[Federal Register Volume 77, Number 81 (Thursday, April 26, 2012)]
[Notices]
[Pages 25003-25007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-10027]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66840; File No. SR-Phlx-2012-23]


Self-Regulatory Organizations; NASDAQ OMX Phlx LLC; Order 
Approving Proposed Rule Change To Amend Registration, Qualification, 
and Continuing Education Requirements for Associated Persons

April 20, 2012.

I. Introduction

    On February 16, 2012, NASDAQ OMX Phlx LLC (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\, and Rule 19b-4 \2\ 
thereunder, a proposed rule change to amend and extend registration, 
qualification, and continuing education requirements for associated 
persons of members. The proposed rule change was published for comment 
in the Federal Register on March 7, 2012.\3\ The Commission received no 
comment letters on the proposal. This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66497 (March 1, 
2012) 77 FR 13668.
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II. Description of the Proposal

Representative Registration

    Exchange Rule 604 applies to all member organizations and generally 
requires the Series 7 examination for Registered Representatives,\4\ 
Principals,\5\ off-floor traders \6\ and persons compensated directly 
or indirectly for the solicitation or handling of business in 
securities who are not otherwise required to register with the Exchange 
by Rule 604(a).\7\ Rule 604(f) provides that members and persons 
associated with member organizations who are registered with the 
Exchange for the purpose of trading NMS Stocks \8\ through the 
facilities of the Exchange, which is the PSX platform, are subject to 
the provisions of Rule 604(g) and (h) governing principal and 
representative registration, respectively. Rule 604(h) is applicable 
today only to PSX users pursuant to Rule 604(f). The Exchange proposes 
to move the requirements in Rule 604, and expand on those requirements, 
in proposed Rules 611, 612 and 613.
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    \4\ See Rule 604(a).
    \5\ See Rule 604(g).
    \6\ See Rule 604(e).
    \7\ See Rule 604(d).
    \8\ See Rule 1(t).
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    Rule 604(h) governs the registration of representatives with the 
Exchange. Specifically, Rule 604(h)(1) requires that all persons 
engaged or to be engaged in the investment banking or securities 
business \9\ of a member organization who are to function as 
representatives be registered through WebCRD \10\ in the category of 
registration appropriate to the function they will perform.\11\ Before 
their registration can become effective, they must pass the Series 7 
examination. The Exchange proposes to delete Rule 604 and adopt broader 
registration requirements in proposed Rule 613. Provisions contained in 
Rule 604(h) would be moved to Rule 613, Representative Registration, in 
substantially the same form, except with respect to trading floor 
personnel subject to Rule 620.
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    \9\ The term ``investment banking or securities business'' means 
the business, carried on by a broker or dealer, of underwriting or 
distributing issues of securities, or of purchasing securities and 
offering the same for sale as a dealer, or of purchasing and selling 
securities upon the order and for the account of others. See Rule 
1(m). Of course, the federal securities laws may require broker-
dealers to become members of the FINRA in order to perform some of 
these functions. See e.g., 15 U.S.C. 78o(b)(8).
    \10\ WebCRD is FINRA's automated Central Registration 
Depository.
    \11\ Supplementary Material .04 of Rule 604.
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    Proposed Rule 613(a) would require all persons engaged or to be 
engaged in the investment banking or securities business of a member 
organization who are to function as representatives to be registered 
through WebCRD as specified in Rule 613(e).\12\ Trading floor personnel 
whose activities \13\ are limited to the trading floor would continue 
to be required to register pursuant to Rule 620 and qualify by passing 
the Exchange's Trading Floor Qualification Examination.\14\ In 
addition, amended Rule 620 would require all trading floor personnel, 
including clerks, interns, and any other associated persons of a member 
organization who are not required to register pursuant to Rule 620(a) 
to register on Form U4 through WebCRD. Thus, the same registration 
information would be available

[[Page 25004]]

