYSE American. Moreover, the                        such markets and other entities. In                       solicit comments on the proposed rule
                                              Exchange’s proposal to make clear that              addition, the Exchange may obtain                         change from interested persons.
                                              the initial and continued listing                   information regarding trading in ETPs,
                                              standards in Rules 5P and 8P do not                 as well as certain other securities and                   I. Self-Regulatory Organization’s
                                              apply to the trading pursuant to UTP of             financial instruments underlying such                     Statement of the Terms of Substance of
                                                                                                  ETPs from markets and other entities                      the Proposed Rule Change
                                                10 In approving this proposed rule change, the    that are members of ISG or with which
                                              Commission has considered the proposed rule’s       the Exchange has in place a                                  The Exchange proposes to amend,
                                              impact on efficiency, competition, and capital                                                                reorganize and enhance its membership,
                                              formation. See 15 U.S.C. 78c(f).
                                                                                                  comprehensive surveillance sharing
                                                11 15 U.S.C. 78f(b).                              agreement.16                                              registration and qualification rules and
                                                12 15 U.S.C. 78f(b)(5).                              The Commission therefore finds that                    to make conforming changes to certain
                                                13 The proposed listing standards of Rules 5P and the proposed rule change, as modified                     other rules.
                                              8P: (1) Provide for the listing of certain ETPs,    by Amendment No. 2, is consistent                            The text of the proposed rule change
                                              provided that an ETP meets the applicable
                                              requirements of NYSE Rules 5P and 8P and does       with, and furthers the objectives of,                     is available on the Exchange’s website at
                                              not have any component NMS Stock that is listed     Section 6(b)(5) of the Act.17                             http://nasdaqphlx.cchwallstreet.com/,
                                              on the Exchange or is based on, or represents an                                                              at the principal office of the Exchange,
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                                              interest in, an underlying index or reference asset
                                              that includes an NMS Stock listed on the Exchange;
                                                                                                        14 In addition, the Commission believes that the
                                                                                                                                                            and at the Commission’s Public
                                                                                                      proposed changes to NYSE Rule 5.1(a)(2) would         Reference Room.
                                              (2) delete a sentence in NYSE Rule 5.1(a)(1) that is
                                                                                                      further harmonize the Exchange’s rules applicable
                                              no longer relevant given the Exchange’s addition of
                                              Section 303A to the Listed Company Manual; and          to ETPs traded on a UTP basis with the rules of
                                              (3) delete all references in NYSE Rules 5P and 8P       NYSE National.                                          18 15 U.S.C. 78s(b)(2).
                                                                                                        15 See Notice, supra note 4, at 31587–31588.          19 17 CFR 200.30–3(a)(12).
                                              that imply that the initial and continued listing
                                                                                                        16 See id. at 31587.                                  1 15 U.S.C. 78s(b)(1).
                                              standards contained in those rules may apply to the
                                              trading pursuant to UTP of such ETPs.                     17 15 U.S.C. 78f(b)(5).                               2 17 CFR 240.19b–4.




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                                              50982                     Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                              II. Self-Regulatory Organization’s                      restructuring the FINRA representative-                Until Transfer or Military Service; 611,
                                              Statement of the Purpose of, and                        level qualification examinations,                      Principal Registration Requirements;
                                              Statutory Basis for, the Proposed Rule                  creating a general knowledge                           612, Categories of Principal Registration;
                                              Change                                                  examination and specialized knowledge                  613, Representative Registration; 614,
                                                                                                      examinations, allowing permissive                      Persons Exempt from Registration; 615,
                                                In its filing with the Commission, the                registration, establishing an exam                     Waiver of Requirements; 616, Electronic
                                              Exchange included statements                            waiver process for persons working for                 Filing Requirements for Uniform Forms;
                                              concerning the purpose of and basis for                 a financial services affiliate of a                    623, Fingerprinting; and 640,
                                              the proposed rule change and discussed                  member, and amending certain                           Continuing Education for Registered
                                              any comments it received on the                         Continuing Education (‘‘CE’’)                          Persons, are proposed to be deleted.
                                              proposed rule change. The text of these                 requirements (collectively, the ‘‘FINRA                Rule 620, Trading Floor Registration, is
                                              statements may be examined at the                       Rule Changes’’).8 The FINRA Rule                       proposed to be renumbered and
                                              places specified in Item IV below. The                  Changes will become effective on                       amended.10
                                              Exchange has prepared summaries, set                    October 1, 2018.                                         In place of the deleted rules and rule
                                              forth in sections A, B, and C below, of                    The Exchange now proposes to                        sections the Exchange proposes to adopt
                                              the most significant aspects of such                    amend, reorganize and enhance its own                  a new 1200 Series of rules captioned
                                              statements.                                             membership, registration and                           Registration, Qualification and
                                              A. Self-Regulatory Organization’s                       qualification rules in part in response to             Continuing Education generally
                                              Statement of the Purpose of, and                        the FINRA Rule Changes, and also in                    conforming to and based upon FINRA’s
                                              Statutory Basis for, the Proposed Rule                  order to conform the Exchange’s rules                  new 1200 Series of rules resulting from
                                              Change                                                  more closely to those of its affiliated                the FINRA Rule Changes, but with a
                                                                                                      exchanges in the interest of uniformity                number of Exchange-specific
                                              1. Purpose                                              and to facilitate compliance with                      variations.11 The proposed new 1200
                                                 The Exchange has adopted                             membership, registration and                           Series is also being proposed for
                                              registration requirements to ensure that                qualification regulatory requirements by               adoption by Phlx’s affiliated exchanges
                                              associated persons of member                            members of multiple Nasdaq-affiliated                  in order to facilitate compliance with
                                              organizations attain and maintain                       exchanges including Phlx. Last, the                    membership, registration and
                                              specified levels of competence and                      Exchange proposes to enhance its                       qualification requirements by members
                                              knowledge pertinent to their function.                  registration rules by adding a new                     of two or more of those affiliated
                                              In general, the current rules require that              registration requirement applicable to                 exchanges.12 In the new 1200 Series of
                                              persons engaged in a member                             developers of algorithmic trading
                                              organization’s investment banking or                    systems similar to a requirement                          10 The Exchange also proposes conforming

                                                                                                      adopted by FINRA pursuant to a 2016                    amendments to Rules 1, Definitions; 1024, Conduct
                                              securities business who are to function                                                                        of Accounts for Options Trading; 1090, Clerks;
                                              as representatives or principals register               FINRA proposed rule change.9                           3202, Application of Other Rules of the Exchange;
                                                                                                         As part of this proposed rule change,               9630, Appeal; Equity Floor Procedure Advice A–7,
                                              with the Exchange in the category of
                                                                                                      current Rules 53, Liability for Dues                   Failure to Timely Submit Amendments to Form U4,
                                              registration appropriate to their                                                                              Form U5 and Form BD; Options Floor Procedure
                                              functions by passing one or more                                                                               Advice F–34, Failure to Timely Submit
                                                                                                      to those members of FINRA that are also members
                                              qualification examinations 3 and exempt                 of the NYSE.                                           Amendments to Form U4, Form U5 and Form BD;
                                              specified associated persons from the                      8 See Securities Exchange Act Release No. 81098
                                                                                                                                                             and Section VII.C., FINRA Fees, of the Exchange’s
                                                                                                                                                             Pricing Schedule, and the addition of new Rule
                                              registration requirements.4 They also                   (July 7, 2017), 82 FR 32419 (July 13, 2017) (Order
                                                                                                                                                             2040, Nonregistered Foreign Finders. The Exchange
                                              prescribe ongoing continuing education                  Approving File No. SR–FINRA–2017–007). See also
                                                                                                                                                             is also proposing to amend the two Floor Procedure
                                                                                                      FINRA Regulatory Notice 17–30 (SEC Approves
                                              requirements for registered persons.5                   Consolidated FINRA Registration Rules,
                                                                                                                                                             Advices to delete references to the ‘‘Department of
                                                                                                                                                             Market Regulation,’’ which refer to FINRA’s former
                                              The Exchange now proposes to amend,                     Restructured Representative-Level Qualification
                                                                                                                                                             Department of Market Regulation. FINRA amended
                                              reorganize and enhance its rules                        Examinations and Changes to Continuing Education
                                                                                                      Requirements) (October 2017). FINRA articulated        its rules recently to reflect an internal
                                              regarding registration, qualification                   its belief that the proposed rule change would         reorganization of its Enforcement Operations. See
                                              examinations and continuing education,                  streamline, and bring consistency and uniformity       Securities Exchange Act Release No. 83781 (August
                                                                                                                                                             6, 2018), 83 FR 39802 (August 10, 2018). In July
                                              as described below.6                                    to, its registration rules, which would, in turn,
                                                                                                                                                             2017, FINRA announced its plan to consolidate its
                                                                                                      assist FINRA members and their associated persons
                                                 Recently, the Commission approved a                  in complying with the rules and improve regulatory     existing enforcement functions into a unified
                                              Financial Industry Regulatory Authority                 efficiency. FINRA also determined to enhance the       Department of Enforcement. FINRA’s recent rule
                                              (‘‘FINRA’’) proposed rule change                        overall efficiency of its representative-level         change makes technical and other non-substantive
                                                                                                      examinations program by eliminating redundancy         changes to FINRA Rules 9000 Series Code of
                                              adopting rules relating to qualification                                                                       Procedure to reflect the single Department of
                                                                                                      of subject matter content across examinations,
                                              and registration requirements in the                    retiring several outdated representative-level         Enforcement, which the Exchange is mirroring in
                                              Consolidated FINRA Rulebook,7                           registrations, and introducing a general knowledge     the two Floor Procedure Advices which will now
                                                                                                      examination that could be taken by all potential       refer only to FINRA’s Department of Enforcement.
                                                                                                                                                                11 The proposed Phlx 1200 Series of Rules would
                                                 3 See Phlx Rules 611, Principal Registration         representative-level registrants and the general
                                                                                                      public. FINRA amended certain aspects of its           consist of Rule 1210, Registration Requirements;
                                              Requirements, and 613, Representative Registration.
                                                 4 See Phlx Rule 614, Persons Exempt from
                                                                                                      continuing education rule, including by codifying      Rule 1220, Registration Categories; Rule 1230,
                                                                                                      existing guidance regarding the effect of failing to   Associated Persons Exempt from Registration; Rule
                                              Registration.                                           complete the Regulatory Element on a registered        1240, Continuing Education Requirements; Rule
                                                 5 See Phlx Rule 640, Continuing Education for
                                                                                                      person’s activities and compensation.                  1250, Electronic Filing Requirements for Uniform
                                              Registered Persons.                                        9 See Securities Exchange Act Release No. 77551     Forms; and Rule 1260, Trading Floor Registration.
                                                 6 The Exchange’s rules governing these matters                                                                 12 The Exchange’s five affiliated exchanges, The
                                                                                                      (April 7, 2016), 81 FR 21914 (April 13, 2016) (Order
                                              were extensively updated and amended in 2012.           Approving File No. SR–FINRA–2016–007). In its          Nasdaq Stock Market LLC (‘‘Nasdaq’’), Nasdaq BX,
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                                              See Securities Exchange Act Release No. 66840           proposed rule change FINRA addressed the               Inc. (‘‘BX’’); Nasdaq ISE, LLC (‘‘ISE’’); Nasdaq
                                              (April 20, 2012), 77 FR 25003 (April 26, 2012) (SR–     increasing significance of algorithmic trading         GEMX, LLC (‘‘GEMX’’); and Nasdaq MRX, LLC
                                              Phlx–2012–23).                                          strategies by amending its rules to require            (‘‘MRX’’) (together with Phlx, the ‘‘Nasdaq
                                                 7 The current FINRA rulebook consists of: (1)                                                               Affiliated Exchanges’’) are also submitting proposed
                                                                                                      registration, as Securities Traders, of associated
                                              FINRA rules; (2) NASD rules; and (3) rules              persons primarily responsible for the design,          rule changes to adopt the 1200 Series of rules. See
                                              incorporated from the New York Stock Exchange           development or significant modification of             SR–NASDAQ–2018–078, SR–BX–2018–047, SR–
                                              (‘‘NYSE’’) (the ‘‘Incorporated NYSE rules’’). While     algorithmic trading strategies, or who are             ISE–2018–82, SR–GEMX–2018–33 and SR–MRX–
                                              the NASD rules generally apply to all FINRA             responsible for the day-to-day supervision or          2018–31. The Exchange recently added a shell
                                              members, the Incorporated NYSE rules apply only         direction of such activities.                          structure to its rulebook with the purpose of



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                                                                        Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                                       50983

                                              rules the Exchange would, among other                     Proposed Rule 1210 provides that                       who is registered as a principal.17 Under
                                              things, recognize additional associated                 each person engaged in the securities                    Rule 611(e)(ii) the Exchange may waive
                                              person registration categories, recognize               business of a member must register with                  the provisions of paragraph (e)(i) in
                                              a new general knowledge examination,                    the Exchange as a representative or                      situations that indicate conclusively
                                              permit the maintenance of permissive                    principal in each category of registration               that only one person should be required
                                              registrations, and require Securities                   appropriate to his or her functions and                  to register as a principal. Additionally,
                                              Trader registration of developers of                    responsibilities as specified in proposed                Rule 611(e)(iii) requires an applicant for
                                              algorithmic trading strategies consistent               Rule 1220, unless exempt from                            membership to have at least one person
                                              with a comparable, existing FINRA                       registration pursuant to proposed Rule                   qualified for registration as a Limited
                                              registration requirement.13                             1230. Unlike current Rules 613(a) and                    Principal—Financial and Operations,
                                                The proposed rule change would                        611(a), proposed Rule 1210 would not                     pursuant to Rule 612(b)(i).18
                                              become operative October 1, 2018 with                   require persons engaged in the                              The Exchange is proposing to delete
                                              the exception of the new registration                   investment banking business of a                         these requirements and in their place to
                                              requirement for developers of                           member to register with the Exchange                     adopt new Rule 1210.01. The new rule
                                              algorithmic trading strategies which                    since a member’s investment banking                      would provide firms that limit the scope
                                              would become operative April 1, 2019.                   business is not the primary concern of                   of their business with flexibility in
                                                                                                      the Exchange or the focus of its                         satisfying the two-principal
                                              Proposed Rules
                                                                                                      operations.16 Proposed Rule 1210 also                    requirement. In particular, proposed
                                              A. Registration Requirements (Proposed                  provides that such person is not                         Rule 1210.01 requires that a member
                                              Rule 1210)                                              qualified to function in any registered                  have a minimum of two General
                                                Exchange Rules 613(a) and 611(a)                      capacity other than that for which the                   Securities Principals, provided that a
                                              currently require that persons engaged,                 person is registered, unless otherwise                   member that is limited in the scope of
                                              or to be engaged, in the investment                     stated in the rules.                                     its activities may instead have two
                                              banking or securities business of a                                                                              officers or partners who are registered in
                                              member who are to function as                           B. Minimum Number of Registered                          a principal category that corresponds to
                                              representatives or principals register                  Principals (Proposed Rule 1210.01)                       the scope of the member’s activities.19
                                              with the Exchange in the category of                      Existing Rule 611(e), Requirement of                   For instance, if a firm’s business is
                                              registration appropriate to their                       Two Registered Principals, at section (i)                limited to securities trading, the firm
                                              functions as specified in Exchange                      requires members other than sole                         may have two Securities Trader
                                              Rules 613 and 612.14 The Exchange is                    proprietorships to have at least two                     Principals, instead of two General
                                              proposing to consolidate and streamline                 officers or partners who are registered as               Securities Principals. Additionally,
                                              provisions of Exchange Rules 613(a) and                 principals with respect to each aspect of                Exchange Rule 1210.01 provides that
                                              611(a) and to adopt them as Exchange                    the member organization’s investment                     any member with only one associated
                                              Rule 1210, subject to several changes.15                banking and securities business                          person is excluded from the two
                                                                                                      pursuant to the applicable provisions of                 principal requirement. Proposed Rule
                                              improving efficiency and readability and to align its   Rule 611; provided, however, that a                      1210.01 would provide that existing
                                              rules closer to those of the other Nasdaq Affiliated                                                             members as well as new applicants may
                                              Exchanges. See Securities Exchange Act Release No.
                                                                                                      proprietary trading firm with 25 or
                                              82169 (November 29, 2017), 82 FR 57508                  fewer registered representatives is only                 request a waiver of the two-principal
                                              (December 5, 2017) (SR–Phlx–2017–97). Ultimately,       required to have one officer or partner                  requirement, consistent with current
                                              the Exchange intends to submit another proposed                                                                  Exchange Rule 611(e)(ii). Finally, the
                                              rule change to transfer the Exchange’s 1200 Series
                                              of rules into the new shell structure. The Phlx 1200    FINRA Rule Changes, with modifications tailored to       Exchange is proposing to retain the
                                              Series of rules would differ slightly from the 1200     the business of the Exchange and of the other            existing rule’s provision permitting a
                                              Series of the other Nasdaq Affiliated Exchanges         Nasdaq Affiliated Exchanges. However, the                proprietary trading firm with 25 or
                                              given Phlx’s trading floor and its unique               Exchange also proposes to adopt Rule 1210,
                                                                                                      Supplementary Material .12, which is not based           fewer registered representatives to have
                                              membership structure which features the concept of
                                              a ‘‘member organization.’’ The Phlx 1200 Series         upon a FINRA rule but instead on current Nasdaq          just one registered principal. The FINRA
                                              would therefore include a Rule 1260, Trading Floor      Rule 1031(c), (d) and (e), which Nasdaq is               Rule Changes do not include this
                                              Registration. Additionally, each of the new Phlx        proposing in SR-Nasdaq-2018–078 to relocate to           provision.20 The Financial and
                                              1200 Series of rules (except Rule 1260) would           Rule 1210, Supplementary Material .12 in the
                                              contain a statement that references to a ‘‘member’’     Nasdaq rulebook. These provisions govern the
                                                                                                                                                                  17 Rule 611(e)(i)(A)–(D) defines the term
                                              in that rule shall be deemed to be references to a      process for applying for registration and amending
                                              ‘‘member organization.’’                                the registration application, as well as for notifying   ‘‘proprietary trading firm’’. Because the Exchange is
                                                 13 See Securities Exchange Act Release No. 77551     the Exchange of termination of the member’s              proposing to delete Rule 611 in its entirety, Rule
                                                                                                      association with a person registered with the            611(e)(i) (A)–(D) would be reworded and relocated
                                              (April 7, 2016), 81 FR 21914 (April 13, 2016) (order
                                              approving SR–FINRA–2016–007). In its proposed           Exchange. The Exchange proposes to adopt Rule            to Rule 1, Definitions, Section (kk) as a defined
                                              rule change to adopt this registration requirement,     1210, Supplemental Material .12, in order to have        term.
                                                                                                                                                                  18 The Exchange’s rules currently refer to various
                                              FINRA addressed the increasing significance of          uniform processes and requirements in this area
                                              algorithmic trading strategies by proposing to          across the Nasdaq Affiliated Exchanges.                  categories of limited principal registration as
                                              require registration, as Securities Traders, of            16 Miami International Securities Exchange LLC        ‘‘Limited Principal—’’ followed by the name of the
                                              associated persons primarily responsible for the        (‘‘MIAX’’) Rule 203(a) and current ISE Rule              registration category. In this proposed rule change,
                                              design, development or significant modification of      313(a)(1) likewise require registration of associated    the Exchange will no longer employ the term
                                              algorithmic trading strategies, or who are              persons of members engaged in the member’s               ‘‘Limited Principal—’’ in discussing various
                                              responsible for the day-to-day supervision or           securities business, but do not require registration     principal registration categories. No substantive
                                              direction of such activities.                           with the exchanges of associated persons of              change is intended; shortening the names of the
                                                 14 Section (a) of Rule 613 includes an exception     members who engage in the member’s investment            various principals simply improves readability of
                                              for members whose activities are limited to the         banking business. Because the Exchange’s proposed        the rules.
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                                                                                                                                                                  19 The principal registration categories are
                                              Exchange’s options trading floor and who are            registration rules focus solely on securities trading
                                              registered pursuant to Rule 620(a), as well as for      activity, the proposed rules differ from the FINRA       described in greater detail below.
                                              associated persons whose activities are limited to      Rule Changes by omitting references to investment           20 The Exchange is not proposing provisions

