Daily Rules, Proposed Rules, and Notices of the Federal Government
Phlx proposes to amend Rule 604, "Registration and Termination of Registered Persons," to adopt new and modify existing provisions governing general and limited categories of principals and representatives. The proposal is meant to capture all persons associated with member organizations who trade on the Exchange's new equity platform, NASDAQ OMX PSX ("PSX"). Specifically, the Exchange proposes to adopt Rule 604(g), "Principal Registration," and Supplementary Material .01-.03 to set forth the categories of principal registration. The rule would require, among other things, that all associated persons who perform certain functions pass an appropriate examination and register as principals; every member organization to have at least two registered principals (unless an exception applies); and each member organization to have a Limited Principal--Financial/Operations. In addition, Phlx Rule 604(h) and Supplementary Material .04 would require that each representative be registered and pass the General Securities Representative Examination ("Series 7").
Phlx also proposes to adopt Phlx Rule 604(i)(1) to delineate categories of persons that are exempt from registration, Rule 604(i)(2) to allow member organizations and persons associated with member organizations to pay to non-registered foreign persons transaction-related compensation based upon business of customers they direct to member organizations if certain conditions are met, and Phlx Rule 604(j) to allow for waiver of qualification examination requirements in exceptional circumstances. In connection with the above amendments, Phlx proposes to add several related terms to Rule 1, "Definitions." Finally, Phlx proposes to amend Rule 640, "Continuing Education for Registered Persons," to delete an outdated reference.
Proposed Phlx Rule 604(f) would state that sub-paragraphs (g) and (h), discussed in greater detail below, apply to member organizations, and associated persons of member organizations, that are registered with the Exchange for the purpose of trading NMS stocks.
Proposed Phlx Rule 604(g) would provide that persons associated with a member organization who are actively engaged in the management of the member organization's investment banking or securities business, including supervision, solicitation, conduct of business or training of persons associated with a member organization for any of these functions, shall be registered as principals. Such persons would include sole proprietors, officers, partners, managers of offices of supervisory jurisdiction, and directors of corporations.
Every member organization, except a sole proprietorship, would be required 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;
All persons who are to function as principals
The Exchange proposes to adopt a "Limited Principal--General Securities Sales Supervisor" category for persons whose supervisory responsibilities are limited.
The Exchange also proposes to adopt a requirement that member organizations
Furthermore, in general, a person designated as a Chief Compliance Officer on Schedule A of Form BD of a member organization would be required to register with the Exchange as a General Securities Principal and pass the Series 24 examination ("Series 24") before his registration could become effective, unless the person's activities are so limited to qualify him for one or more of the limited categories of principal registration.
Phlx proposes to add 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 a period of two or more years immediately preceding the date of receipt by the Exchange of a new application, must pass a qualification examination for principals appropriate to the person's category of registration.
Proposed Phlx Rule 604(h) and Supplementary Material .04 would govern the registration of representatives
The Exchange also proposes to adopt Phlx Rule 604(i)(1) exempting the following persons associated with a member organization from registration with the Exchange: (1) Persons whose functions are solely and exclusively clerical or ministerial; (2) persons who are not actively engaged in the investment banking or securities business; (3) persons whose functions are related solely and exclusively to the member organization's need for nominal corporate officers or for capital participation; and (4) persons whose functions are related solely and exclusively to: (A) effecting transactions on the floor of another national securities exchange and who are registered as floor members with such exchange; (B) transactions in municipal securities; (C) transactions in commodities; (D) transactions in security futures, provided that any such person is registered with FINRA or a registered futures association; (E) transactions in variable contracts and insurance premium funding programs and other contracts issued by an insurance company; (F) transactions in direct participation programs; (G) transactions in government securities; or (H) 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.
Proposed Phlx Rule 604(j) provides that the Exchange may, in exceptional cases and where good cause is shown, waive an applicable qualification examination and accept other standards as evidence of an applicant's qualifications for registration.
Pursuant to proposed Rule 604(i)(2), the Exchange proposes to allow a member organization, and persons associated with a member organization, to pay to non-registered foreign persons transaction-related compensation based upon the business of customers directed to member organizations under certain enumerated conditions.
The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.
Additionally, the Commission believes that the proposed rule change is consistent with the principles of Section 11A(a)(1)
In order to meet its obligations under Section 6 of the Act
The Commission believes that Phlx's proposed rule change will help ensure that all associated persons of member organizations transacting business on PSX, as well as those who supervise, train or otherwise oversee those who do, will be registered with, and qualified by, the Exchange and will be subject to continuing education requirements. In addition, the proposal should strengthen the Exchange's ability to ensure an effective supervisory structure for those conducting business on PSX.
The Commission believes that Phlx's requirement that each person associated with a member organization who performs the functions of a representative, register with Phlx as a General Securities Representative and pass the Series 7 examination before registration may become effective, helps ensure that all associated persons who transact business on PSX, including those engaged in proprietary trading, are subject to appropriate registration, qualification, and continuing education requirements and is consistent with the Act. These requirements bolster the integrity of the Exchange by helping to ensure that all associated persons engaged in a securities business are, and will continue to be, properly trained and qualified to perform their functions and will be supervised and can be identified by regulators and the general public.
Similarly, the Commission believes that the requirement that all persons functioning in certain capacities be registered through WebCRD as principals and be subject to higher qualification standards appropriately identifies those persons with heightened accountability and reflects the enhanced responsibility of the principal role and is consistent with the Act. The general requirement that firms have a minimum of two principals responsible for oversight of member organization activity on Phlx--who must be registered as such and pass the Series 24 exam--should help Phlx strengthen the regulation of its member firms, and
In addition, the Commission believes that requiring Chief Compliance Officers and any employee operating in the capacity of a FINOP to register with the Exchange as principals and take either the Series 24 or Series 27, respectively, is appropriate based on the heightened level of accountability inherent in the duty of overseeing compliance by an Exchange member, and in the oversight and preparation of financial reports and the oversight of those employed in the financial and operational capacities at each firm.
The Commission believes Phlx's proposed Limited Principal--General Securities Sales Supervisor category is appropriate as the qualification standards required reflect the narrower responsibility of persons in this category of registration.
The Commission believes Phlx's proposed provision requiring any person whose registration has been revoked by the Exchange as a disciplinary sanction or whose most recent registration as a principal or representative has been terminated for a period of two or more years immediately preceding the date of receipt by the Exchange of a new application, to pass the qualification examination appropriate to such person's category of registration is appropriate. This rule helps to ensure that persons' qualifications are current.
The Commission also believes Phlx's proposed exceptions from the above-discussed general requirements are appropriate. Any member seeking an exception from Phlx's mandate that each firm have two principals must provide evidence that conclusively indicates to the Exchange that only one principal is necessary. The Commission expects this authority to be used sparingly, since principals oversee the operations of member firms and provide the first line of defense in ensuring that member firms are complying with the rules of an exchange as well as the Federal securities laws. In addition, the qualification examination waiver applies only in exceptional cases and requires the Exchange to have good cause;
The Commission believes that proposed Rule 604(i)(2), which allows payment to finders when certain conditions are satisfied, is reasonable as it is consistent with the compensation arrangements allowed on other exchanges for foreign finders who direct business to member organizations.
Finally, the Commission believes that adding paragraph (f) to Rule 604, specifying the applicability of paragraphs (g) and (h), and adding terms used in the proposed rules to its Definitions section will provide clarity to Phlx's rules, enabling regulators, members, and the general public to better understand the rules.