electronically in WebCRD for trading floor members and associated 
persons as is available for persons registered as General Securities 
Representatives.
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    \12\ The requirement does not cover 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).
    \13\ These functions include handling and executing electronic 
and phoned-in orders on the trading floor, as well as providing 
markets, both verbally and electronically.
    \14\ Trading floor personnel, and members on the trading floor, 
would, however, be subject to new principal registration 
requirements, described below.
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    Currently, Supplementary Material .04 to Rule 604, Categories of 
Representative Registration--General Securities Representative, 
contains the basic requirement that each member and each person 
associated with a member organization who is included within the 
definition of a representative in Rule 1(cc) register with the Exchange 
as a General Securities Representative and pass the Series 7 
examination before his registration may become effective. This 
provision is not changing and is similar to that of several other self-
regulatory organizations (``SROs'').\15\ The Exchange proposes to move 
the provisions of Rule 604(h) into Rule 613 and Supplementary Material 
.04 of Rule 604 into Rule 613(e) so that the ``registered 
representative'' categories and requirements would be located in one 
rule.
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    \15\ See e.g., BX Rules 1031 and 1032, NASDAQ Rules 1031 and 
1032, and NASD Rules 1031 and 1032.
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    The Exchange also proposes Rule 613(f) which would adopt a limited 
category of representative registration, Proprietary Trader, and a 
qualifying examination for that category, the Series 56.\16\ Members 
and associated persons engaged solely in proprietary trading, market 
making or effecting transactions on behalf of a broker-dealer account 
and who do not do business with the public may register as Proprietary 
Traders and pass the Series 56 examination, in lieu of registering as 
General Securities Representatives and passing the Series 7 
examination. The Proprietary Trader category would include both Floor 
Brokers on the Exchange's trading floor and persons performing 
brokerage functions off the trading floor (``upstairs'').\17\
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    \16\ The Exchange filed the Series 56 content outline with the 
Commission. See Securities Exchange Act Release No. 66645 (March 22, 
2012), 77 FR 19042 (March 29, 2012). The Series 56 would also serve 
as a prerequisite for the Proprietary Trader principal registration 
category. The Series 24 would be the appropriate examination for the 
new principal registration category, as described below.
    \17\ This provision is the same as the provision in Chicago 
Board Options Exchange Incorporated (``CBOE'') rules, which requires 
that an individual Trading Permit Holder or associated person who 
effects transactions on behalf of a broker-dealer account register 
and pass the Series 56 examination. See CBOE Rule 3.6A, 
Interpretation and Policy .06.
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    The Exchange proposes to replace Rule 604 with Rule 613. Rule 613 
would cover every person subject to registration as a representative, 
and unlike Rule 604, it is not limited to associated persons of member 
organizations for which the Exchange is the designated examining 
authority (``DEA''). Furthermore, the proposed rules would extend the 
requirements currently set forth in Rule 604(h), which apply only to 
member organizations registered to use PSX,\18\ to all member 
organizations. In addition, the language of Rule 613 more closely 
aligns with the rules of FINRA and NASDAQ, which should facilitate 
compliance by broker-dealers.
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    \18\ See Rule 604(f).
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Principal Registration

    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 persons associated with a member 
organization for any of these functions are principals. Such persons 
include: Sole proprietors, officers, partners, managers of offices of 
supervisory jurisdiction,\19\ and directors of corporations. Currently, 
principals of PSX member firms must register via Form U4 in Web CRD, 
and qualify by passing an appropriate examination, pursuant to Rule 
604(g). The Exchange proposes to extend these principal requirements to 