                                              the Exchange’s options trading floor and are            banking in proposed Rules 1210, 1210.03, 1210.10,        conforming to the new FINRA Rule 1210.01
                                              registered pursuant to Rule 620(b). As discussed        1220(a)(1), 1220(a)(2)(B), 1220(b), and 1240(b)(1),      requirements that all FINRA members are required
                                              below, the Exchange proposes to preserve this           and also by omitting as unnecessary from Rule            to have a Principal Financial Officer and a Principal
                                              exception as new section (c) of proposed Rule 1260.     1220(a)(10) a limitation on the qualification of a       Operations Officer, because it believes that its
                                                 15 In general the 1200 Series would conform the      General Securities Sales Supervisor to supervise the     proposed Rule 1220(a)(4), Financial and Operations
                                              Exchange’s rules to FINRA’s rules as revised in the     origination and structuring of an underwriting.                                                      Continued




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                                              50984                      Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                              Operations Principal requirement of                      associated person of a member who is                    individual working exclusively in an
                                              current Rules 611(e)(i) and 612(b)(i),                   registered, and functioning solely, as a                administrative capacity, the individual’s
                                              which it references, would be revised                    General Securities Representative would                 day-to-day supervisor may be a
                                              and relocated to proposed Rule                           be able to obtain and maintain a General                nonregistered person. Members would
                                              1220(a)(4)(A).                                           Securities Principal registration with the              be required to assign a registered
                                                                                                       member. Further, proposed Rule                          supervisor to this person who would be
                                              C. Permissive Registrations (Proposed
                                                                                                       1210.02 allows an individual engaged in                 responsible for periodically contacting
                                              Rule 1210.02)
                                                                                                       the securities business of a foreign                    such individual’s day-to-day supervisor
                                                 Current Rule 611(a) prohibits member                  securities affiliate or subsidiary of a                 to verify that the individual is not acting
                                              organizations from maintaining a                         member to obtain and maintain any                       outside the scope of his or her assigned
                                              principal registration with the Exchange                 registration permitted by the member.                   functions. If such individual is
                                              for any person (A) who is no longer                         The Exchange is proposing to permit                  permissively registered as a
                                              active in the member organization’s                      the registration of such individuals for                representative, the registered supervisor
                                              investment banking or securities                         several reasons. First, a member may                    must be registered as a representative or
                                              business, (B) who is no longer                           foresee a need to move a former                         principal. If the individual is
                                              functioning as a principal, or (C) where                 representative or principal who has not                 permissively registered as a principal,
                                              the sole purpose is to avoid the                         been registered for two or more years                   the registered supervisor must be
                                              examination requirement of the rule. A                   back into a position that would require                 registered as a principal.22
                                              member organization may not make                         such person to be registered. Currently,
                                              application for the registration of any                  such persons are required to requalify                  D. Qualification Examinations and
                                              person as principal where there is no                    (or obtain a waiver of the applicable                   Waivers of Examinations (Proposed
                                              intent to employ such person in the                      qualification examinations) and reapply                 Rule 1210.03)
                                              member organization’s investment                         for registration. Second, the proposed                     Current Rule 611(a) provides that
                                              banking or securities business.                          rule change would allow members to                      before a registration can become
                                              However, a member organization may                       develop a depth of associated persons                   effective, persons who are to function as
                                              maintain or make application for the                     with registrations in the event of                      principals must pass a qualification
                                              registration as a principal of a person                  unanticipated personnel changes. Third,                 examination for principals appropriate
                                              who performs legal, compliance,                          allowing registration in additional                     to the category of registration as
                                              internal audit, back-office operations, or               categories encourages greater regulatory                specified in the rule. Rule 613(d)
                                              similar duties for the member                            understanding. Finally, the proposed                    provides that no member organization
                                              organization or a person engaged in the                  rule change would eliminate an                          shall permit any member or person
                                              investment banking or securities                         inconsistency in the current rules,                     associated with it to engage in the
                                              business of a foreign securities affiliate               which permit some associated persons                    investment banking or securities
                                              or subsidiary of the member                              of a member to obtain permissive                        business unless the member
                                              organization. Exchange Rule 613(b) is a                  registrations, but not others who equally               organization determines that such
                                              parallel provision applicable to                         are engaged in the member’s business.                   person satisfies the qualification
                                              representatives.                                            Individuals maintaining a permissive                 requirements established by the Board
                                                 The Exchange is proposing to replace                  registration under the proposed rule                    and is not subject to statutory
                                              these provisions with new Rule 1210.02.                  change would be considered registered                   disqualification as defined in Section
                                              The Exchange is also proposing to                        persons and subject to all Exchange                     3(a)(39) 23 of the Act. The Exchange is
                                              expand the scope of permissive                           rules, to the extent relevant to their                  proposing to replace these provisions
                                              registrations and to clarify a member’s                  activities. For instance, an individual                 with new Rule 1210.03.
                                              obligations regarding individuals who                    working solely in an administrative                        In addition, as part of the FINRA Rule
                                              are maintaining such registrations.                      capacity would be able to maintain a                    Changes FINRA has adopted a
                                                 Specifically, proposed Rule 1210.02                   General Securities Representative                       restructured representative-level
                                              allows any associated person to obtain                   registration and would be considered a                  qualification examination program
                                              and maintain any registration permitted                  registered person for purposes of rules                 whereby representative-level registrants
                                              by the member. For instance, an                          relating to borrowing from or lending to                would be required to take a general
                                              associated person of a member working                    customers, but the rule would have no                   knowledge examination (the Securities
                                              solely in a clerical or ministerial                      practical application to his or her                     Industry Essentials Exam or ‘‘SIE’’) and
                                              capacity, such as in an administrative                   conduct because he or she would not                     a specialized knowledge examination
                                              capacity, would be able to obtain and                    have any customers.                                     appropriate to their job functions at the
                                              maintain a General Securities                               Consistent with the Exchange’s                       firm with which they are associating.
                                              Representative registration with the                     supervision rules, members would be                     Therefore, proposed Rule 1210.03
                                              member. As another example, an                           required to have adequate supervisory                   provides that before the registration of a
                                                                                                       systems and procedures reasonably                       person as a representative can become
                                              Principal, which requires member firms operating         designed to ensure that individuals with                effective under proposed Rule 1210,
                                              pursuant to certain provisions of SEC rules to                                                                   such person must pass the SIE and an
                                              designate at least one Financial and Operations          permissive registrations do not act
                                              Principal, is sufficient. Further, the Exchange is not   outside the scope of their assigned                     appropriate representative-level
                                              adopting the FINRA Rule 1210.01 requirements that        functions.21 With respect to an                         qualification examination as specified
                                              (1) a member engaged in investment banking               individual who solely maintains a                       in proposed Rule 1220. Proposed Rule
                                              activities have an Investment Banking Principal, (2)                                                             1210.03 also provides that before the
                                                                                                       permissive registration, such as an
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                                              a member engaged in research activities have a
                                              Research Principal, or (3) a member engaged in
                                                                                                                                                               registration of a person as a principal
                                              options activities with the public have a Registered       21 The FINRA Proposed Rules at Rule 1210.02 cite
                                                                                                                                                                 22 In either case, the registered supervisor of an
                                              Options Principal. The Exchange does not recognize       FINRA’s own supervision rule, by number. Because
                                              the Investment Banking Principal or the Research         the 1200 Series of rules is intended to apply to the    individual who solely maintains a permissive
                                              Principal registration categories, and the Registered    Exchange as well as to its affiliates which have        registration would not be required to be registered
                                              Options Principal registration requirement is set        different supervision rules, proposed Rule 1210.02      in the same representative or principal registration
                                              forth in Rule 1210.08 and its inclusion is therefore     refers generally to the supervision rules rather than   category as the permissively-registered individual.
                                              unnecessary in Rule 1210.01.                             identifying them by number.                               23 15 U.S.C. 78c(a)(39).




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                                                                         Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                              50985

                                              can become effective under proposed                      which a current Securities Trader may                  position. However, if they do not
                                              Rule 1210, such person must pass an                      engage under current Exchange Rules.                   register within four years from the date
                                              appropriate principal-level qualification                  Individuals who are registered on the                of their last registration, their SIE status
                                              examination as specified in proposed                     operative date of the proposed rule                    in the CRD system would be
                                              Rule 1220.                                               change would be eligible to maintain                   administratively terminated. Similar to
                                                Further, proposed 1210.03 provides                     those registrations without being subject              the current process for registration,
                                              that if the job functions of a registered                to any additional requirements.                        firms would continue to use the CRD
                                              representative other than an individual                  Individuals who had been registered                    system to request registrations for
                                              registered as an Order Processing                        within the past two years prior to the                 representatives. An individual would be
                                              Assistant Representative, change and he                  operative date of the proposed rule                    able to schedule both the SIE and
                                              or she needs to become registered in                     change would also be eligible to                       specialized knowledge examinations for
                                              another representative-level category, he                maintain those registrations without                   the same day, provided the individual is
                                              or she would not need to pass the SIE                    being subject to any additional                        able to reserve space at one of FINRA’s
                                              again. Rather, the registered person                     requirements, provided that they                       designated testing centers.
                                              would need to pass only the appropriate                  reregister with the Exchange within two                   Finally, under current Rule 615, the
                                              representative-level qualification                       years from the date of their last                      Exchange may, in exceptional cases and
                                              examination.24 Thus under the                            registration.                                          where good cause is shown, waive the
                                              proposed rule change, individuals                          Further, registered representatives                  applicable qualification examination
                                              seeking registration in two or more                      other than an individual registered as an              and accept other standards as evidence
                                              representative-level categories would                    Order Processing Assistant                             of an applicant’s qualifications for
                                              experience a net decrease in the total                   Representative, would be considered to                 registration. The Exchange is proposing
                                              number of exam questions they would                      have passed the SIE in the CRD system,                 to replace Rule 615 with proposed Rule
                                              be required to answer because the SIE                    and thus if they wish to register in any               1210.03 with changes that track FINRA
                                              content would be tested only once.                       other representative category after the                Rule 1210.03. The proposed rule
                                                The proposed rule change solely                        operative date of the proposed rule                    provides that the Exchange will only
                                              impacts the representative-level                         change, they could do so by taking only                consider examination waiver requests
                                              qualification requirements. The                          the appropriate specialized knowledge                  submitted by a firm for individuals
                                              proposed rule change does not change                     examination.25 However, with respect to                associated with the firm who are
                                              the scope of the activities permitted                    an individual who is not registered on                 seeking registration in a representative-
                                              under the existing representative                        the operative date of the proposed rule                or principal-level registration category.
                                              categories. For instance, after the                      change but was registered within the                   Moreover, proposed Rule 1210.03 states
                                              operative date of the proposed rule                      past two years prior to the operative                  that the Exchange will consider waivers
                                                                                                       date of the proposed rule change, the                  of the SIE alone or the SIE and the
                                              change, a previously unregistered
                                                                                                       individual’s SIE status in the CRD                     representative- and principal-level
                                              individual registering as a Securities
                                                                                                       system would be administratively                       examination(s) for such individuals.
                                              Trader for the first time would be
                                                                                                       terminated if such individual does not
                                              required to pass the SIE and an                                                                                 E. Requirements for Registered Persons
                                                                                                       register within four years from the date
                                              appropriate specialized knowledge                                                                               Functioning as Principals for a Limited
                                                                                                       of the individual’s last registration.26
                                              examination. However, such individual                      In addition, individuals, with the                   Period (Proposed Rule 1210.04)
                                              may engage only in those activities in                   exception of Order Processing Assistant                  Current Rule 611(d) provides that any
                                                                                                       Representatives, who had been                          person associated with a member
                                                 24 The exception for Order Processing Assistant

                                              Representatives and Foreign Associates was
                                                                                                       registered as representatives two or                   organization as a registered
                                              adopted by FINRA in FINRA Rule 1210.03, and is           more years, but less than four years,                  representative whose duties are changed
                                              included in proposed Exchange Rule 1210.03               prior to the operative date of the                     by the member organization so as to
                                              without the reference to Foreign Associates which        proposed rule change would also be                     require registration in any principal
                                              is a registration category the Nasdaq Affiliated                                                                classification is allowed a period of 90
                                              Exchanges do not recognize. FINRA has stated that
                                                                                                       considered to have passed the SIE and
                                              the SIE would assess basic product knowledge; the        designated as such in the CRD system.                  calendar days following the change in
                                              structure and function of the securities industry        Moreover, if such individuals re-register              his or her duties during which to pass
                                              markets, regulatory agencies and their functions;        with a firm after the operative date of                the appropriate qualification
                                              and regulated and prohibited practices. Proposed                                                                examination for principals. It further
                                              Rule 1210.03 provides that all associated persons,
                                                                                                       the proposed rule change and within
                                              such as associated persons whose functions are           four years of having been previously                   provides that any person not presently
                                              solely and exclusively clerical or ministerial, are      registered, they would only need to pass               associated with a member organization
                                              eligible to take the SIE. Proposed Rule 1210.03 also     the specialized knowledge examination                  as registered representative seeking
                                              provides that individuals who are not associated                                                                registration as a principal shall submit
                                              persons of firms, such as members of the general
                                                                                                       associated with that registration
                                              public, are eligible to take the SIE. FINRA has stated
                                                                                                                                                              the appropriate application for
                                              its belief that expanding the pool of individuals           25 Under the proposed rule change, only             registration and any required
                                              who are eligible to take the SIE would enable            individuals who have passed an appropriate             registration and examination fees. Such
                                              prospective securities industry professionals to         representative-level examination would be              person shall be allowed a period of 90
                                              demonstrate to prospective employers a basic level       considered to have passed the SIE. Registered
                                              of knowledge prior to submitting a job application.      principals who do not hold an appropriate              days after all applicable prerequisites
                                              Further, this approach would allow for more              representative-level registration would not be         are fulfilled to pass the appropriate
                                              flexibility and career mobility within the securities    considered to have passed the SIE. For example, an     qualification examination for principals.
                                              industry. While all associated persons of firms as       individual who is registered solely as a Financial     A person who has never been registered
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                                              well as individuals who are not associated persons       and Operations Principal (Series 27) today would
                                              would be eligible to take the SIE pursuant to            have to take the Series 7 to become registered as a    does not qualify for this exception. This
                                              proposed Rule 1210.03, passing the SIE alone             General Securities Representative. Under the           provision specifically applies to a
                                              would not qualify them for registration with the         proposed rule change, in the future, this individual   person associated with a member
                                              Exchange. Rather, to be eligible for registration with   would have to pass the SIE and the specialized         organization of another registered
                                              the Exchange, an individual would be required to         Series 7 examination to obtain registration as a
                                              pass an applicable representative or principal           General Securities Representative.                     national securities exchange or
                                              qualification examination and complete the other            26 As discussed below, the Exchange is proposing    association who is required to register in
                                              requirements of the registration process.                a four-year expiration period for the SIE.             a principal classification under