cover all member organizations, including those that trade options. The 
more extensive principal requirements would be embodied in Rules 611 
and 612, which would be substantially similar to Rule 604(g) and 
Supplementary Material .01-.03.
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    \19\ The Exchange defined the term ``office of supervisory 
jurisdiction'' to mean any office of a member organization at which 
any one or more of the following functions take place: Order 
execution and/or market making; structuring of public offerings or 
private placements; maintaining custody of customers' funds and/or 
securities; final acceptance (approval) of new accounts on behalf of 
the member organization; review and endorsement of customer orders; 
final approval of advertising or sales literature for use by persons 
associated with the member organization, pursuant to Rule 605, 
except for an office that solely conducts final approval of research 
reports; or responsibility for supervising the activities of persons 
associated with the member organization at one or more other branch 
offices of the member organization. This definition is drawn from 
NASD Rule 3010. The Exchange is adopting the reference to this term 
in order to cover these managers in the new principal registration 
requirement. The Exchange is not, at this time, adopting a 
comprehensive program with regard to such offices, such as that 
found in NASD Rule 3010. See proposed Rule 611(b).
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    The Exchange also proposes to recognize two new categories of 
limited principal registration. First, the Exchange proposes to adopt 
Rule 612(d), which recognizes Registered Options Principals. Each 
member or person associated with a member organization who is included 
within the definition of principal, including any person designated as 
a Chief Compliance Officer on Schedule A of Form BD of a member 
organization, may register as a Registered Options Principal and pass 
the Series 4 examination, instead of registering as a General 
Securities Principal and passing the Series 24 examination, if the 
person's activities are limited solely to options. Specifically, a 
Registered Options Principal can only supervise the options activities 
of a member organization and must be registered pursuant to Exchange 
Rules as a General Securities Representative.
    Second, the Exchange proposes to recognize the Proprietary Trader 
Principal category as a limited principal category in Rule 612(e). It 
would apply to persons whose supervisory responsibilities in the 
investment banking and securities business are limited to the 
activities of a member organization that involve proprietary trading, 
market making and effecting transactions on behalf of broker-dealers. 
It would require that the associated person register pursuant to 
Exchange Rules as a Proprietary Trader, qualify by passing the Series 
24 examination, and not function in a principal capacity with 
responsibility over any area of business activity other than 
proprietary trading, market making and effecting transactions on behalf 
of broker-dealer accounts.\20\ This category is in lieu of registration 
as a General Securities Principal, for which the prerequisite 
qualification examination is the Series 7. The qualification 
examination for the proposed new registration category of Proprietary 
Trader Principal is the Series 24, which is the same qualification 
required for registration as a General Securities Principal. However, 
the prerequisite examination for the Proprietary Trader Principal 
category is the Series 56. Phlx expects the Proprietary Trader 
Principal category to be available to Phlx member organizations in 
WebCRD shortly.
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    \20\ The Exchange worked with other exchanges and FINRA to 
develop this registration category. The Proprietary Trader Principal 
registration category is limited to those who supervise persons 
engaged only in activities covered by the proposed Proprietary 
Trader registration category.
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    Both a Registered Options Principal and a Proprietary Trader 
Principal would count towards a firm's two-principal requirement in 
Rule 611(e). If the member organization is involved in activity other 
than that permitted by these categories, however, an additional 
principal or principals would be required.
    Two additional limited principal registration categories would also 
be available to all member organizations. Rule 604.02, titled Limited 
Principal--