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                                              50986                      Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                              Exchange rules but who is not required                   in a principal classification under                    principles of trade, such as Exchange
                                              to be so registered under the rules of the               Exchange rules but who is not required                 Rule 707.30 Further, if the Exchange
                                              other exchange or association, as well as                to be so registered under the rules of the             determines that an associated person
                                              to a person associated with a member                     other exchange or association, as well as              has violated the SIE Rules of Conduct or
                                              organization who was not required to                     to a person associated with a member                   the Rules of Conduct for representative
                                              register with the Exchange as a principal                organization who was not required to                   and principal examinations, the
                                              prior to the adoption of Exchange Rule                   register with the Exchange as a Principal              associated person may forfeit the results
                                              611.                                                     prior to the adoption of Exchange Rule                 of the examination and may be subject
                                                 The Exchange is proposing to adopt                    611. The Exchange believes this                        to disciplinary action by the Exchange.
                                              these requirements of Rule 611(d) as                     language to be superfluous as the                        Proposed Rule 1210.05 also states that
                                              new Rule 1210.04, subject to certain                     applicability to various individuals of                the Exchange considers all of the
                                              changes. Proposed Rule 1210.04 states                    proposed Rule 1210.04 speaks for itself                qualification examinations’ content to
                                              that a member may designate any                          and requires no elaboration.28                         be highly confidential. The removal of
                                              person currently registered, or who                                                                             examination content from an
                                              becomes registered, with the member as                   F. Rules of Conduct for Taking                         examination center, reproduction,
                                              a representative to function as a                        Examinations and Confidentiality of                    disclosure, receipt from or passing to
                                              principal for a limited period, provided                 Examinations (Proposed Rule 1210.05)                   any person, or use for study purposes of
                                              that such person has at least 18 months                     Before taking an examination, FINRA                 any portion of such qualification
                                              of experience functioning as a registered                currently requires each candidate to                   examination or any other use that would
                                              representative within the five-year                      agree to the Rules of Conduct for taking               compromise the effectiveness of the
                                              period immediately preceding the                         a qualification examination. Among                     examinations and the use in any manner
                                              designation and has fulfilled all                        other things, the examination Rules of                 and at any time of the questions or
                                              prerequisite registration, fee and                       Conduct require each candidate to attest               answers to the examinations would be
                                              examination requirements prior to                        that he or she is in fact the person who               prohibited and would be deemed to be
                                              designation as principal. These                          is taking the examination. These Rules                 a violation of Exchange rules requiring
                                              requirements apply to any principal                      of Conduct also require that each                      observance of high standards of
                                              category, including those categories that                candidate agree that the examination                   commercial honor or just and equitable
                                              are not subject to a prerequisite                        content is the intellectual property of                principles of trade. Finally, proposed
                                              representative-level registration                        FINRA and that the content cannot be                   Rule 1210.05 would prohibit an
                                              requirement, such as the Financial and                   copied or redistributed by any means. If               applicant from receiving assistance
                                              Operations Principal registration                        FINRA discovers that a candidate has                   while taking the examination, and
                                              category.27 This change is intended to                   violated the Rules of Conduct for taking               require the applicant to certify that no
                                              ensure that representatives designated                   a qualification examination, the                       assistance was given to or received by
                                              to function as principals for the limited                candidate may forfeit the results of the               him or her during the examination.31
                                              period under the proposed rule have an                   examination and may be subject to
                                                                                                       disciplinary action by FINRA. For                      G. Waiting Periods for Retaking a Failed
                                              appropriate level of registered
                                                                                                       instance, for cheating on a qualification              Examination (Proposed Rule 1210.06)
                                              representative experience. The proposed
                                              rule clarifies that the requirements of                  examination, FINRA’s Sanction                             The Exchange proposes to adopt new
                                              the rule apply to any principal category,                Guidelines recommend a bar.29                          Rule 1210.06, which provides that a
                                              including those categories that are not                     Effective October 1, 2018, FINRA has                person who fails an examination may
                                              subject to a prerequisite representative-                codified the requirements relating to the              retake that examination after 30
                                              level registration requirement, such as                  Rules of Conduct for examinations                      calendar days from the date of the
                                              the Financial and Operations Principal                   under FINRA Rule 1210.05. FINRA also                   person’s last attempt to pass that
                                              registration category. Similarly, the rule               adopted Rules of Conduct for taking the                examination.32 Proposed Rule 1210.06
                                              would permit a member to designate                       SIE for associated persons and non-                    further provides that if a person fails an
                                              any person currently registered, or who                  associated persons who take the SIE.                   examination three or more times in
                                              becomes registered, with the member as                      The Exchange proposes to adopt its                  succession within a two-year period, the
                                              a principal to function in another                       own version of Rule 1210.05, which                     person is prohibited from retaking that
                                              principal category for a period of 120                   would provide that associated persons                  examination until 180 calendar days
                                              calendar days prior to passing an                        taking the SIE are subject to the SIE                  from the date of the person’s last
                                              appropriate qualification examination as                 Rules of Conduct, and that associated                  attempt to pass it. These waiting periods
                                              specified under Rule 1220. Proposed                      persons taking any representative or                   would apply to the SIE and the
                                              Rule 1210.04 would increase the                          principal examination are subject to the               representative- and principal-level
                                              existing rule’s 90 day period to 120                     Rules of Conduct for representative and                examinations.33
                                              days, to provide additional flexibility                  principal examinations. Under the
                                              for representatives functioning as                       proposed rule, a violation of the SIE                     30 Exchange Rule 707 prohibits members, member

                                                                                                       Rules of Conduct or the Rules of                       organizations or persons associated with or
                                              principals for a limited period of time.                                                                        employed by a member or member organization
                                                 The Exchange is not conserving in                     Conduct for representative and                         from engaging in acts or practices inconsistent with
                                              new Rule 1210.04 the language in                         principal examinations by an associated                just and equitable principles of trade. FINRA Rule
                                              existing Rule 611 that the provisions                    person would be deemed to be a                         1210.05 cites FINRA Rule 2010, which is a
                                              apply to a person associated with a                      violation of Exchange rules requiring                  comparable rule.
                                                                                                                                                                 31 The Exchange is not adopting portions of
                                              member organization of another                           observance of high standards of
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                                                                                                                                                              FINRA’s Rule 1210.05 which apply to non-
                                              registered national securities exchange                  commercial honor or just and equitable                 associated persons, over whom the Exchange would
                                              or association who is required to register                                                                      in any event have no jurisdiction.
                                                                                                          28 Proposed Rule 1210.04 omits FINRA Rule              32 Proposed Rule 1210.06 has no counterpart in

                                                27 Inthis regard, the Exchange notes that              1210.04’s reference to Foreign Associates, which is    existing Exchange rules.
                                              qualifying as a registered representative is currently   a registration category not recognized by the Nasdaq      33 FINRA Rule 1210.06 requires individuals

                                              a prerequisite to qualifying as a principal on the       Affiliated Exchanges, but otherwise tracks the         taking the SIE who are not associated persons to
                                              Exchange except with respect to the Financial and        language of FINRA Rule 1210.04.                        agree to be subject to the same waiting periods for
                                              Operations Principal registration category.                 29 See SR–FINRA–2017–007, pp. 26–27.                retaking the SIE. The Exchange is not including this



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                                                                        Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                            50987

                                              H. CE Requirements (Proposed Rule                       industry current.39 Therefore, the                     defined in turn in proposed Rule 1240
                                              1210.07)                                                Exchange is proposing Rule 1210.07, to                 as persons registered pursuant to Rule
                                                                                                      clarify that all ‘‘covered persons’’ as                1210.
                                                 Pursuant to current Exchange Rule                    defined in Rule 1240(a)(5), including
                                              640, no member organization shall                                                                              I. Lapse of Registration and Expiration
                                                                                                      those who solely maintain a permissive
                                              permit any registered person to continue                                                                       of SIE (Proposed Rule 1210.08)
                                                                                                      registration, are required to satisfy the
                                              to, and no registered person shall                      Regulatory Element, as specified in                       Existing Rule 611(c) states that any
                                              continue to, perform duties as a                        proposed new Rule 1240, discussed                      person whose registration has been
                                              registered person, unless such person                   below.40 Individuals who have passed                   revoked by the Exchange as a
                                              has complied with the continuing                        the SIE but not a representative or                    disciplinary sanction or whose most
                                              education requirements of paragraph (a)                 principal-level examination and do not                 recent registration as principal has been
                                              of Rule 640. Under the rule the CE                      hold a registered position would not be                terminated for two or more years
                                              requirements applicable to registered                   subject to any CE requirements.                        immediately preceding the date of
                                              persons consist of a Regulatory                         Consistent with current practice,                      receipt by the Exchange of a new
                                              Element 34 and a Firm Element.35 The                    proposed Rule 1210.07 would also                       application is required to pass a
                                              Regulatory Element applies to registered                provide that a registered person of a                  qualification examination for Principals
                                              persons and must be completed within                    member who becomes CE inactive                         appropriate to the category of
                                              prescribed time frames.36 For purposes                  would not be permitted to be registered                registration as specified in Rule 611.
                                              of the Regulatory Element, a ‘‘registered               in another registration category with                  The two year period is calculated from
                                              person’’ is defined in current Rule 640                 that member or be registered in any                    the termination date to the date the
                                              as any member, registered                               registration category with another                     Exchange receives a new application for
                                              representative or other person registered               member, until the person has satisfied                 registration. A comparable provision
                                              or required to be registered under                      the Regulatory Element.                                applicable to representatives is found in
                                              Exchange Rules, but does not include                       Individuals whose activities are                    Rule 613(c). The Exchange is proposing
                                              such person whose activities are limited                limited solely to the transaction of                   to delete existing Rules 611(c) and
                                              solely to the transaction of business on                business on the Exchange’s trading                     613(c), and to replace them with Rule
                                                                                                      floor, with members or registered                      1210.08, Lapse of Registration and
                                              the Exchange’s trading floor, with
                                                                                                      broker-dealers, would continue to be                   Expiration of SIE.
                                              members or registered broker-dealers.37                                                                           Proposed Rule 1210.08 contains
                                              The Firm Element consists of annual,                    excluded from the CE requirement.41
                                                                                                      Pursuant to proposed Rule 1260,                        language comparable to that of existing
                                              member-developed and administered                                                                              Rules 611(c) and 613(c) but also clarifies
                                              training programs designed to keep                      Section (c), members whose activities
                                                                                                      are limited to the Exchange’s options                  that, for purposes of the proposed rule,
                                              covered registered persons current                                                                             an application would not be considered
                                              regarding securities products, services                 trading floor and who are registered
                                                                                                      pursuant to proposed Rule 1260(a) as                   to have been received by the Exchange
                                              and strategies offered by the member.                                                                          if that application does not result in a
                                              For purposes of the Firm Element, the                   well as associated persons whose
                                                                                                      activities are limited to the Exchange’s               registration. Proposed Rule 1210.08 also
                                              term ‘‘covered registered persons’’ is                                                                         sets forth the expiration period of the
                                              defined as any registered person who                    options trading floor and who are
                                                                                                                                                             SIE. Based on the content covered on
                                              has direct contact with customers in the                registered pursuant to proposed Rule
                                                                                                                                                             the SIE, the Exchange is proposing that
                                              conduct of the member organization’s                    1260(b) would be exempt from the
                                                                                                                                                             a passing result on the SIE be valid for
                                              securities sales, trading or investment                 representative registration requirements
                                                                                                                                                             four years. Therefore, under the
                                              banking activities, and to the immediate                of proposed Rules 1210 and 1220. The
                                                                                                                                                             proposed rule change, an individual
                                              supervisors of such persons.38                          CE requirements of proposed Rule 1240
                                                                                                                                                             who passes the SIE and is an associated
                                                                                                      would apply only to ‘‘covered persons,’’
                                                 The Exchange proposes to delete                                                                             person of a firm at the time would have
                                              current Rule 640. The CE requirements                      39 The Exchange notes that Rule 625 also may
                                                                                                                                                             up to four years from the date he or she
                                              set forth in Rule 640 are proposed to be                require individuals who are not required to register   passes the SIE to pass a representative-
                                              reorganized and renumbered, and to be                   pursuant to Rule 1210 to complete mandatory            level examination to register as a
                                              adopted as new Rule 1240. The                           training. The rule provides that all members and       representative with that firm, or a
                                                                                                      persons employed by or associated with such            subsequent firm, without having to
                                              Exchange believes that all persons                      member or a member organization shall
                                              registered pursuant to Rule 1210,                       successfully complete mandatory training, as           retake the SIE. In addition, an
                                              regardless of their activities, should be               required by the Exchange. Training topics include,     individual who passes the SIE and is
                                              subject to the Regulatory Element of the                but are not limited to, training related to that       not an associated person at the time
                                                                                                      person’s function at the Exchange, changes in          would have up to four years from the
                                              CE requirements so that they can keep                   existing automated systems or any new technology
                                              their knowledge of the securities                       that is utilized by the Exchange, compliance with      date he or she passes the SIE to become
                                                                                                      Exchange Rules and federal securities laws, and        an associated person of a firm, pass a
                                              language in proposed Rule 1210.06, as the Exchange
                                                                                                      issues related to conduct, health and safety on the    representative-level examination and
                                                                                                      trading floor. In addition, floor members shall        register as a representative without
                                              will not apply the 1200 Series of rules in any event    complete mandatory training programs, on at least
                                              to individuals who are not associated persons of        a semi-annual basis, that address compliance with      having to retake the SIE.
                                              members.                                                the federal securities laws and the Exchange’s Rules      Moreover, an individual holding a
                                                 34 See Rule 640(a).
                                                                                                      in place to prevent and deter unlawful trading by      representative-level registration who
                                                 35 See Rule 640(b).
                                                                                                      floor members.                                         leaves the industry after the operative
                                                 36 Pursuant to Rule 640(a), each registered person      40 Current Rule 640 would be deleted, replaced by
                                                                                                                                                             date of the proposed rule change would
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                                              is required to complete the Regulatory Element on       proposed Rule 1240. Rule 1240(a)(5) would define
                                              the occurrence of their second registration             the term ‘‘covered person’’ as any person registered   have up to four years to re-associate
                                              anniversary date(s), and every three years thereafter   with the Exchange pursuant to Rule 1210, including     with a firm and register as a
                                              or as otherwise prescribed by the Exchange. On          any person who is permissively registered pursuant     representative without having to retake
                                              each occasion, the Regulatory Element must be           to Rule 1210.02, and any person who is designated
                                              completed within 120 days after the person’s
                                                                                                                                                             the SIE. However, the four-year
                                                                                                      as eligible for a waiver pursuant to Rule 1210.09.
                                              registration anniversary date.                             41 See existing Rule 640, Commentary .01, which     expiration period in the proposed rule
                                                 37 See Rule 640, Commentary .01.
                                                                                                      excludes such individuals from the term ‘‘registered   change extends only to the SIE, and not
                                                 38 See Rule 640(b)(1).                               person’’ as it is used in Rule 640.                    the representative- and principal-level


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                                              50988                     Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                              registrations. The representative- and                  or her initial designation as an FSA-                     Education (proposed to be renumbered
                                              principal-level registrations would                     eligible person, and not for any                          as Rule 1240).
                                              continue to be subject to a two year                    subsequent FSA designation(s).                               Upon registering an FSA-eligible
                                              expiration period as is the case today.                 Thereafter, the individual would be                       person, a firm would file a Form U4 and
                                                                                                      eligible for a waiver for up to seven                     request the appropriate registration(s)
                                              J. Waiver of Examinations for
                                              Individuals Working for a Financial                     years from the date of initial                            for the individual. The firm would also
                                              Services Industry Affiliate of a Member                 designation 45 provided that the other                    submit an examination waiver request
                                              (Proposed Rule 1210.09)                                 conditions of the waiver, as described                    to the Exchange,47 similar to the process
                                                                                                      below, have been satisfied.                               used today for waiver requests, and it
                                                 The Exchange is proposing Rule                       Consequently, a member other than the                     would represent that the individual is
                                              1210.09 to provide a new process                        member that initially designated an                       eligible for an FSA waiver based on the
                                              whereby individuals who would be                        individual as an FSA-eligible person                      conditions set forth below. The
                                              working for a financial services industry               may request a waiver for the individual                   Exchange would review the waiver
                                              affiliate of a member 42 would terminate                and more than one member may request                      request and make a determination of
                                              their registrations with the member and                 a waiver for the individual during the                    whether to grant the request within 30
                                              would be granted a waiver of their                      seven-year period.46                                      calendar days of receiving the request.
                                              requalification requirements upon re-                      An individual designated as an FSA-                    The Exchange would summarily grant
                                              registering with a member, provided the                 eligible person would be subject to the                   the request if the following conditions
                                              firm that is requesting the waiver and                  Regulatory Element of CE while working                    are met:
                                              the individual satisfy the criteria for a               for a financial services industry affiliate                  (1) Prior to the individual’s initial
                                              Financial Services Affiliate (‘‘FSA’’)                  of a member. The individual would be                      designation as an FSA-eligible person,
                                              waiver.43 The purpose of the FSA                        subject to a Regulatory Element program                   the individual was registered for a total
                                              waiver is to provide a firm greater                     that correlates to his or her most recent                 of five years within the most recent 10-
                                              flexibility to move personnel, including                registration category, and CE would be                    year period, including for the most
                                              senior and middle management,                           based on the same cycle had the                           recent year with the member that
                                              between the firm and its financial                      individual remained registered. If the                    initially designated the individual as an
                                              services affiliate(s) so that they may gain             individual fails to complete the                          FSA-eligible person;
                                              organizational skills and better                        prescribed Regulatory Element during                         (2) The waiver request is made within
                                              knowledge of products developed by the                  the 120-day window for taking the                         seven years of the individual’s initial
                                              affiliate(s) without the individuals                    session, he or she would lose FSA                         designation as an FSA-eligible person
                                              having to requalify by examination each                 eligibility (i.e., the individual would                   by a member;
                                              time they returned to the firm.                         have the standard two-year period after                      (3) The initial designation and any
                                                 Under the proposed waiver process,
                                                                                                      termination to re-register without                        subsequent designation(s) were made
                                              the first time a registered person is
                                                                                                      having to retake an examination). The                     concurrently with the filing of the
                                              designated as eligible for a waiver based
                                                                                                      Exchange is making corresponding                          individual’s related Form U5;
                                              on the FSA criteria, the member with
                                                                                                      changes to Rule 640, Continuing                              (4) The individual continuously
                                              which the individual is registered
                                                                                                                                                                worked for the financial services
                                              would notify the Exchange of the FSA                       45 Individuals would be eligible for a single, fixed   affiliate(s) of a member since the last
                                              designation. The member would                           seven-year period from the date of initial                Form U5 filing;
                                              concurrently file a full Form U5                        designation, and the period would not be tolled or           (5) The individual has complied with
                                              terminating the individual’s registration               renewed.
                                                                                                                                                                the Regulatory Element of CE; and
                                              with the firm, which would also                            46 The following examples illustrate this point:

                                                                                                         Example 1. Firm A designates an individual as an          (6) The individual does not have any
                                              terminate the individual’s other SRO
                                                                                                      FSA-eligible person by notifying the Exchange and         pending or adverse regulatory matters,
                                              and state registrations.                                files a Form U5. The individual joins Firm A’s            or terminations, that are reportable on
                                                 To be eligible for initial designation as            financial services affiliate. Firm A does not submit      the Form U4, and has not otherwise
                                              an FSA-eligible person by a member, an                  a waiver request for the individual. After working
                                                                                                      for Firm A’s financial services affiliate for three       been subject to a statutory
                                              individual must have been registered for
                                                                                                      years, the individual directly joins Firm B’s             disqualification while the individual
                                              a total of five years within the most                   financial services affiliate for three years. Firm B      was designated as an FSA-eligible
                                              recent 10-year period prior to the                      then submits a waiver request to register the             person with a member.
                                              designation, including for the most                     individual.
                                                                                                                                                                   Following the Form U5 filing, an
                                              recent year with that member.44 An                         Example 2. Same as Example 1, but the
                                                                                                      individual directly joins Firm B after working for        individual could move between the
                                              individual would have to satisfy these
                                                                                                      Firm A’s financial services affiliate, and Firm B         financial services affiliates of a member
                                              preconditions only for purposes of his                  submits a waiver request to register the individual       so long as the individual is
                                                                                                      at that point in time.
                                                 42 Proposed Rule 1210.09 defines a ‘‘financial                                                                 continuously working for an affiliate.
                                                                                                         Example 3. Firm A designates an individual as an
                                              services industry affiliate of a member’’ as a legal    FSA-eligible person by notifying the Exchange and         Further, a member could submit
                                              entity that controls, is controlled by or is under      files a Form U5. The individual joins Firm A’s            multiple waiver requests for the
                                              common control with a member and is regulated by        financial services affiliate for three years. Firm A      individual, provided that the waiver
                                              the SEC, Commodity Futures Trading Commission           then submits a waiver request to reregister the
                                              (‘‘CFTC’’), state securities authorities, federal or
                                                                                                                                                                requests are made during the course of
                                                                                                      individual. After working for Firm A in a registered
                                              state banking authorities, state insurance              capacity for six months, Firm A re-designates the         the seven-year period.48 An individual
                                              authorities, or substantially equivalent foreign        individual as an FSA-eligible person by notifying
                                              regulatory authorities.                                 FINRA and files a Form U5. The individual rejoins           47 The Exchange would consider a waiver of the
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                                                 43 There is no counterpart to proposed Rule          Firm A’s financial services affiliate for two years,      representative-level qualification examination(s),
                                              1210.09 in the Exchange’s existing rules. FINRA         after which the individual directly joins Firm B’s        the principal-level qualification examination(s) and
                                              Rule 1210.09 was recently adopted as a new waiver       financial services affiliate for one year. Firm B then    the SIE, as applicable.
                                              process for FINRA registrants, as part of the FINRA     submits a waiver request to register the individual.        48 For example, if a member submits a waiver
                                              Rule Changes.                                              Example 4. Same as Example 3, but the                  request for an FSA-eligible person who has been
                                                 44 For purposes of this requirement, a five year     individual directly joins Firm B after the second         working for a financial services affiliate of the
                                              period of registration with the Exchange, with          period of working for Firm A’s financial services         member for three years and re-registers the
                                              FINRA or with another self-regulatory organization      affiliate, and Firm B submits a waiver request to         individual, the member could subsequently file a
                                              would be sufficient.                                    register the individual at that point in time.            Form U5 and re-designate the individual as an FSA-



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                                                                        Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                                50989

                                              who has been designated as an FSA-                      Exchange for any person who is no                          securities business, such as supervision,
                                              eligible person by a member would not                   longer active in the member                                solicitation, conduct of business or the
                                              be able to take additional examinations                 organization’s investment banking or                       training of persons associated with a
                                              to gain additional registrations while                  securities business, who is no longer                      member organization for any of these
                                              working for a financial services affiliate              functioning in the registered capacity, or                 functions. The Exchange is proposing to
                                              of a member.                                            where the sole purpose is to avoid an                      streamline and adopt Rule 611(b) as
                                              K. Status of Persons Serving in the                     examination requirement. The rules also                    Rule 1220(a)(1).
                                              Armed Forces of the United States                       prohibit a member organization from                           For the reason discussed above in
                                              (Proposed Rule 1210.10)                                 applying for the registration of a person                  connection with proposed Rule 1210,
                                                                                                      as representative or principal where the                   proposed Rule 1220(a)(1) would not
                                                Current Rule 53, Inactive Status of                   member organization does not intend to                     apply to individuals who are not
                                              Currently Registered Persons, provides                  employ the person in its investment                        engaged in the management of the
                                              specific relief to registered persons                   banking or securities business. These                      member’s securities business even if
                                              serving in the Armed Forces of the                      prohibitions do not apply to the current                   they are engaged in the management of
                                              United States. Among other things, the                  permissive registration categories                         the member’s investment banking
                                              rule permits a registered person of a                   identified in Rules 611(a) and 613(a).50                   business. Proposed Rule 1220(a)(1)
                                              member or member organization who                         In light of proposed Rule 1210.02,                       clarifies that a member’s chief executive
                                              volunteers for or is called into active                 Permissive Registrations, discussed                        officer (‘‘CEO’’) and chief financial
                                              duty in the Armed Forces of the United                  above the Exchange is proposing to                         officer (‘‘CFO’’) (or equivalent officers)
                                              States to be placed, after proper                       delete these provisions of Rule 611(a)                     are considered principals based solely
                                              notification to the Exchange, upon                      and 613(a) and instead adopt Rule                          on their status. The proposed rule
                                              inactive status and remain eligible to                  1210.11 prohibiting a member from                          further clarifies that the term
                                              receive ongoing transaction-related                     registering or maintaining the                             ‘‘principal’’ includes any other
                                              compensation. The rule also includes                    registration of a person unless the
                                              specific provisions regarding the                                                                                  associated person who is performing
                                                                                                      registration is consistent with the                        functions or carrying out
                                              deferment of the lapse of registration                  requirements of proposed Rule 1210.51
                                              requirements in Rules 611, 613 and                                                                                 responsibilities that are required to be
                                              3228 for formerly registered person                     M. Registration Categories (Proposed                       performed or carried out by a principal
                                              serving in the Armed Forces of the                      Rule 1220)                                                 under Exchange rules. In addition, the
                                              United States.                                                                                                     proposed rule provides that the phrase
                                                                                                        The Exchange is proposing to adopt                       ‘‘actively engaged in the management of
                                                The Exchange is proposing to adopt                    new and revised registration category
                                              Rule 53 as Rule 1210.10 with certain                                                                               the member’s securities business’’
                                                                                                      rules and related definitions in                           includes the management of, and the
                                              changes. To enhance the efficiency of                   proposed Rule 1220, Registration
                                              the current notification process for                                                                               implementation of corporate policies
                                                                                                      Categories.52                                              related to, such business as well as
                                              registered persons serving in the Armed
                                              Forces, proposed Rule 1210.10 requires                  1. Definition of Principal (Proposed                       managerial decision-making authority
                                              that the member with which such                         Rule 1220(a)(1))                                           with respect to the member’s securities
                                              person is registered promptly notify the                                                                           business and management-level
                                                                                                         Current Rule 611(b) defines
                                              Exchange of such person’s return to                                                                                responsibilities for supervising any
                                                                                                      ‘‘principal’’ to include sole proprietors,
                                              employment with the member. A sole                                                                                 aspect of such business, such as serving
                                                                                                      officers, partners, managers of offices of
                                              proprietor must similarly notify the                                                                               as a voting member of the member’s
                                                                                                      supervisory jurisdiction and directors
                                              Exchange of his or her return to                                                                                   executive, management or operations
                                                                                                      who are actively engaged in the
                                              participation in the securities business.                                                                          committees.
                                                                                                      management of the member
                                              Further, proposed Rule 1210.10                          organization’s investment banking or                       2. General Securities Principal
                                              provides that the Exchange would also                                                                              (Proposed Rule 1220(a)(2))
                                              defer the lapse of the SIE for formerly                    50 Rules 611(a) allows for permissive principal

                                              registered persons serving in the Armed                 registration of individuals who perform legal,               Current Rule 612(a) currently requires
                                              Forces of the United States.49                          compliance, internal audit, back-office operations,        that an associated person who meets the
                                                                                                      or similar duties for the member organization or a         definition of ‘‘principal’’ under Rule 611
                                              L. Impermissible Registrations                          person engaged in the investment banking or
                                                                                                                                                                 and each person designated as Chief
                                              (Proposed Rule 1210.11)                                 securities business of a foreign securities affiliate or
                                                                                                      subsidiary of the member organization. Rule 613(a)         Compliance Officer (‘‘CCO’’) on
                                                Existing Rule 611(a) and 613(a)                       permits permissive registration as a representative        Schedule A of the member’s Form BD
                                              prohibit a member organization from                     of an individual who performs legal, compliance,           (Uniform Application for Broker-Dealer
                                                                                                      internal audit, back-office operations, or similar
                                              maintaining a principal or                              responsibilities for the member organization, or a
                                                                                                                                                                 Registration) register as a General
                                              representative registration with the                    person who performs administrative support                 Securities Principal. A person
                                                                                                      functions for registered personnel, or a person            registering as a General Securities
                                              eligible person. Moreover, if the individual works      engaged in the investment banking or securities            Principal must pass the General
                                              with a financial services affiliate of the member for   business of a foreign securities affiliate or
                                                                                                      subsidiary of the member organization.
                                                                                                                                                                 Securities Principal examination. The
                                              another three years, the member could submit a
                                              second waiver request and re-register the individual       51 As discussed above, the Exchange is also             rule, however, provides that such
                                              upon returning to the member.                           proposing Rule 1210, Supplementary Material .12,           person is not required to register as a
                                                 49 Proposed Rule 1210.10 tracks FINRA Rule           Application for Registration and Jurisdiction, which       General Securities Principal if the
                                              1210.10 except for the statement that inactive          is not included in FINRA Rule 1210. Proposed               person’s activities are so limited as to
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                                              registered persons are not to be included within the    Exchange Rule 1210, Supplementary Material .12,
                                              definition of ‘‘Personnel’’ for purposes of dues or     is based upon portions of existing Nasdaq Rule             qualify such person for one or more of
                                              assessments as provided in Article VI of the FINRA      1031.                                                      the limited principal categories
                                              By-Laws. Instead, proposed Rule 1210.10                    52 For ease of reference, the Exchange proposes to      specified in Rules 611(b)–(e). Further,
                                              incorporates language from existing Nasdaq and BX       adopt as Rule 1220, Supplementary Material .07, in         the rule does not preclude individuals
                                              IM–1002–2, stating that inactive persons under the      chart form, a Summary of Qualification
                                              rule are not included within the scope of fees, if      Requirements in chart form for each of the
                                                                                                                                                                 registered in a limited principal
                                              any, charged by the Exchange with respect to            Exchange’s permitted registration categories               category from registering as General
                                              registered persons.                                     discussed below.                                           Securities Principals. Rule 612(a) also


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                                              50990                     Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                              includes transitioning and                              1220(a)(2)(B) provide that, subject to the                3. Compliance Official (Proposed Rule
                                              grandfathering provisions for CCO’s.                    lapse of registration provisions in                       1220(a)(3))
                                                 Rule 612(a) requires individuals                     proposed Rule 1210.08, General                               Current Rule 612(a) provides that
                                              seeking to register and qualify as a                    Securities Principals who obtained the                    each person designated as a Chief
                                              General Securities Principal, prior to or               Corporate Securities Representative                       Compliance Officer on Schedule A of
                                              concurrent with such registration, to                   prerequisite registration on the                          Form BD of a member organization to
                                              become registered as a General                          Exchange in lieu of the General                           which Rule 611 applies, be required to
                                              Securities Representative. It also                      Securities Representative prerequisite                    register with the Exchange as a General
                                              includes a grandfathering provision for                 registration and individuals who had                      Securities Principal and shall pass the
                                              persons who were registered as                          been registered as such within the past                   Series 24 examination before such
                                              principals before the adoption of the                   two years prior to the operative date of                  registration may become effective,
                                              General Securities Principal registration               the proposed rule change, may continue                    unless such person’s activities are so
                                              category. Finally, it provides that an                                                                            limited as to qualify such person for one
                                                                                                      to supervise corporate securities
                                              associated person registered solely as a                                                                          or more of the limited categories of
                                                                                                      activities as currently permitted.55
                                              General Securities Principal is not                                                                               principal registration specified Rule
                                              qualified to function as a Limited                      Proposed Rule 1220(a)(2)(B) requires all
                                                                                                      other individuals registering as General                  612(b)–(e).58 The Exchange proposes to
                                              Principal—Financial and Operations,                                                                               delete this provision.
                                              Limited Principal—General Securities                    Securities Principals after October 1,
                                                                                                      2018, to first become registered as a                        In its place, the Exchange proposes to
                                              Sales Supervisor or Securities Trader                                                                             adopt Rule 1220(a)(3) providing that
                                              Principal.                                              General Securities Representative
                                                                                                                                                                each person designated as a Chief
                                                 The Exchange is proposing to more                    pursuant to Rule 1220(b)(2).56
                                                                                                                                                                Compliance Officer on Schedule A of
                                              clearly set forth the obligation to register               The Exchange is also proposing to                      Form BD shall be required to register
                                              as a General Securities Principal.                      eliminate the grandfathering provision                    with the Exchange as a General
                                              Specifically, proposed Rule                             for individuals who were registered as                    Securities Principal, provided that such
                                              1220(a)(2)(A) states that each principal                principals prior to the adoption of the                   person may instead register as a
                                              as defined in proposed Rule 1220(a)(1)                  General Securities Principal registration                 Compliance Official if his or her duties
                                              is required to register with the Exchange               category because it no longer has any                     do not include supervision of trading.
                                              as a General Securities Principal, except               practical application. Finally, the                       All individuals registering as
                                              that if a principal’s activities are limited            Exchange is proposing to delete the                       Compliance Official would be required,
                                              to the functions of a Compliance                        provision that persons eligible for                       prior to or concurrent with such
                                              Official, a Financial and Operations                    registration in other principal categories                registration, to pass the Compliance
                                              Principal, a Securities Trader Principal,                                                                         Official qualification examination. An
                                                                                                      are not precluded from registering as
                                              a Securities Trader Compliance Officer,                                                                           individual designated as a Chief
                                                                                                      General Securities Principals because it
                                              or a Registered Options Principal, then                                                                           Compliance Officer on Schedule A of
                                              the principal shall appropriately register              is superfluous.57
                                                                                                                                                                Form BD of a member that is engaged
                                              in one or more of these categories.53                                                                             in limited securities business could also
                                                                                                        55 The Exchange itself does not recognize the
                                              Proposed Rule 1220(a)(2)(A) further                                                                               be registered in a principal category
                                                                                                      Corporate Securities Representative registration
                                              provides that if a principal’s activities               category, but understands that FINRA and Nasdaq           under Rule 1220(a) that corresponds to
                                              are limited solely to the functions of a                currently accept Corporate Securities                     the limited scope of the member’s
                                              General Securities Sales Supervisor,                    Representative registration as a prerequisite to          business.
                                              then the principal may appropriately                    General Securities Principal registration.
                                                                                                        56 The Exchange is not adopting the FINRA Rule
                                                                                                                                                                   Additionally, Rule 1220(a)(3) would
                                              register in that category in lieu of                                                                              provide that an individual designated as
                                                                                                      1220(a)(2)(B) language permitting an individual
                                              registering as a General Securities                     registering as a General Securities Principal after       a Chief Compliance Officer on Schedule
                                              Principal, provided that if the principal               October 1, 2018 to register as a General Securities       A of Form BD may register and qualify
                                              is engaged in options sales activities he               Sales Supervisor and to pass the General Securities       as a Securities Trader Compliance
                                              or she would be required to register as                 Principal Sales Supervisor Module qualification
                                                                                                                                                                Officer if, with respect to transactions in
                                              a General Securities Sales Supervisor or                examination. The Exchange believes that
                                                                                                      individuals registering as General Securities             equity, preferred or convertible debt
                                              as a Registered Options Principal.54                    Principals should be required to demonstrate their        securities, or options such person is
                                                 Proposed Rule 1220(a)(2)(B) requires                 competence for that role by passing the General           engaged in proprietary trading, the
                                              that an individual registering as a                     Securities Principal qualification examination.           execution of transactions on an agency
                                              General Securities Principal satisfy the                  57 Proposed Rule 1220(a)(2) generally tracks
                                                                                                                                                                basis, or the direct supervision of such
                                              General Securities Representative                       FINRA Rule 1220(a)(2), except that it omits
                                                                                                      references to a number of registration categories
                                                                                                                                                                activities other than a person associated
                                              prerequisite registration and pass the                  which FINRA recognizes but that the Exchange              with a member whose trading activities
                                              General Securities Principal                            does not, and it includes a reference to the              are conducted principally on behalf of
                                              qualification examination.                              Securities Trader Compliance Officer category             an investment company that is
                                                 In conjunction with the elimination of               which the Exchange proposes to recognize, but
                                                                                                                                                                registered with the SEC pursuant to the
                                              the Corporate Securities Representative                 which FINRA does not. Additionally, proposed
                                                                                                      Rule 1220(a)(2)(A)(i) extends that provision’s            Investment Company Act and that
                                              registration category by FINRA, the                     exception to the General Securities Principal             controls, is controlled by, or is under
                                              Exchange is proposing that Rule                         registration requirement to certain principals whose      common control with a member. All
                                                                                                      activities are ‘‘limited to’’ (rather than ‘‘include’’)   individuals registering as Securities
                                                 53 The Exchange is proposing to recognize the        the functions of a more limited principal. The
                                                                                                                                                                Trader Compliance Officers would be
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                                              Compliance Official and Securities Trader               Exchange believes that activities ‘‘limited to’’
                                              Compliance Officer registration categories for the      expresses the intent of that exception more               required to first become registered
                                              first time as a result of this proposed rule change.    accurately than activities that ‘‘include.’’ Finally,
                                                 54 The Exchange’s proposed Rule 1220(a)(2)(A)        proposed Rule 1220(a)(2)(B) specifies that                  58 The limited registration categories identified in

                                              deviates somewhat from the counterpart FINRA            registration as a Corporate Securities Representative     Rule 612(b)–(e) are Limited Principal—Financial
                                              rule in that it does not offer various limited          must be with the Exchange in order to fulfill the         and Operations, Limited Principal—General
                                              registration categories provided for in FINRA’s new     Corporate Securities Representative registration          Securities Sales Supervisor, Limited Principal—
                                              Rule 1220(a)(2)(A). It therefore proposes to reserve    prerequisite for General Securities Principal             Registered Options Principal, and Securities Trader
                                              Rules 1220(a)(2)(A)(ii) and (iv).                       registration pursuant to that rule.                       Principal.



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                                                                         Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                                     50991

                                              pursuant to paragraph (b)(4) as a                        5. Investment Banking Principal                       activities specified in proposed Rule
                                              Securities Trader, and to pass the                       (Proposed Rule 1220(a)(5))                            1220(b)(4) 62 register as a Securities
                                              Compliance Official qualification                           The Exchange does not recognize the                Trader Principal. The proposed rule
                                              exam.59                                                  Investment Banking Principal                          requires individuals registering as
                                                                                                       registration category and is reserving                Securities Trader Principals to be
                                              4. Financial and Operations Principal
                                              (Proposed Rule 1220(a)(4))                               Rule 1220(a)(5), retaining the caption                registered as Securities Traders and to
                                                                                                       solely to facilitate comparison with                  pass the General Securities Principal
                                                 Existing Rule 612(b) provides that                                                                          qualification examination.
                                              every member organization to which                       FINRA’s rules.
                                              Rule 611 applies and that is operating                   6. Research Principal (Proposed Rule                  8. Registered Options Principal
                                              pursuant to the provisions of SEC Rule                   1220(a)(6))                                           (Proposed Rules 1220(a)(8))
                                              15c3–1(a)(1)(ii), (a)(2)(i) or (a)(8) shall                 The Exchange does not recognize the                   Rule 612(d) provides that each person
                                              designate as Limited Principal—                          Research Principal registration category              associated with a member organization
                                              Financial and Operations those persons                   and is reserving Rule 1220(a)(6),                     to which Rule 611 applies and who is
                                              associated with it, at least one of whom                 retaining the caption solely to facilitate            included in the definition of principal
                                              shall be its chief financial officer, who                comparison with FINRA’s rules.                        in Rule 611 may register with the
                                              perform the duties described in Rule                                                                           Exchange as a Limited Principal—
                                              612(b)(ii).60 It requires each person                    7. Securities Trader Principal (Proposed              Registered Options Principal if: (A) His
                                              associated with a member organization                    Rule 1220(a)(7))                                      or her supervisory responsibilities in the
                                              who performs such duties to be                              Existing Rule 612(e) provides that                 investment banking and securities
                                              registered as a Limited Principal—                       each person associated with a member                  business are limited exclusively to the
                                              Financial and Operations with the                        who is included within the definition of              options activities of a member
                                              Exchange and to pass the Series 27                       principal in Rule 611(b) and who will                 organization, (B) he or she is registered
                                              examination before such registration                     have supervisory responsibility over the              pursuant to Exchange rules as a General
                                              may become effective.                                    securities trading activities described in            Securities Representative, and (C) he or
                                                 The Exchange is proposing to delete                   Rule 613(f) shall become qualified and                she is qualified to be so registered by
                                              Rule 612(b) and to adopt in its place                    registered as a Securities Trader                     passing the Series 4 examination. It also
                                              Rule 1220(a)(4), substituting the word                   Principal. To qualify for registration as             provides that a person registered in this
                                              ‘‘and’’ for the current word ‘‘or’’ found                a Securities Trader Principal, such                   category solely on the basis of having
                                              in Rule 612(b)(ii)(F) in order to conform                person must become qualified and                      passed the Series 4 examination for
                                              to FINRA Rule 1220(a)(4)(A) in                           registered as a Securities Trader under               Limited Principal—Registered Options
                                              describing the duties of a Financial and                 Rule 613(f) and pass the General                      Principal shall not be qualified to
                                              Operations Principal.61                                  Securities Principal qualification                    function in a principal capacity with
                                                59 Proposed Rule 1220(a)(3) differs from FINRA
                                                                                                       examination. A person who is qualified                responsibility over any area of business
                                              Rule 1220(a)(3), Compliance Officer. The Exchange        and registered as a Securities Trader                 activity not described in paragraph
                                              does not recognize the Compliance Officer                Principal under this provision may only               (d)(i)(A).
                                              registration category. Similarly, FINRA does not         have supervisory responsibility over the                 The Exchange is proposing to delete
                                              recognize the Compliance Official or the Securities      Securities Trader activities specified in             Rule 612(d) and to adopt Rule
                                              Trader Compliance Officer registration categories
                                              which the Exchange proposes to recognize.                Rule 613(f), unless such person is                    1220(a)(8)(A), Registered Options
                                              However, FINRA Rule 1220(a)(3), like proposed            separately qualified and registered in                Principal, which would require under
                                              Rule 1220(a)(3), offers an exception pursuant to         another appropriate principal                         its section (a)(8)(A) that each member
                                              which a Chief Compliance Officer designated on           registration category, such as the                    that is engaged in transactions in
                                              Schedule A of Form BD may register in a principal
                                              category that corresponds to the limited scope of        General Securities Principal registration             options with the public to have at least
                                              the member’s business.                                   category. Conversely, a person who is                 one Registered Options Principal.63
                                                60 Those duties include (A) final approval and         registered as a General Securities                       In addition, each principal as defined
                                              responsibility for the accuracy of financial reports     Principal is not qualified to supervise               in paragraph (a)(1) of the rule who is
                                              submitted to any duly established securities                                                                   responsible for supervising a member’s
                                              industry regulatory body; (B) final preparation of
                                                                                                       the trading activities described in Rule
                                              such reports; (C) supervision of individuals who         613(f), unless such person has also                   options sales practices with the public
                                              assist in the preparation of such reports; (D)           become qualified and registered as a                  would be required to register with the
                                              supervision of and responsibility for individuals        Securities Trader under Rule 613(f) by                Exchange as a Registered Options
                                              who are involved in the actual maintenance of the                                                              Principal, subject to the following
                                              member organization’s books and records from
                                                                                                       passing the Securities Trader
                                              which such reports are derived; (E) supervision          qualification examination and become                  exception. If a principal’s options
                                              and/or performance of the member organization’s          registered as a Securities Trader                     activities are limited solely to those
                                              responsibilities under all financial responsibility      Principal.                                            activities that may be supervised by a
                                              rules promulgated pursuant to the provisions of the                                                            General Securities Sales Supervisor,
                                              Act; (F) overall supervision of and responsibility for
                                                                                                          The Exchange is proposing to delete
                                              the individuals who are involved in the                  Rule 612(e) and to adopt in its place                 then such person may register as a
                                              administration and maintenance of the member             Rule 1220(a)(7), Securities Trader                    General Securities Sales Supervisor
                                              organization’s back office operations; or (G) any        Principal. Proposed Rule 1220(a)(7)                   pursuant to paragraph (a)(10) of the Rule
                                              other matter involving the financial and operational                                                           in lieu of registering as a Registered
                                              management of the member organization. A person
                                                                                                       requires that a principal responsible for
                                              registered solely as a Limited Principal—Financial       supervising the securities trading                    Options Principal.64
                                              and Operations shall not be qualified to function in
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                                                                                                                                                                62 Proposed Rule 1220(b)(4), discussed below,
                                              a Principal capacity with responsibility over any        Financial and Operations Principal must register as
                                              other area of business activity.                         such with the Exchange. Further, as discussed         provides for registration in the representative-level
                                                61 FINRA Rule 1220(a)(4) differs from proposed         above, the Exchange is not adopting a Principal       ‘‘Securities Trader’’ category.
                                                                                                                                                                63 Proposed Rule 1220(a)(8) differs from FINRA
                                              Rule 1220(a)(4) in that it includes an Introducing       Financial Officer or Principal Operations Officer
                                              Broker-Dealer Financial and Operations Principal         requirement like FINRA Rule 1220(a)(4)(B), as it      Rule 1220(a)(8) in that it omits certain references to
                                              registration requirement. Additionally, proposed         believes the Financial and Operations Principal       other specific FINRA rules.
                                              Rule 1220(a)(4) contains a requirement, which the        requirement is sufficient. Finally, proposed Rule        64 Current Exchange Rule 1024, Conduct of

                                              FINRA rule does not, that each person associated         1220(a)(4)(B)(v) and (vi) contain minor wording       Accounts for Options Trading, provides that
                                              with a member who performs the duties of a               variations from the FINRA rule.                                                                    Continued




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                                              50992                     Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                                Pursuant to proposed Rule                             9. Government Securities Principal. [sic]              of firm or customer funds and/or
                                              1220(a)(8)(B), subject to the lapse of                  (Rule 1220(a)(9))                                      securities for purposes of SEC Rule
                                              registration provisions in Rule 1210.08,                  The Exchange does not recognize the                  15c3–3; or (5) supervision of overall
                                              each person registered as a Registered                  Government Securities Principal                        compliance with financial responsibility
                                              Options Principal on October 1, 2018                    registration category and is reserving                 rules for broker/dealers promulgated
                                              and each person who was registered as                                                                          pursuant to the provisions of the Act.
                                                                                                      Rule 1220(a)(9), retaining the caption
                                              a Registered Options Principal within                                                                          Rule 612(c)(iii) explains the purpose of
                                                                                                      solely to facilitate comparison with
                                              two years prior to October 1, 2018                                                                             the General Securities Sales Supervisor
                                                                                                      FINRA’s rules.
                                              would be qualified to register as a                                                                            registration category.
                                              Registered Options Principal without                    10. General Securities Sales Supervisor                   The Exchange is proposing to adopt
                                              passing any additional qualification                    (Proposed Rules 1220(a)(10) and                        Rule 612(c)(i) and (ii) and Rule
                                              examinations. All other individuals                     1220.04)                                               612(c)(iii), with changes, as Rules
                                              registering as Registered Options                          Current Rule 612(c) provides that                   1220(a)(10) and 1220.04, respectively.66
                                              Principals after October 1, 2018 would,                 each person associated with a member                   Rule 1220(a)(10), however, omits the
                                              prior to or concurrent with such                        organization to which Rule 611 applies                 current Rule 1022(g) prohibition against
                                              registration, be required to become                                                                            supervision of the origination and
                                                                                                      and who is included in the definition of
                                              registered pursuant to paragraph Rule                                                                          structuring of underwritings, as that
                                                                                                      Principal in Rule 611 may register with
                                              1220(b)(2) of the Rule as a General                                                                            activity does not fall within the new,
                                                                                                      the Exchange as a Limited Principal—
                                              Securities Representative and pass the                                                                         more limited scope of ‘‘securities
                                                                                                      General Securities Sales Supervisor if:
                                              Registered Options Principal                                                                                   trading’’ covered by the new 1200 Series
                                                                                                      (A) His or her supervisory
                                              qualification examination.65                                                                                   of rules.
                                                                                                      responsibilities in the investment
                                                                                                      banking and securities business are                       Each person seeking to register as a
                                              members, member organizations and individuals                                                                  General Securities Sales Supervisor
                                              associated with member organizations shall not be       limited to the securities sales activities
                                              approved to transact options business with the          of a member organization, including the                would be required, prior to or
                                              public until such persons, who are designated as        training of sales and sales supervisory                concurrent with such registration, to
                                              Options Principals, have been approved by and
                                                                                                      personnel and the maintenance of                       become registered pursuant to Rule
                                              registered with the Exchange. Further, persons                                                                 1220(b)(2) of the rule as a General
                                              engaged in the supervision of options sales practice    records of original entry and/or ledger
                                              or a person to whom the designated general partner      accounts of the member organization                    Securities Representative and pass the
                                              or executive officer (pursuant to Rule 1025) or         required to be maintained in branch                    General Securities Sales Supervisor
                                              another Registered Options Principal delegates the
                                                                                                      offices by SEC record keeping rules; (B)               qualification examinations.
                                              authority to supervise options sales practices shall
                                              be designated as options principals. Rule 1024,         he or she is registered pursuant to                    11. Investment Company and Variable
                                              Commentary .06 provides that individuals engaged        Exchange Rules as a General Securities                 Contracts Products Principal and Direct
                                              in the supervision of options sales practices and       Representative; and (C) he or she is
                                              designated as Options Principals are required to                                                               Participation Programs Principal (Rules
                                              qualify as an Options Principal by passing the          qualified to be so registered by passing               1220(a)(11) and (a)(12))
                                              Registered Options Principal Qualification              the Series 9 or Series 10 examination.
                                              Examination (Series 4) or the Sales Supervisor          Under the rule a person registered in                    The Exchange does not recognize the
                                              Qualification Examination (Series 9/10), and is         this category solely on the basis of                   Investment Company and Variable
                                              proposed to be deleted in view of new Rule
                                                                                                      having passed the Series 9 or Series 10                Contracts Products Principal and the
                                              1220(a)(8)(a). Under Rule 1024.07, individuals who
                                              are delegated responsibility pursuant to Rule 1025      examination for Limited Principal—                     Direct Participation Programs Principal
                                              for the acceptance of discretionary accounts, for       General Securities Sales Supervisor is                 registration categories and is reserving
                                              approving exceptions to a member’s criteria or
                                                                                                      not qualified to: (A) Function in a                    Rule 1220(a)(11) and (a)(12), retaining
                                              standards for uncovered options accounts, and for                                                              the captions solely to facilitate
                                              approval of communications, shall be designated as      Principal capacity with responsibility
                                              Options Principals and are required to qualify as an    over any area of business activity not                 comparison with FINRA’s rules.
                                              Options Principal by passing the Registered Options     described in paragraph (c)(i)(A); (B) be               12. Private Securities Offerings
                                              Principal Qualification Examination (Series 4).
                                              Further, Exchange Rule 1024.08 states that a person
                                                                                                      included for purposes of the Principal                 Principal (Rule 1220(a)(13))
                                              accepting orders from non-member customers              numerical requirements of Rule 611(e);
                                                                                                                                                               The Exchange does not recognize the
                                              (unless such customer is a broker-dealer registered     or (C) perform for a member
                                              with the Securities and Exchange Commission) is                                                                Private Securities Offerings Principal
                                                                                                      organization any or all of the following
                                              required to register with the Exchange and to be                                                               registration category and is reserving
                                                                                                      activities: (1) Supervision of the
                                              qualified by passing the General Securities                                                                    Rule 1220(a)(13), retaining the caption
                                              Registered Representative Examination (Series 7).       origination and structuring of
                                                                                                                                                             solely to facilitate comparison with
                                              Except for Rule 1024, Commentary .06, the               underwritings; (2) supervision of market
                                              foregoing provisions of Rule 1024 are specific to                                                              FINRA’s rules.
                                                                                                      making commitments; (3) final approval
                                              conducting an options business with the public and
                                              are not proposed to be amended in this proposed
                                                                                                      of advertisements as these are defined in                66 The Exchange is not proposing to carry over
                                              rule change. However, Rule 1024(a) also contains        Rule 605; (4) supervision of the custody               into proposed Rule 1220(a)(10) the current Rule
                                              provisions regarding submission of Forms U4 and                                                                612(c)(ii)(C)(3) prohibition against final approval of
                                              U5 to WebCRD that are duplicative of the proposed       futures products before such person engages in         advertisements by General Securities Sales
                                              1200 Series of rules, in particular proposed Rules      security futures activities. Unlike FINRA Rule         Supervisors. The Exchange notes that FINRA
                                              1210.12, Application for Registration and               1220.02, proposed Exchange Rule 1220.02 omits          removed this prohibition several years ago from
                                              Jurisdiction, and 1250, Electronic Filing               references to United Kingdom Securities                NASD Rule 1022(g) (Limited Principal—General
                                              Requirements for Electronic Forms, and are              Representatives and Canada Securities                  Securities Sales Supervisor) and NASD IM–1022–2
                                              therefore proposed to be deleted.                       Representatives, which are registration categories     (Limited Principal—General Securities Sales
                                                65 The Exchange is also proposing to adopt Rule       the Exchange does not recognize. In any event, the     Supervisor). See Securities Exchange Act Release
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                                              1220, Supplementary Material .02, which provides        Exchange does not currently offer security futures     No. 68918 (February 13, 2013), 78 FR 11925
                                              that each person who is registered with the             products for trading. In addition, the Exchange is     (February 20, 2013) (SR–FINRA–2013–014). Also,
                                              Exchange as a Registered Options Principal (or as       also proposing to adopt Rule 1220, Supplementary       unlike FINRA Rule 1220.04, proposed Exchange
                                              a General Securities Representative, Options            Material .03 which requires notification to the        Rule 1220.04 refers to ‘‘multiple exchanges’’ rather
                                              Representative, or General Securities Sales             Exchange in the event such person is terminated,       than listing the various exchanges where a sales
                                              Supervisor) shall be eligible to engage in security     resigns, becomes incapacitated or is otherwise         principal might be required to qualify in the
                                              futures activities as a principal provided that such    unable to perform the duties of a Registered Options   absence of the General Securities Sales Supervisor
                                              individual completes a Firm Element program as set      Principal, and imposes certain restrictions on the     registration category. It also omits FINRA internal
                                              forth in proposed Rule 1240 that addresses security     member’s options business in that event.               cross-references.