[[Page 25005]]

Financial and Operations, requires each member organization of the 
Exchange that is subject to Rule 604(g) and that is operating pursuant 
to the provisions of Rule 15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8) under 
the Act to designate as Limited Principal--Financial and Operations 
(``FINOP'') those persons associated with it, at least one of whom 
shall be its chief financial officer, who perform certain financial and 
operational duties, as specified in the rule. Each FINOP must register 
with the Exchange and pass the Series 27 examination. The Exchange 
proposes to move this provision to Rule 612(b) and extend it to cover 
trading floor members, in order to ensure that persons handling the 
financial affairs of a firm are properly registered and qualified, 
given the importance and complexity of the rules governing financial 
responsibility for broker-dealers.\21\ Although the FINOP is a type of 
principal registration, because its scope is limited to financial 
matters, the FINOP does not count toward the two-principal requirement 
of Rule 611(e).
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    \21\ See e.g., Phlx Rule 703.
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    The Limited Principal--General Securities Sales Supervisor, 
currently in Rule 604.03, would be moved to Rule 612(c) and would also 
be available to all member organizations who have associated persons 
meeting its specific, limited requirements. Like the FINOP, the General 
Securities Sales Supervisor does not count toward satisfying the two-
principal requirement of Rule 611.

Other Rule Modifications

    In connection with strengthening its registration rules, the 
Exchange is proposing to reorganize and renumber its registration rules 
to better align with those of NASDAQ and FINRA.
    In addition to the amendments discussed above, the Exchange 
proposes to renumber without change: Rule 604(i), Persons Exempt from 
Registration, to Rule 614 (and Rule 604(i)(2) to Rule 614(b)); and Rule 
604(j), Waiver of Requirements, to Rule 615; \22\ and Rule 604(g)(5), 
the general requirement to have a minimum of two principals with 
respect to each aspect of a member's investment banking and securities 
business (except a proprietary trading firm with 25 or fewer 
representatives, which is only required to have one) to Rule 
611(e)(i).\23\
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    \22\ Rule 604(j) provides that 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 Commission 
expects this waiver authority to be used sparingly, and that where 
used, the Exchange would keep records of waivers granted and reasons 
for so doing.
    \23\ Although there must be a minimum of two Principals, all 
persons who engage in specified supervisory functions must be 
registered as Principals.
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    The Exchange proposes to consolidate electronic filing requirements 
in proposed Rule 616, Electronic Filing Requirements for Uniform Forms. 
Rule 616(a), WebCRD Filing, would require that forms filed pursuant to 
the Rule 600 Series be filed electronically through WebCRD. Similarly, 
Rule 616(b), Form U4 and U5 Filing Requirements, would require that 
initial filings and amendments of Forms U4 and U5 be submitted 
electronically.\24\ In addition, every application for registration 
filed with the Exchange shall be kept current at all times by 
supplementary amendments via electronic filing or such other process as 
the Exchange may prescribe. The amendments shall be filed not later 
than 30 days after the applicant learns of the facts or circumstances 
giving rise to the need for the amendment.\25\
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    \24\ As part of the member organization's recordkeeping 
requirements, it must retain such records for a period of not less 
than three years, the first two years in an easily accessible place, 
and make such records available promptly upon request in accordance 
with Rule 17a-4 under the Act (17 CFR 240.17a-4).
    \25\ This rule is similar to NASDAQ Rule 1031(d)(3).
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    The Exchange also proposes to amend OFPA F-34 and EFPA A-7, both 
titled Failure to Timely Submit Amendments to Form U4, Form U5 and Form 
BD. These are the corollary minor rule plan provisions for Rule 623, 
which are being amended only to delete the reference to Rule 604 and 
add rule numbers 611-613 and 616.
    The Exchange proposes to amend Rule 620, Trading Floor 
Registration, to specifically state the registration categories 
governed by the rule, to require all trading floor associated persons 
of member organizations to register via Form U4, to delete unnecessary 
language and to strengthen the time requirement. Specifically, the 
Exchange proposes to add to Rule 620(a), which requires Floor Brokers, 
Specialists and Registered Options Traders on an Exchange trading floor 
to register under ``Member Exchange'' (``ME'') via Form U4. The 
Exchange notes that this provision covers members operating on the 
trading floor and that such members are required to successfully 
complete the Exchange's Trading Floor Qualification Examination. The 
Exchange also proposes to delete the reference in Rule 620(a) regarding 
updating Form U4 within a certain time period and include this 
requirement in Rule 616.
    Rule 620(b) covers all trading floor personnel, such as clerks, 
interns, and other associated persons of member organizations who are 
not required to register under Rule 620(a) and requires them to 
register with the Exchange on a form supplied by the Exchange. The 
Exchange proposes to require these individuals to be registered on Form 
U4 in WebCRD. Accordingly, these associated persons will be subject to 
the comprehensive disclosure obligations of Form U4, which the Exchange 
believes is an important enhancement. The specific registration 
category will be ``Floor Employee (``FE'')'' under ``Phlx,'' which will 
be stated in the rule. The Exchange does not intend to require a 
qualification examination for non-member trading floor personnel at 
this time.\26\
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    \26\ The Exchange does not believe that the Series 7, Series 56 
or its Trading Floor Qualification Examination is appropriate for 
the limited functions of a trading floor clerk because these persons 
are not members trading on the floor, and they are supervised by 
members. These persons do not execute transactions on the Exchange, 
but rather enter orders and report trades, for example, and perform 
related clerical functions. See Rule 1090.
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    The Exchange also proposes to amend Rule 620(b) to provide that 
following the termination of, or the initiation of a change in the 
status of any such personnel of a member organization who has been 
issued an Exchange access card and a trading floor badge, the 
appropriate Exchange form must be completed, approved and dated by a 
member organization principal, officer, or member of the member 
organization with authority to do so, and submitted to the appropriate 
Exchange department no later than 9:30 a.m. the next business day by 
the member organization employer. The Exchange proposes to strengthen 
this requirement by adding that such submission should occur as soon as 
possible but no later than 9:30 a.m. the next business day.
    The Exchange proposes to codify an existing fingerprinting 
requirement into new paragraph (b) of Rule 623, Fingerprinting. This 
paragraph specifies that a member organization must promptly submit 
fingerprints on behalf of any person filing Form U4 pursuant to Rule 
616, and the Exchange may make registration effective pending receipt 
of fingerprint information.
    Finally, as a result of the expanded and amended registration 
requirements, additional persons will become subject to Continuing 
Education requirements in Rule 640.

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III. Discussion and Commission Findings