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                                                                        Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                                      50993

                                              13. Supervisory Analyst (Rule                           adopt new Rule 1220(b)(2), General                     16. Operations Professional, Securities
                                              1220(a)(14))                                            Securities Representative. Proposed                    Trader, Investment Banking
                                                The Exchange does not recognize the                   Rule 1220(b)(2)(A) states that each                    Representative, Research Analyst,
                                              Supervisory Analyst registration                        representative as defined in proposed                  Investment Company and Variable
                                              category and is reserving Rule                          Rule 1220(b)(1) is required to register                Contracts Products Representative,
                                              1220(a)(14), retaining the caption solely               with the Exchange as a General                         Direct Participation Programs
                                              to facilitate comparison with FINRA’s                   Securities Representative, subject to the              Representative and Private Securities
                                              rules.                                                  exception that if a representative’s                   Offerings Representative (Rules
                                                                                                      activities include the functions of a                  1220(b)(3), 1220(b)(4), 1220(b)(5),
                                              14. Definition of Representative                                                                               1220(b)(6), 1220(b)(7), 1220(b)(8),
                                              (Proposed Rule 1220(b)(1))                              Securities Trader, as specified in Rule
                                                                                                                                                             1220(b)(9) and 1220.05)
                                                                                                      1220(b)(2), then such person shall
                                                 Current Rule 1(a)(ee) defines                        appropriately register as a Securities                    Operations Professional, Investment
                                              ‘‘Representative’’ as a member or an                    Trader.                                                Banking Representative, Research
                                              associated person of a registered broker                                                                       Analyst, Investment Company and
                                              or dealer, including assistant officers                    Further, consistent with the proposed               Variable Products Representative, Direct
                                              other than principals, who is engaged in                restructuring of the representative-level              Participation Programs Representative
                                              the investment banking or securities                    examinations, proposed Rule                            and Private Securities Offerings
                                              business for the member organization                    1220(b)(2)(B) would require that                       Representative. The Exchange does not
                                              including the functions of supervision,                 individuals registering as General                     recognize these registration categories
                                              solicitation or conduct of business in                  Securities Representatives pass the SIE                for its associated persons. The Exchange
                                              securities or who is engaged in the                     and the General Securities                             is therefore reserving Rules 1220(b)(3)—
                                              training of persons associated with a                   Representative examination except that                 Operations Professional, and related
                                              broker or dealer for any of these                       individuals registered as a General                    Rule 1220.05, Scope of Operations
                                              functions.                                              Securities Representatives within two                  Professional Requirement; 1220(b)(5)—
                                                 The Exchange now proposes to amend                   years prior to October 1, 2018 would be                Investment Banking Representative;
                                              Exchange Rule 1(a)(ee) to incorporate by                qualified to register as General                       1220(b)(6)—Research Analyst;
                                              reference a new definition of                                                                                  1220(b)(7)—Investment Company and
                                                                                                      Securities Representatives without
                                              ‘‘representative’’ in proposed Rule                                                                            Variable Products Representative;
                                                                                                      passing any additional qualification
                                              1220(b)(1). Proposed 1220(b)(1) would                                                                          1220(b)(8)—Direct Participation
                                              define the term representative as any                   examinations.68
                                                                                                                                                             Programs Representative; and
                                              person associated with a member,                           In addition, the Exchange is                        1220(b)(9)—Private Securities Offerings
                                              including assistant officers other than                 proposing to adopt Rule 1220.01 to                     Representative, retaining the captions
                                              principals, who is engaged in the                       provide individuals who are associated                 for each of them solely to facilitate
                                              member’s securities business, such as                   persons of firms and who hold foreign                  comparison with FINRA’s rules.
                                              supervision, solicitation, conduct of                   registrations an alternative, more                        Securities Trader—Proposed Rule
                                              business in securities or the training of               flexible, process to obtain an Exchange                1220(b)(4). Pursuant to current
                                              persons associated with a member for                    representative-level registration. The                 Exchange Rule 613(f)(1) and (2),
                                              any of these functions.                                 Exchange believes that there is                        associated persons must pass the
                                              15. General Securities Representative                   sufficient overlap between the SIE and                 qualification examination for Securities
                                              (Proposed Rule 1220(b)(2))                              these foreign qualification requirements               Trader (the Series 57 examination) and
                                                                                                      to permit them to act as exemptions to                 register with the Exchange as a
                                                Under Rule 613(a), except for                                                                                Securities Trader if, with respect to
                                              members whose activities are limited to                 the SIE. Under proposed Rule 1220.01,
                                                                                                      individuals who are in good standing as                transactions in equity, preferred or
                                              the Exchange’s options trading floor and                                                                       convertible debt securities, or foreign
                                              who are registered pursuant to Rule                     representatives with the Financial
                                                                                                      Conduct Authority in the United                        currency options on the Exchange, such
                                              620(a) as well as associated persons                                                                           person is engaged in proprietary trading,
                                              whose activities are limited to the                     Kingdom or with a Canadian stock
                                                                                                      exchange or securities regulator would                 the execution of transactions on an
                                              Exchange’s options trading floor and                                                                           agency basis, or the direct supervision
                                              who are registered pursuant to Rule                     be exempt from the requirement to pass
                                                                                                                                                             of such activities, other than any person
                                              620(b), all persons engaged or to be                    the SIE, and thus would be required
                                                                                                                                                             associated with a member whose trading
                                              engaged in the investment banking or                    only to pass a specialized knowledge                   activities are conducted principally on
                                              securities business of a member                         examination to register with the                       behalf of an investment company that is
                                              organization who are to function as                     Exchange as a representative. The                      registered with the Commission
                                              representatives shall be registered as                  proposed approach would provide                        pursuant to the Investment Company
                                              such with the Exchange through                          individuals with a United Kingdom or                   Act of 1940 and that controls, is
                                              WebCRD under PHLX in the category of                    Canadian qualification more flexibility                controlled by or is under common
                                              registration appropriate to the function                to obtain an Exchange representative-                  control, with the member.69
                                              to be performed as specified in                         level registration.                                       The Exchange now proposes to delete
                                              paragraph (e),67 Categories of
                                                                                                                                                             Exchange Rule 613(f) and to replace it
                                              Representative Registration—General
                                                                                                                                                             with proposed Rule 1220(b)(4).70 Rule
                                              Securities Representative or (f),
                                              Securities Trader.
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                                                                                                                                                                69 Rule 613(f)(3) provides that a person registered
                                                The Exchange proposes to delete                                                                              as a Securities Trader is not qualified to function
                                              those provisions of Rule 613(a) and to                                                                         in any other registration category, unless he or she
                                                                                                                                                             is also qualified and registered in such other
                                                                                                        68 Proposed Rule 1220(b)(2)(B) differs from
                                                 67 Rule 613(e) provides that individuals required                                                           registration category.
                                              to register with the Exchange as a General Securities   FINRA Rule 1220(b)(2)(B) in that it omits references      70 Proposed Rule 1220(b)(4)(A) differs from

                                              Representative under the rule must pass the Series      to various registration categories which FINRA         FINRA Rule 1220(b)(4)(A) in that it applies to
                                              7 examination before such registration may become       recognizes but which the Exchange does not             trading on the Exchange while the FINRA rule is
                                              effective.                                              propose to recognize.                                                                               Continued




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                                              50994                     Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                              1220(b)(4) would require each                           strategy. An algorithm that solely                     event of a significant modification to the
                                              representative as defined in Rule                       generates trading ideas or investment                  algorithm, members, likewise, would be
                                              1220(b)(1) of the rule to register with the             allocations—including an automated                     required to ensure that the associated
                                              Exchange as a Securities Trader if, with                investment service that constructs                     person primarily responsible for the
                                              respect to transactions in equity,                      portfolio recommendations—but that is                  significant modification (or the
                                              preferred or convertible debt securities,               not equipped to automatically generate                 associated person supervising or
                                              or options 71 such person is engaged in                 orders and order-related messages to                   directing such activity), is registered as
                                              proprietary trading, the execution of                   effectuate such trading ideas into the                 a Securities Trader.
                                              transactions on an agency basis, or the                 market—whether independently or via a                     A member employing an algorithm is
                                              direct supervision of such activities                   linked router—would not constitute an                  responsible for the algorithm’s activities
                                              other than a person associated with a                   algorithmic trading strategy.73                        whether the algorithm is designed or
                                              member whose trading activities are                        The associated persons covered by the               developed in house or by a third-party.
                                              conducted principally on behalf of an                   expanded registration requirement                      Thus, in all cases, robust supervisory
                                              investment company that is registered                   would be required to pass the requisite                procedures, both before and after
                                              with the SEC pursuant to the Investment                 qualification examination and be subject               deployment of an algorithmic trading
                                              Company Act and that controls, is                       to the same continuing education                       strategy, are a key component in
                                              controlled by, or is under common                       requirements that are applicable to                    protecting against problematic behavior
                                              control with a member. Rule 1220(b)(4)                  individual Securities Traders. The                     stemming from algorithmic trading. In
                                              would require individuals registering as                Exchange believes that potentially                     addition, associated persons responsible
                                              Securities Traders to pass the SIE as                   problematic conduct stemming from                      for monitoring or reviewing the
                                              well as the Securities Trader                           algorithmic trading strategies—such as                 performance of an algorithmic trading
                                              qualification exam.                                     failure to check for order accuracy,                   strategy must be registered, and a
                                                 Additionally, proposed Rule                          inappropriate levels of messaging traffic,             member’s trading activity must always
                                              1220(b)(4)(A) would require each person                 and inadequate risk management                         be supervised by an appropriately
                                              associated with a member who is: (i)                    controls—could be reduced or                           registered person. Therefore, even
                                              Primarily responsible for the design,                   prevented, in part, through improved                   where a firm purchases an algorithm off-
                                              development or significant modification                 education regarding securities                         the-shelf and does not significantly
                                              of an algorithmic trading strategy                      regulations for the specified individuals              modify the algorithm, the associated
                                              relating to equity, preferred or                        involved in the algorithm design and                   person responsible for monitoring or
                                              convertible debt securities or options; or              development process.                                   reviewing the performance of the
                                              (ii) responsible for the day-to-day                        The proposal is intended to ensure                  algorithm would be required to be
                                              supervision or direction of such                        the registration of one or more                        registered.
                                              activities to register with the Exchange                associated persons that possesses                         Pursuant to proposed Rule
                                              as a Securities Trader.72                               knowledge of, and responsibility for,                  1220(b)(4)(B) each person registered as a
                                                 For purposes of this proposed new                    both the design of the intended trading                Securities Trader on October 1, 2018
                                              registration requirement an ‘‘algorithmic               strategy and the technological                         and each person who was registered as
                                              trading strategy’’ is an automated system               implementation of the strategy,                        a Securities Trader within two years
                                              that generates or routes orders (or order-              sufficient to evaluate whether the                     prior to October 1, 2018 would be
                                              related messages) but does not include                  resulting product is designed to achieve               qualified to register as a Securities
                                              an automated system that solely routes                  regulatory compliance in addition to                   Trader without passing any additional
                                              orders received in their entirety to a                  business objectives. For example, a lead               qualification examinations. All other
                                              market center. The proposed registration                developer who liaises with a head trader               individuals registering as Securities
                                              requirement applies to orders and order                 regarding the head trader’s desired                    Traders after October 1, 2018 would be
                                              related messages whether ultimately                     algorithmic trading strategy and is                    required, prior to or concurrent with
                                              routed or sent to be routed to an                       primarily responsible for the                          such registration, to pass the SIE and the
                                              exchange or over the counter. An order                  supervision of the development of the                  Securities Trader qualification
                                              router alone would not constitute an                    algorithm to meet such objectives must                 examination.
                                              algorithmic trading strategy. However,                  be registered under the proposal as the                17. Eliminated Registration Categories
                                              an order router that performs any                       associated person primarily responsible                (Proposed Rule 1220.06)
                                              additional functions would be                           for the development of the algorithmic
                                                                                                      trading strategy and supervising or                       Proposed Rule 1220.06 has no
                                              considered an algorithmic trading
                                                                                                      directing the team of developers.                      practical relevance to the Exchange, but
                                                                                                      Individuals under the lead developer’s                 is included because the Nasdaq
                                              limited to the specified trading which is ‘‘effected
                                              otherwise than on a securities exchange.’’              supervision would not be required to                   Affiliated Exchanges are also proposing
                                              Additionally, the FINRA rule does not specifically      register under the proposal if they are                to adopt the new 1200 Series, on a
                                              extend to options trading.
                                                                                                      not primarily responsible for the                      uniform basis. Proposed Rule 1220.06
                                                71 Current Rule 613(f) refers to transactions in
                                                                                                      development of the algorithmic trading                 will be relevant to Nasdaq and BX
                                              foreign currency options. Proposed Rule 1220(b)(4)
                                              would instead refer to ‘‘options’’ generally, to        strategy or are not responsible for the                which, unlike the Exchange, are
                                              clarify that equity options as well as foreign          day-to-day supervision or direction of                 proposing to eliminate a number of
                                              currency options are products with respect to
                                                                                                      others on the team. Under this scenario,               existing registration categories that are
                                              which Securities Trader registration requirements                                                              not currently recognized by the
                                              would apply.                                            the person on the business side that is
                                                                                                                                                             Exchange.74
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                                                72 As noted above, this new registration              primarily responsible for the design of
                                              requirement was recently added to the FINRA             the algorithmic trading strategy, as                      Proposed Rule 1220.06 provides that,
                                              rulebook. The Exchange has determined to add a          communicated to the lead developer,                    subject to the lapse of registration
                                              parallel requirement to its own rules, but also to
                                                                                                      also would be required to register. In the             provisions in proposed Rule 1210.08,
                                              add options to the scope of products within the                                                                individuals who are registered with the
                                              proposed rule’s coverage. See Securities Exchange
                                              Act Release No. 77551 (April 7, 2016), 81 FR 21914        73 See Securities Exchange Act Release No. 77551     Exchange in any capacity recognized by
                                              (April 13, 2016) (Order Approving File No. SR–          (April 7, 2016), 81 FR 21914 (April 13, 2016) (Order
                                              FINRA–2016–007).                                        Approving File No. SR–FINRA–2016–007).                  74 See   SR–Nasdaq–2018–078.



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                                                                         Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                                   50995

                                              the Exchange immediately prior to                       solely and exclusively to the member                  Because exchanges have registration
                                              October 1, 2018, and each person who                    organization’s need for nominal                       categories other than the floor member
                                              was registered with the Exchange in                     corporate officers or for capital                     category, proposed Rule 1230 clarifies
                                              such categories within two years prior                  participation; and                                    that the exemption applies to associated
                                              to October 1, 2018, shall be eligible to                   (iv) persons associated with a member              persons solely and exclusively effecting
                                              maintain such registrations with the                    organization whose functions are related              transactions on the floor of another
                                              Exchange. However, if individuals                       solely and exclusively to effecting                   national securities exchange, provided
                                              registered in such categories terminate                 transactions on the floor of another                  they are appropriately registered with
                                              their registration with the Exchange and                national securities exchange and who                  such exchange.78 Additionally, the
                                              the registration remains terminated for                 are registered as floor members with                  Exchange proposes to add Section 3 of
                                              two or more years, they would not be                    such exchange; transactions in                        Rule 1230, pursuant to which persons
                                              able to re-register in that category. In                municipal securities; transactions in                 associated with a member that are not
                                              addition, proposed Rule 1220.06 would                   commodities; transactions in security                 citizens, nationals, or residents of the
                                              include the current restrictions to which               futures, provided that any such person                United States or any of its territories or
                                              Order Processing Assistant                              is registered with FINRA or a registered              possessions, that will conduct all of
                                              Representatives are subject under                       futures association; transactions in                  their securities activities in areas
                                              Nasdaq rules.75 As stated above, Rule                   variable contracts and insurance                      outside the jurisdiction of the United
                                              1220.06 would have no application to                    premium funding programs and other                    States, and that will not engage in any
                                              the Exchange as a practical matter.76                   contracts issued by an insurance                      securities activities with or for any
                                                                                                      company; transactions in direct                       citizen, national or resident of the
                                              18. Grandfathering Provisions                           participation programs; transactions in               United States need not register with the
                                                 In addition to the grandfathering                    government securities; or effecting sales             Exchange.79
                                              provisions in proposed Rule 1220(a)(2)                  as part of a primary offering of securities              The Exchange proposes to adopt Rule
                                              (relating to General Securities                         not involving a public offering pursuant              1230.01 to clarify that the function of
                                              Principals) and proposed Rule 1220.06                   to Section 3(b), 4(2), or 4(6) of the                 accepting customer orders is not
                                              (relating to the eliminated registration                Securities Act of 1933 and the rules and              considered a clerical or ministerial
                                              categories), the Exchange is proposing to               regulations thereunder.                               function and that associated persons
                                              include grandfathering provisions in                       The Exchange is proposing to adopt                 who accept customer orders under any
                                              proposed Rule 1220(a)(8) (Registered                    Rule 614 as Rule 1230 subject to certain              circumstances are required to be
                                              Options Principal), 1220(b)(2) (General                 changes. Rule 614 exempts from                        appropriately registered. However, the
                                              Securities Representative), and                         registration those associated persons                 proposed rule provides that an
                                              1220(b)(4) (Securities Trader).                         who are not actively engaged in the                   associated person is not accepting a
                                              Specifically, the proposed                              securities business. It also exempts from             customer order where occasionally,
                                              grandfathering provisions provide that,                 registration those associated persons                 when an appropriately registered person
                                              subject to the lapse of registration                    whose functions are related solely and                is unavailable, the associated person
                                              provisions in proposed Rule 1210.08,                    exclusively to a member’s need for                    transcribes the order details and the
                                              individuals who are registered in                       nominal corporate officers or for capital             registered person contacts the customer
                                              specified registration categories on the                participation.77 The Exchange believes                to confirm the order details before
                                              operative date of the proposed rule                     that the determination of whether an                  entering the order.
                                              change and individuals who had been                     associated person is required to register
                                              registered in such categories within the                must be based on an analysis of the                   O. Changes to Continuing Education
                                              past two years prior to the operative                   person’s activities and functions in the              Requirements (Proposed Rule 1240)
                                              date of the proposed rule change would                  context of the various registration                      As described above, existing Rule 640,
                                              be qualified to register in the proposed                categories. The Exchange does not                     Continuing Education for Registered
                                              corresponding registration categories                   believe that categorical exemptions for               Persons, includes a Regulatory Element
                                              without having to take any additional                   associated persons who are not                        and a Firm Element. The Regulatory
                                              examinations.                                           ‘‘actively engaged’’ in a member’s                    Element applies to registered persons
                                                                                                      securities business, associated persons               and consists of periodic computer-based
                                              N. Associated Persons Exempt From                                                                             training on regulatory, compliance,
                                                                                                      whose functions are related only to a
                                              Registration (Proposed Rules 1230 and                                                                         ethical, supervisory subjects and sales
                                                                                                      member’s need for nominal corporate
                                              1230.01)                                                                                                      practice standards. The Firm Element
                                                                                                      officers or associated persons whose
                                                Existing Rule 614 currently provides                  functions are related only to a member’s              consists of at least annual, member-
                                              that the following persons associated                   need for capital participation is                     developed and administered training
                                              with a member organization are not                      consistent with this analytical                       programs designed to keep covered
                                              required to register:                                   framework. The Exchange therefore is                  registered persons current regarding
                                                (i) Persons associated with a member                  proposing to delete these exemptions.                 securities products, services and
                                              organization whose functions are solely                 Rule 614(a)(iv)(a) further exempts from               strategies offered by the member. The
                                              and exclusively clerical or ministerial;                registration associated persons whose                 CE requirements set forth in Rule 640
                                                (ii) persons associated with a member                 functions are related solely and                      have been reorganized and renumbered,
                                              organization who are not actively                       exclusively to effecting transactions on
                                              engaged in the investment banking or                    the floor of another national securities                 78 Proposed Rule 1230 differs from FINRA Rule

                                              securities business;                                    exchange as long as they are registered               1230 in that it includes a number of exemptions
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                                                (iii) persons associated with a member                                                                      based upon current Nasdaq Rule 1060(a) which are
                                                                                                      as floor members with such exchange.                  not found in FINRA Rule 1230.
                                              organization whose functions are related                                                                         79 Individuals described by Section 3 of Rule 1230
                                                                                                        77 These exemptions generally apply to associated   who are associated with FINRA members may be
                                                75 See  Nasdaq Rule 1042.                             persons who are corporate officers of a member in     registered with FINRA as Foreign Associates
                                                76 Proposed Exchange Rule 1220.06 omits               name only to meet specific corporate legal            pursuant to FINRA Rule 1220.06. FINRA is
                                              references to a number of registration categories it    obligations or who only provide capital for a         eliminating this registration category effective
                                              does not propose to recognize, but which FINRA          member, but have no other role in a member’s          October 1, 2018, and the Exchange has never
                                              refers to in its own Rule 1220.06.                      business.                                             recognized it.



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                                              50996                     Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                              and are now proposed to be adopted                      should apply to all covered registered                   Under Rule 1250(c)(1), initial and
                                              with amendments as new Rule 1240.80                     persons. Therefore, proposed Rule                     transfer electronic Form U4 filings and
                                                                                                      1240(b)(2)(B), which provides that the                any amendments to the disclosure
                                              1. Regulatory Element
                                                                                                      Firm Element training programs must                   information on Form U4 must be based
                                                 The Exchange is proposing to replace                 cover applicable regulatory                           on a manually signed Form U4 provided
                                              the term ‘‘registered person’’ in current               requirements, would also require that a               to the member or applicant for
                                              Rule 640 with the term ‘‘covered                        firm’s training program cover training in             membership by the person on whose
                                              person’’ and make conforming changes                    ethics and professional responsibility.               behalf the Form U4 is being filed. As
                                              to proposed Rule 1240(a). For purposes                                                                        part of the member’s recordkeeping
                                              of the Regulatory Element, the Exchange                 P. Electronic Filing Rules
                                                                                                                                                            requirements, it would be required to
                                              is proposing to define the term ‘‘covered                  Existing Rule 616 states that forms                retain the person’s manually signed
                                              person’’ in Rule 1240(a)(5) as any                      required to be filed under the Rule 600               Form U4 or amendments to the
                                              person registered pursuant to proposed                  Series shall be filed electronically                  disclosure information on Form U4 in
                                              Rule 1210, including any person who is                  through WebCRD, including initial                     accordance with Rule 17a–4(e)(1) under
                                              permissively registered pursuant to                     filings and amendments of Forms U4                    the Act and make them available
                                              proposed Rule 1210.02, and any person                   and U5. It also provides for prompt                   promptly upon regulatory request. An
                                              who is designated as eligible for an FSA                filing of amendments, and that records                applicant for membership must also
                                              waiver pursuant to proposed Rule                        of filed documents be retained for a                  retain every manually signed Form U4
                                              1210.09. The purpose of this change is                  period of not less than three years, the              it receives during the application
                                              to ensure that all registered persons,                  first two years in an easily accessible               process and make them available
                                              including those with permissive                         place, in accordance with Exchange Act                promptly upon regulatory request. Rule
                                              registrations, keep their knowledge of                  Rule 17a–4. Electronic filing                         1250(c)(2) and Supplementary Material
                                              the securities industry current. The                    requirements are also found in a number               .03 and 04 provide for the electronic
                                              inclusion of persons designated as                      of other rules.                                       filing of Form U4 amendments without
                                              eligible for an FSA waiver under the                       The Exchange is proposing to delete
                                                                                                                                                            the individual’s manual signature,
                                              term ‘‘covered persons’’ corresponds to                 existing Rule 616 and to replace it with
                                                                                                                                                            subject to certain safeguards and
                                              the requirements of proposed Rule                       new Rule 1250, Electronic Filing
                                                                                                                                                            procedures.
                                              1210.09. In addition, consistent with                   Requirements for Uniform Forms, which                    Rule 1250(d) provides that upon filing
                                              proposed Rule 1210.09, proposed Rule                    will consolidate Form U4 and U5                       an electronic Form U4 on behalf of a
                                              1240(a) provides that an FSA-eligible                   electronic filing requirements in a single            person applying for registration, a
                                              person would be subject to a Regulatory                 location.81 The new rule provides that                member must promptly submit
                                              Element program that correlates to his                  all forms required to be filed under the              fingerprint information for that person
                                              or her most recent registration category,               Exchange’s registration rules including               and that the Exchange may make a
                                              and CE would be based on the same                       the Rule 1200 series shall be filed                   registration effective pending receipt of
                                              cycle had the individual remained                       through an electronic process or such                 the fingerprint information.82 It further
                                              registered. The proposed rule also                      other process as the Exchange may                     provides that if a member fails to submit
                                              provides that if an FSA-eligible person                 prescribe to the Central Registration                 the fingerprint information within 30
                                              fails to complete the Regulatory Element                Depository. It also would impose certain              days after filing of an electronic Form
                                              during the prescribed time frames, he or                new requirements.                                     U4, the person’s registration will be
                                              she would lose FSA eligibility.                            Under Rule 1250(b) members would
                                                 Further, the Exchange is proposing to                                                                      deemed inactive, requiring the person to
                                                                                                      be required to designate registered
                                              add a rule to address the impact of                                                                           immediately cease all activities
                                                                                                      principal(s) or corporate officer(s) who
                                              failing to complete the Regulatory                                                                            requiring registration or performing any
                                                                                                      are responsible for supervising a firm’s
                                              Element on a registered person’s                                                                              duties and functioning in any capacity
                                                                                                      electronic filings. The registered
                                              activities and compensation.                                                                                  requiring registration. Under the rule
                                                                                                      principal(s) or corporate officer(s) who
                                              Specifically, proposed Rule 1240(a)(2)                                                                        the Exchange must administratively
                                                                                                      has or have the responsibility to review
                                              provides that any person whose                                                                                terminate a registration that is inactive
                                                                                                      and approve the forms filed pursuant to
                                              registration has been deemed inactive                                                                         for a period of two years. A person
                                                                                                      the rule would be required to
                                              under the rule may not accept or solicit                                                                      whose registration is administratively
                                                                                                      acknowledge, electronically, that he is
                                              business or receive any compensation                                                                          terminated could reactivate the
                                                                                                      filing this information on behalf of the
                                              for the purchase or sale of securities.                                                                       registration only by reapplying for
                                                                                                      member and the member’s associated
                                              However, like the FINRA rule, the                                                                             registration and meeting the
                                                                                                      persons. Under Rule 1250,
                                              proposed rule provides that such person                                                                       qualification requirements of the
                                                                                                      Supplementary Material .01, the
                                              may receive trail or residual                                                                                 applicable provisions of proposed
                                                                                                      registered principal(s) or corporate
                                              commissions resulting from transactions                                                                       Exchange Rule 1220. Upon application
                                                                                                      officer(s) could delegate filing
                                              completed before the inactive status,                                                                         and a showing of good cause, the
                                                                                                      responsibilities to an associated person
                                              unless the member with which the                                                                              Exchange could extend the 30-day
                                                                                                      (who need not be registered) but could
                                              person is associated has a policy                                                                             period.
                                                                                                      not delegate any of the supervision,                     Rule 1250(e) would require initial
                                              prohibiting such trail or residual                      review, and approval responsibilities
                                              commissions.                                                                                                  filings and amendments of Form U5 to
                                                                                                      mandated in Rule 1250(b). The                         be submitted electronically. As part of
                                              2. Firm Element                                         registered principal(s) or corporate                  the member’s recordkeeping
                                                                                                      officer(s) would be required to take
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                                                 The Exchange believes that training in                                                                     requirements, it would be required to
                                                                                                      reasonable and appropriate action to                  retain such records for a period of not
                                              ethics and professional responsibility                  ensure that all delegated electronic                  less than three years, the first two years
                                                80 Proposed Rule 1240 also differs slightly from
                                                                                                      filing functions were properly executed
                                              FINRA Rule 1240 in that it omits references to          and supervised.                                         82 Proposed Rule 1250(d) covers the same subject

                                              certain registration categories which the Exchange                                                            matter as current Rules 616, Electronic Filing
                                              does not recognize as well as an internal cross          81 Proposed Rule 1250 is based upon current          Requirements for Uniform Forms, and 623,
                                              reference to FINRA Rule 4517.                           Nasdaq Rule 1140.                                     Fingerprinting, which would be deleted.



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                                                                         Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                          50997

                                              in an easily accessible place, in                       1260(c) would provide that members 84                 these rules and improve regulatory
                                              accordance with Rule 17a–4 under the                    whose activities are limited to the                   efficiency. The proposed rule change
                                              Act, and to make such records available                 Exchange’s options trading floor and                  will also improve the efficiency of the
                                              promptly upon regulatory request.                       who are registered pursuant to Rule                   examination program, without
                                                                                                      1260(a), as well as associated persons                compromising the qualification
                                                Finally, under proposed Rule 1250,
                                                                                                      whose activities are limited to the                   standards, by eliminating duplicative
                                              Supplementary Material .02, a member
                                                                                                      Exchange’s options trading floor and are              testing of general securities knowledge
                                              could enter into an agreement with a
                                                                                                      registered pursuant to Rule 1260(b) are               on examinations and by removing
                                              third party pursuant to which the third                 exempt from the representative                        examinations that currently have
                                              party agrees to file the required forms                 registration requirements (but not the                limited utility. In addition, the proposed
                                              electronically on behalf of the member                  principal registration requirements,                  rule change will expand the scope of
                                              and the member’s associated persons.                    including any prerequisite                            permissive registrations, which, among
                                              Notwithstanding the existence of such                   representative registration requirement)              other things, will allow members to
                                              an agreement, the member would                          of Rules 1210 and 1220. Rule 1260(c) is               develop a depth of associated persons
                                              remain responsible for complying with                   intended to preserve the current                      with registrations to respond to
                                              the requirements of the Rule.                           exclusion of these individuals from the               unanticipated personnel changes and
                                              Q. Trading Floor Registration (Rule                     representative registration requirements              will encourage greater regulatory
                                              1260)                                                   of Rule 613.85                                        understanding. Further, the proposed
                                                                                                                                                            rule change will provide a more
                                                                                                      R. Other Rules                                        streamlined and effective waiver
                                                 Currently, Rules 620(a) and (b) govern
                                              trading floor member registration and                     The Exchange is deleting Rule 614,                  process for individuals working for a
                                              non-member clerk registration. Rule                     Persons Exempt from Registration, as                  financial services industry affiliate of a
                                              620(a) requires each Floor Broker,                      explained above. Rule 614(b), however,                member, and it will require such
                                              Specialist and Registered Options                       contains provisions dealing with                      individuals to maintain specified levels
                                              Trader on the Exchange trading floor to                 Nonregistered Foreign ‘‘Finders’’ and is              of competence and knowledge while
                                              be registered as ‘‘Member Exchange’’                    simply being relocated with                           working in areas ancillary to the
                                              (‘‘ME’’) under ‘‘PHLX’’ on Form U4, and                 nonsubstantive changes to new Rule                    securities business. The proposed rule
                                              to successfully complete the appropriate                2040.86 The remaining rules identified                change will improve the supervisory
                                              floor trading examination(s), if                        above under ‘‘Overview’’ which are to                 structure of firms by imposing an
                                                                                                      be amended in this proposed rule                      experience requirement for
                                              prescribed by the Exchange, in addition
                                                                                                      change simply update citations and/or                 representatives that are designated by
                                              to requirements imposed by other
                                                                                                      make technical or nonsubstantive                      firms to function as principals for a 120-
                                              Exchange rules. Under the rule the
                                                                                                      changes to the proposed new rules.                    day period before having to pass an
                                              Exchange may also require periodic                                                                            appropriate principal qualification
                                              examinations due to changes in trading                  2. Statutory Basis                                    examination. The proposed rule change
                                              rules, products or automated systems.                      The Exchange believes that its                     will also prohibit unregistered persons
                                              Rule 620(b) requires all trading floor                  proposal is consistent with Section 6(b)              from accepting customer orders under
                                              personnel, including clerks, interns,                   of the Act,87 in general, and furthers the            any circumstances, which will enhance
                                              stock execution clerks and any other                    objectives of Section 6(b)(5) of the Act,88           investor protection.
                                              associated persons, of a member                         in particular, in that it is designed to                 The Exchange believes that, with the
                                              organization not required to register                   promote just and equitable principles of              introduction of the SIE and expansion of
                                              pursuant to Rule 620(a) to be registered                trade, to remove impediments to and                   the pool of individuals who are eligible
                                              as ‘‘Floor Employee’’ (‘‘FE’’) under                    perfect the mechanism of a free and                   to take the SIE, the proposed rule
                                              ‘‘PHLX’’ on Form U4. Under the rule the                 open market and a national market                     change has the potential of enhancing
                                              Exchange may require these individuals                  system, and, in general to protect                    the pool of prospective securities
                                              to also successfully complete an                        investors and the public interest.                    industry professionals by introducing
                                              examination, and may require periodic                      The Exchange believes that the                     them to securities laws, rules and
                                              examinations due to changes in trading                  proposed rule change will streamline,                 regulations and appropriate conduct
                                              rules, products or automated systems.                   and bring consistency and uniformity                  before they join the industry in a
                                              To consolidate these registration rules                 to, the registration rules, which will, in            registered capacity.
                                              into the new Rule 1200 series, Rule 620                 turn, assist members and their                           The extension of the Securities Trader
                                              is being renumbered as Rule 1260.83                     associated persons in complying with                  registration requirement to developers
                                                                                                                                                            of algorithmic trading strategies requires
                                                 The Exchange proposes to adjust                         84 In Rule 1260, unlike the other 1200 Series of   associated persons primarily
                                              internal cross references as required by                proposed rules, the word ‘‘member’’ is not used to    responsible for the design, development
                                              this proposed rule change, but not to                   mean ‘‘member organization.’’                         or significant modification of an
                                              make substantive changes to Rule 620(a)                    85 Current Rule 613(a) imposes representative
                                                                                                                                                            algorithmic trading strategy or
                                              and (b). However, the Exchange                          registration requirements upon persons engaged or
                                                                                                      to be engaged in the investment banking or            responsible for the day-to-day
                                              proposes to adopt new section (c) to                    securities business of a member organization except   supervision or direction of such
                                              exempt certain individuals on the                       members whose activities are limited to the           activities to register and meet a
                                              Exchange’s trading floor from the                       Exchange’s options trading floor and who are
                                                                                                      registered pursuant to Rule 620(a), as well as
                                                                                                                                                            minimum standard of knowledge
                                              representative registration requirements                                                                      regarding the securities rules and
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                                                                                                      associated persons whose activities are limited to
                                              of proposed rules 1210 and 1220. Rule                   the Exchange’s options trading floor and are          regulations applicable to the member
                                                                                                      registered pursuant to Rule 620(b).                   employing the algorithmic trading
                                                                                                         86 The FINRA counterpart to Rule 614(b) occupies
                                                83 Exhibit 5 simply reflects the proposed new rule                                                          strategy. This minimum standard of
                                              number of current Rule 620 rather than the deletion     a similar location in the FINRA rulebook. See
                                                                                                      FINRA Rule 2040(c), Nonregistered Foreign
                                                                                                                                                            knowledge is identical to the standard
                                              of the entire rule and the subsequent reinsertion of
                                              the entire rule following Rule 1250. In the rulebook,   Finders.                                              of knowledge currently applicable to
                                              Rule 1260 will appear immediately following Rule           87 15 U.S.C. 78f(b).                               traditional securities traders. The
                                              1250.                                                      88 15 U.S.C. 78f(b)(5).                            Exchange believes that improved