    The Commission believes that this proposed rule change is an 
important step towards harmonizing the registration, qualification and 
continuing education requirements across the SROs. In order to meet its 
obligations under Section 6(b)(1) of the Act \27\ to enforce compliance 
by member firms \28\ and their associated persons with the Act, the 
rules thereunder, and the Exchange's own rules, an exchange must have 
baseline registration and examination requirements for all persons 
conducting business on an exchange, as well as for those supervising 
the activity. In addition, an exchange should have continuing education 
requirements for registered persons to help ensure that members and 
persons associated with their members are up to date on the industry, 
including but not limited to amendments to the Exchange's rules and the 
securities laws, rules, and regulations that govern their activities.
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    \27\ Section 6 requires exchanges to have the ability to enforce 
compliance by their members and associated persons with the federal 
securities laws and with their own rules. 15 U.S.C. 78f(b)(1).
    \28\ Broker and dealers are required to supervise the activities 
of their associated persons. See Section 15(b)(4)(E) of the Act, 15 
U.S.C. 78o(b)(4)(E).
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    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.\29\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\30\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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. The 
Commission believes that the proposed rule change is also consistent 
with Section 6(c)(3)(B) of the Act,\31\ which authorizes exchanges to 
prescribe standards of training, experience and competence for persons 
associated with exchange members, and gives exchanges the authority to 
bar a natural person from becoming a member or a person associated with 
a member, if the person does not meet the standards of training, 
experience and competence prescribed in the rules of the exchange.
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    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78f(b)(5).
    \31\ 15 U.S.C. 78f(c)(3)(B).
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    Phlx's proposed rule change requires all associated persons of 
member organizations engaged in a securities business on Phlx, as well 
as those who supervise, train or otherwise oversee those who do, to 
register with the Exchange via the Form U4, qualify by passing an 
appropriate examination, and comply with continuing education 
requirements. Phlx's requirements should help ensure that all 
associated persons who transact business on Phlx, including those 
engaged in proprietary trading, are subject to appropriate 
registration, qualification, and continuing education requirements. 
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, will be supervised, and can be identified by 
regulators.
    Phlx is adding new limited principal registration categories which 
are recognized by other exchanges.\32\ The Registered Option Principal 
will be restricted to supervising those persons exclusively involved in 
options activities, and the required examination, the Series 4, is 
focused on practices in and rules governing the options industry. The 
Proprietary Trader Principal category is corollary to the new 
Proprietary Trader Representative category discussed above and is 
recognized by many of the other exchanges.\33\ Proprietary Trader 
Principals may supervise persons engaged in proprietary trading, market 
making and effecting transactions on behalf of broker-dealer accounts 
and must pass the Series 24 (General Securities Principal) examination.
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    \32\ See, e.g., CBOE Rule 9.2 and ISE Rule 601.
    \33\ See, e.g., CBOE Rule 3.6A and NASDAQ Rule 1032(c).
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    In sum, under the proposed rule change, all Principals must 
register through WebCRD and pass appropriate prerequisite examinations, 
as well as principal examinations that reflect the enhanced 
responsibility entrusted to principals. In addition, Principals would 
be subject to the Exchange's continuing education requirements.
    Phlx's proposed exceptions from the above-discussed general 
requirements are appropriate. Any member seeking an exception from the 
two principal requirement must provide evidence that conclusively 
indicates to the Exchange that only one principal is necessary. The 
Commission expects this authority to be used sparingly, because such 
persons oversee the operations of member firms and provide the first 
line of defense in ensuring that member firms are complying with the 
rules of the exchange as well as the federal securities laws. In 
addition, Phlx may waive the qualification examination requirement in 
exceptional cases where the applicant has demonstrated that good cause 
exists to grant the waiver. The Commission also expects this authority 
to be used sparingly. The Commission notes that these exceptions are 
substantively the same as exceptions provided in similar rules at other 
SROs,\34\ and it expects Phlx to keep records detailing the reasons for 
exceptions granted and waivers given.\35\
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    \34\ See, e.g., FINRA Rule 1070(d) and NASDAQ Rule 1070(d).
    \35\ See Rule 17a-1(a) under the Act, 17 CFR 240.17a-1(a).
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    Phlx's proposed rule change will help ensure that all associated 
persons of members transacting business on the Exchange, 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. The Commission believes the proposal 
should enhance the Exchange's ability to ensure an effective 
supervisory structure for those conducting business on its facilities. 
The requirements apply broadly and should enhance the ability of 
Exchange members to comply with the Exchange's rules as well as with 
the federal securities laws.
    Additionally, the Commission believes that the proposed rule change 
is consistent with the principles of Section 11A(a)(1)(22) of the Act 
in that it seeks to assure fair competition among brokers and dealers 
and among exchange markets. The Commission believes that the proposed 
rule change will promote uniformity of regulation across markets, thus 
reducing opportunities for regulatory arbitrage. Phlx's proposed rule 
change helps ensure that all persons conducting a securities business 
through Phlx are appropriately registered, qualified, and supervised, 
as is required under the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (SR-Phlx-2012-023), be, and 
hereby is, approved.
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    \36\ 15 U.S.C. 78s(b)(2).
    \37\ 17 CFR 200.30-3(a)(12).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-10027 Filed 4-25-12; 8:45 am]
BILLING CODE 8011-01-P