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                                              50998                     Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices

                                              education of firm personnel may reduce                  under the proposal, and the firm would                2018. Therefore, the Commission
                                              the potential for problematic market                    need to establish policies and                        believes that the waiver of the 30-day
                                              conduct and manipulative trading                        procedures to monitor compliance with                 operative delay is consistent with the
                                              activity.                                               the proposed requirement on an ongoing                protection of investors and the public
                                                Finally, the proposed rule change                     basis. However, given the prevalence                  interest and hereby waives the 30-day
                                              makes organizational changes to the                     and importance of algorithmic trading                 operative delay and designates the
                                              Exchange’s registration and                             strategies in today’s markets, the                    proposal operative on October 1, 2018.92
                                              qualification rules to align them with                  Exchange believes that associated                        At any time within 60 days of the
                                              registration and qualification rules of                 persons engaged in the activities                     filing of the proposed rule change, the
                                              the Nasdaq Affiliated Exchanges, in                     covered by this proposal must meet a                  Commission summarily may
                                              order to prevent unnecessary regulatory                 minimum standard of knowledge                         temporarily suspend such rule change if
                                              burdens and to promote efficient                        regarding the applicable securities rules             it appears to the Commission that such
                                              administration of the rules. The change                 and regulations. To mitigate the costs                action is necessary or appropriate in the
                                              also makes minor updates and                            imposed on member firms, the proposed                 public interest, for the protection of
                                              corrections to the Exchange’s rules                     rule change limits the scope of                       investors, or otherwise in furtherance of
                                              which improve readability.                              registration requirement by excluding                 the purposes of the Act.
                                              B. Self-Regulatory Organization’s                       technological or development support                  IV. Solicitation of Comments
                                              Statement on Burden on Competition                      personnel who are not primarily
                                                                                                      responsible for the covered activities. It              Interested persons are invited to
                                                 The Exchange does not believe that                   also excludes supervisors who are not                 submit written data, views, and
                                              the proposed rule change will impose                    responsible for the ‘‘day-to-day’’                    arguments concerning the foregoing,
                                              any burden on competition not                           supervision or direction of the covered               including whether the proposed rule
                                              necessary or appropriate in furtherance                 activities.                                           change is consistent with the Act.
                                              of the purposes of the Act. The                                                                               Comments may be submitted by any of
                                              proposed rule change is designed to                     C. Self-Regulatory Organization’s                     the following methods:
                                              ensure that all associated persons of                   Statement on Comments on the
                                                                                                      Proposed Rule Change Received From                    Electronic Comments
                                              members engaged in a securities
                                              business are, and will continue to be,                  Members, Participants, or Others                        • Use the Commission’s internet
                                              properly trained and qualified to                         No written comments were either                     comment form (http://www.sec.gov/
                                              perform their functions, will be                        solicited or received.                                rules/sro.shtml); or
                                              supervised, and can be identified by                                                                            • Send an email to rule-comments@
                                              regulators. The proposed new 1200                       III. Date of Effectiveness of the                     sec.gov. Please include File Number SR–
                                              Series of rules, which are similar in                   Proposed Rule Change and Timing for                   Phlx–2018–61 on the subject line.
                                              many respects to the registration-related               Commission Action
                                                                                                                                                            Paper Comments
                                              requirements adopted by FINRA                              Because the foregoing proposed rule
                                              effective October 1, 2018, should                       change does not: (i) Significantly affect               • Send paper comments in triplicate
                                              enhance the ability of member firms to                  the protection of investors or the public             to Secretary, Securities and Exchange
                                              comply with the Exchange’s rules as                     interest; (ii) impose any significant                 Commission, 100 F Street NE,
                                              well as with the Federal securities laws.               burden on competition; and (iii) become               Washington, DC 20549–1090.
                                              Additionally, as described above, the                   operative for 30 days from the date on                All submissions should refer to File
                                              Exchange intends the amendments                         which it was filed, or such shorter time              Number SR–Phlx–2018–61. This file
                                              described herein to eliminate                           as the Commission may designate, it has               number should be included on the
                                              inconsistent registration-related                       become effective pursuant to Section                  subject line if email is used. To help the
                                              requirements across the Nasdaq                          19(b)(3)(A) of the Act 89 and Rule 19b–               Commission process and review your
                                              Affiliated Exchanges, thereby promoting                 4(f)(6) thereunder.                                   comments more efficiently, please use
                                              uniformity of regulation across markets.                   A proposed rule change filed under                 only one method. The Commission will
                                              The new 1200 Series should in fact                      Rule 19b–4(f)(6) normally does not                    post all comments on the Commission’s
                                              remove administrative burdens that                      become operative for 30 days from the                 internet website (http://www.sec.gov/
                                              currently exist for members seeking to                  date of filing. However, Rule 19b–                    rules/sro.shtml). Copies of the
                                              register associated persons on multiple                 4(f)(6)(iii) 90 permits the Commission to             submission, all subsequent
                                              Nasdaq Affiliated Exchanges featuring                   designate a shorter time if such action               amendments, all written statements
                                              varying registration-related                            is consistent with the protection of                  with respect to the proposed rule
                                              requirements. Additionally, all                         investors and the public interest. The                change that are filed with the
                                              similarly-situated associated persons of                Exchange has asked the Commission to                  Commission, and all written
                                              members will be treated similarly under                 waive the 30-day operative delay so that              communications relating to the
                                              the new 1200 Series in terms of                         the proposal may become operative on                  proposed rule change between the
                                              standards of training, experience and                   October 1, 2018 to coincide with the                  Commission and any person, other than
                                              competence for persons associated with                  effective date of FINRA’s proposed rule               those that may be withheld from the
                                              Exchange members.                                       change on which the proposal is                       public in accordance with the
                                                 With respect in particular to                        based.91 The waiver of the operative                  provisions of 5 U.S.C. 552, will be
                                              registration of developers of algorithmic               delay would make the Exchange’s                       available for website viewing and
                                              trading strategies, the Exchange                        qualification requirements consistent                 printing in the Commission’s Public
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                                              recognizes that the proposal would                      with those of FINRA, as of October 1,                 Reference Room, 100 F Street NE,
                                              impose costs on member firms                                                                                  Washington, DC 20549, on official
                                                                                                        89 15  U.S.C. 78s(b)(3)(A).
                                              employing associated persons engaged
                                                                                                        90 17  CFR 240.19b–4(f)(6)(iii).                       92 For purposes only of waiving the 30-day
                                              in the activity subject to the registration                91 See supra note 7. As discussed above, the       operative delay, the Commission has also
                                              requirement. Specifically, among other                  Exchange has stated that the new registration         considered the proposed rule’s impact on
                                              things, additional associated persons                   requirements for developers of algorithmic trading    efficiency, competition, and capital formation. See
                                              would be required to become registered                  strategies would become operative on April 1, 2019.   15 U.S.C. 78c(f).



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                                                                        Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices                                                    50999

                                              business days between the hours of 10                   the principal office of the Exchange, and              FINRA representative-level qualification
                                              a.m. and 3 p.m. Copies of the filing also               at the Commission’s Public Reference                   examinations, creating a general
                                              will be available for inspection and                    Room.                                                  knowledge examination and specialized
                                              copying at the principal office of the                                                                         knowledge examinations, allowing
                                                                                                      II. Self-Regulatory Organization’s
                                              Exchange. All comments received will                                                                           permissive registration, establishing an
                                                                                                      Statement of the Purpose of, and
                                              be posted without change. Persons                                                                              examination waiver process for persons
                                                                                                      Statutory Basis for, the Proposed Rule
                                              submitting comments are cautioned that                                                                         working for a financial services affiliate
                                                                                                      Change
                                              we do not redact or edit personal                                                                              of a member, and amending certain
                                              identifying information from comment                       In its filing with the Commission, the              continuing education (‘‘CE’’)
                                              submissions. You should submit only                     Exchange included statements                           requirements (collectively, the ‘‘FINRA
                                              information that you wish to make                       concerning the purpose of and basis for                Rule Changes’’).7 The FINRA Rule
                                              available publicly. All submissions                     the proposed rule change and discussed                 Changes will become effective on
                                              should refer to File Number SR-Phlx-                    any comments it received on the                        October 1, 2018.
                                              2018–61 and should be submitted on or                   proposed rule change. The text of these                  The Exchange now proposes to
                                              before October 31, 2018.                                statements may be examined at the                      amend, reorganize and enhance certain
                                                                                                      places specified in Item IV below. The                 of its corresponding membership,
                                                For the Commission, by the Division of
                                              Trading and Markets, pursuant to delegated              Exchange has prepared summaries, set                   registration and qualification
                                              authority.93                                            forth in sections A, B, and C below, of                requirement rules in part in response to
                                              Eduardo A. Aleman,                                      the most significant aspects of such                   the FINRA Rule Changes, and also in
                                              Assistant Secretary.
                                                                                                      statements.                                            order to conform the Exchange’s rules
                                              [FR Doc. 2018–21902 Filed 10–9–18; 8:45 am]             A. Self-Regulatory Organization’s                      more closely to those of its affiliated
                                                                                                      Statement of the Purpose of, and                       exchanges in the interest of uniformity
                                              BILLING CODE 8011–01–P
                                                                                                      Statutory Basis for, the Proposed Rule                 and to facilitate compliance with
                                                                                                      Change                                                 membership, registration and
                                              SECURITIES AND EXCHANGE                                                                                        qualification regulatory requirements by
                                                                                                      1. Purpose                                             members of multiple Nasdaq-affiliated
                                              COMMISSION
                                                                                                      Overview                                               exchanges including BX. Last, the
                                              [Release No. 34–84353; File No. SR–BX–                                                                         Exchange proposes to enhance its
                                              2018–047]                                                 The Exchange has adopted                             registration rules by adding a new
                                                                                                      registration requirements to ensure that               registration requirement applicable to
                                              Self-Regulatory Organizations; Nasdaq                   associated persons attain and maintain                 developers of algorithmic trading
                                              BX, Inc.; Notice of Filing and                          specified levels of competence and                     systems similar to a requirement
                                              Immediate Effectiveness of Proposed                     knowledge pertinent to their function.                 adopted by FINRA pursuant to a 2016
                                              Rule Change To Amend, Reorganize                        In general, the current rules require that             FINRA proposed rule change.8
                                              and Enhance Membership,                                 persons engaged in a member’s
                                              Registration and Qualification Rules,                   investment banking or securities                       incorporated from the New York Stock Exchange
                                              and To Make Conforming Changes to                       business who are to function as                        (‘‘NYSE’’) (the ‘‘Incorporated NYSE rules’’). While
                                              Certain Other Rules                                     representatives or principals register                 the NASD rules generally apply to all FINRA
                                                                                                                                                             members, the Incorporated NYSE rules apply only
                                              October 3, 2018.
                                                                                                      with the Exchange in each category of                  to those members of FINRA that are also members
                                                                                                      registration appropriate to their                      of the NYSE.
                                                 Pursuant to Section 19(b)(1) of the
                                                                                                      functions by passing one or more                          7 See Securities Exchange Act Release No. 81098
                                              Securities Exchange Act of 1934
                                                                                                      qualification examinations,3 and exempt                (July 7, 2017), 82 FR 32419 (July 13, 2017) (Order
                                              (‘‘Act’’),1 and Rule 19b–4 thereunder,2                                                                        Approving File No. SR–FINRA–2017–007). See also
                                                                                                      specified associated persons from the
                                              notice is hereby given that on                                                                                 FINRA Regulatory Notice 17–30 (SEC Approves
                                                                                                      registration requirements.4 They also                  Consolidated FINRA Registration Rules,
                                              September 27, 2018, Nasdaq BX, Inc.
                                              (‘‘BX’’ or ‘‘Exchange’’) filed with the                 prescribe ongoing continuing education                 Restructured Representative-Level Qualification
                                                                                                      requirements for registered persons.5                  Examinations and Changes to Continuing Education
                                              Securities and Exchange Commission                                                                             Requirements) (October 2017). FINRA articulated
                                              (‘‘SEC’’ or ‘‘Commission’’) the proposed                The Exchange now proposes to amend,                    its belief that the proposed rule change would
                                              rule change as described in Items I and                 reorganize and enhance its rules                       streamline, and bring consistency and uniformity
                                              II, below, which Items have been                        regarding registration, qualification                  to, its registration rules, which would, in turn,
                                                                                                      examinations and continuing education,                 assist FINRA members and their associated persons
                                              prepared by the Exchange. The                                                                                  in complying with the rules and improve regulatory
                                              Commission is publishing this notice to                 as described below.                                    efficiency. FINRA also determined to enhance the
                                                                                                        Recently, the Commission approved a                  overall efficiency of its representative-level
                                              solicit comments on the proposed rule
                                                                                                      FINRA proposed rule change                             examinations program by eliminating redundancy
                                              change from interested persons.                                                                                of subject matter content across examinations,
                                                                                                      consolidating and adopting NASD and
                                                                                                                                                             retiring several outdated representative-level
                                              I. Self-Regulatory Organization’s                       Incorporated NYSE rules relating to                    registrations, and introducing a general knowledge
                                              Statement of the Terms of Substance of                  qualification and registration                         examination that could be taken by all potential
                                              the Proposed Rule Change                                requirements into the Consolidated                     representative-level registrants and the general
                                                                                                      FINRA Rulebook,6 restructuring the                     public. FINRA amended certain aspects of its
                                                 The Exchange proposes to amend,                                                                             continuing education rule, including by codifying
                                              reorganize and enhance its membership,                    3 See, e.g., Exchange Rules 1021, Registration
                                                                                                                                                             existing guidance regarding the effect of failing to
                                              registration and qualification rules, and                                                                      complete the Regulatory Element on a registered
                                                                                                      Requirements, 1022, Categories of Principal            person’s activities and compensation.
                                              to make conforming changes to certain                   Registration, 1031, Registration Requirements, 1032,      8 See Securities Exchange Act Release No. 77551
                                              other rules.
amozie on DSK3GDR082PROD with NOTICES1




                                                                                                      Categories of Representative Registration, and 1041,   (April 7, 2016), 81 FR 21914 (April 13, 2016) (Order
                                                 The text of the proposed rule change                 Registration Requirements for Assistant                Approving File No. SR–FINRA–2016–007). In its
                                                                                                      Representatives.
                                              is available on the Exchange’s website at                 4 See Rule 1060, Persons Exempt from
                                                                                                                                                             proposed rule change FINRA addressed the
                                              http://nasdaqbx.cchwallstreet.com/, at                                                                         increasing significance of algorithmic trading
                                                                                                      Registration.                                          strategies by amending its rules to require
                                                                                                        5 See Rule 1120, Continuing Education
                                                                                                                                                             registration, as Securities Traders, of associated
                                                93 17 CFR 200.30–3(a)(12).                            Requirements.                                          persons primarily responsible for the design,
                                                1 15 U.S.C. 78s(b)(1).                                  6 The current FINRA rulebook consists of: (1)        development or significant modification of
                                                2 17 CFR 240.19b–4.                                   FINRA rules; (2) NASD rules; and (3) rules                                                        Continued




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Document Created: 2018-10-10 17:39:12
Document Modified: 2018-10-10 17:39:12
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation83 FR 50981 

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