Document ID: SEC-2017-1325-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX LLC
Posted Date: 2017-08-04T04:00Z

[Federal Register Volume 82, Number 149 (Friday, August 4, 2017)]
[Notices]
[Pages 36469-36471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16405]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81270; File No. SR-Phlx-2017-56]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change to a Proposal To Amend Rule 1027, Discretionary 
Accounts, To Conform It More Closely to a Comparable Rule of the 
Chicago Board Options Exchange (``CBOE'') and To Make Minor Corrections 
and Clarifications

July 31, 2017.
    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 July 20, 2017, 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, II, and III, below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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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 Rule 1027, Discretionary Accounts, 
to conform it more closely to a comparable rule of the Chicago Board 
Options Exchange (``CBOE'') and to make minor corrections and 
clarifications.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/ com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

[[Page 36470]]

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
    Rule 1027 generally imposes restrictions and various requirements 
on members \3\ and partners and employees of member organizations \4\ 
regarding the exercise of discretionary power with respect to trading 
in options in a customer's accounts. The Exchange proposes to amend 
Rule 1027 in a number of respects to eliminate redundant rule text, 
clarify certain rule text, and conform parts of the rule more closely 
to CBOE Rule 9.10, Discretionary Account.\5\
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    \3\ Exchange Rule 1(n) defines ``member'' as a permit holder 
which has not been terminated in accordance with the By-Laws and 
Rules of the Exchange. The Exchange has issued ``Series A-1'' 
permits, which confer on the holder rights and privileges, and 
impose on the holder the obligations, set forth in Exchange Rule 
908. Under Exchange Rule 908(b) a Series A-1 permit may only be 
issued to an individual who is a natural person of at least twenty-
one (21) years of age, or to a corporation meeting the eligibility 
and application requirements set forth in the By-Laws and Rules.
    \4\ Rule 1(o) defines ``member organization'' as ``a 
corporation, partnership (general or limited), limited liability 
partnership, limited liability company, business trust or similar 
organization, transacting business as a broker or a dealer in 
securities and which has the status of a member organization by 
virtue of (i) admission to membership given to it by the Membership 
Department pursuant to the provisions of Rules 900.1 or 900.2 or the 
By-Laws or (ii) the transitional rules adopted by the Exchange 
pursuant to Section 6-4 of the By-Laws.'' Rule 901(a) provides in 
part that ``[t]he Membership Department shall have jurisdiction over 
the issuance of memberships (in respect of members and member 
organizations) and permits and over applications by non-members for 
admission as members.'' Rule 901(c) provides that ``[a]ll 
applications to qualify and register a corporation or other entity 
as a member organization and all applications for reinstatement of 
any qualification or registration of a member organization shall be 
referred to the Membership Department which shall investigate and 
act thereon.''
    \5\ CBOE Rule 9.10 was substantially amended in Securities 
Exchange Act Release No. 56492 (September 21, 2007), 72 FR 54952 
(September 27, 2007) (SR-CBOE-2007-106) to create a supervisory 
structure for options that is similar to that required by New York 
Stock Exchange (``NYSE'') and National Association of Securities 
Dealers (``NASD'') rules. On July 26, 2007, the Commission approved 
a proposed rule change filed by NASD to amend NASD's Certificate of 
Incorporation to reflect its name change to Financial Industry 
Regulatory Authority Inc., or FINRA, in connection with the 
consolidation of the member firm regulatory functions of NASD and 
NYSE Regulation, Inc. See Securities Exchange Act Release No. 56146 
(July 26, 2007).
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Rule 1027(a)
    Rules 1027(a)(i) and (ii) apply to stock or exchange-traded fund 
share options and foreign currency options respectively. These 
provisions prohibit the exercise of any discretionary power with 
respect to trading in options contracts in a customer's account unless 
such customer has given prior written authorization with respect to 
such trading and the account has been accepted in writing by a 
designated Registered Options Principal or, in the case of foreign 
currency options, a Foreign Currency Options Principal.
    Rule 1027(a)(i) is proposed to be amended to include index options, 
as their current exclusion from the rule is without a rational basis 
and was likely an oversight. References to Registered Options Principal 
``qualified persons'' or ``qualified individuals'' in Rule 1027(a)(i) 
are proposed to be amended in order to refer only to ``Registered 
Options Principals,'' in order to eliminate needless ambiguity and lack 
of clarity as to who is a Registered Options Principal ``qualified 
person'' or ``qualified individual.'' Additionally, the last two 
sentences of Section (a)(i) currently provide that every discretionary 
order shall be identified as discretionary at the time of entry, and 
that discretionary accounts shall receive frequent review by a 
Registered Options Principal qualified person specifically delegated 
such responsibilities under Rule 1025, who is not exercising the 
discretionary authority. These sentences are largely duplicative of 
existing Rule 1027(a)(iii) and are therefore proposed to be deleted. 
The rule would be expanded to cover member organizations, to be more 
consistent with the comparable CBOE rule which applies to CBOE Trading 
Permit Holder (``TPH'') organizations.\6\
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    \6\ Rule 1027(a)(ii) deals with foreign currency options and has 
no counterpart in CBOE Rule 9.10(a). The Exchange is nevertheless 
proposing to revise Rule 1027(a)(ii) by expanding its scope to 
include member organizations for consistency with Rule 1027(a)(i) in 
terms of extent of coverage of the rule.
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    The Exchange proposes to delete from Section (a)(iii) a reference 
to ``Compliance Registered Option Principal,'' a term which the 
Exchange no longer uses, and proposes to substitute the term 
``Registered Options Principal.'' It also proposes to amend that 
section by adding language requiring the Registered Options Principal 
providing appropriate supervisory review to be specifically delegated 
such responsibilities under Rule 1025 and not be the Registered Options 
Principal exercising the discretionary review. These changes would 
conform Section (a)(iii) to the duplicative language deleted from 
Section (a)(i) as described above. The Exchange also proposes to delete 
the last sentence of Section (a)(iii), which provides that the 
provisions of paragraph (a) shall not apply to discretion as to the 
price at which or the time when an order given by a customer for the 
purchase or sale of a definite number of option contracts in a 
specified security or foreign currency shall be executed. This sentence 
is largely duplicative of existing language in Rule 1027(e), Discretion 
as to Time or Price Excepted. Rule 1027(e), however, is proposed to be 
amended by the addition of a reference to ``foreign currency'' which 
was present in the deleted sentence of Section (a)(iii).
    The Exchange is proposing no changes to section (a)(iv) which 
extends the provisions of Rule 1027 to index warrants, as no changes 
are required.
Rule 1027(c) Prohibited Transactions
    Currently, Rule 1027(c) prohibits members as well as partners, 
officers and employees of a member organization having discretionary 
power over a customer's account from, in the exercise of such 
discretion, executing or causing to be executed therein any purchases 
or sales of option contracts which are excessive in size or frequency 
in view of the financial resources in such account. The prohibition is 
proposed to be reworded, to conform Phlx Rule 1027(c) more closely to 
CBOE Rule 9.10, Discretionary Accounts, section (c). Additionally, the 
rule would be expanded to cover member organizations as well as members 
and partners and employees of member organizations.
Rule 1027(d) Record of Transactions
    Rule 1027(d) currently requires a record to be made of every 
transaction in option contracts in respect to which a member or a 
partner, officer or employee of a member organization has exercised 
discretionary authority, clearly reflecting such fact and indicating 
the name of the customer, the designation and number of the option 
contracts, the premium and the date and time when such transaction was

[[Page 36471]]

effected. The Exchange proposes to reword the rule so that it applies 
to option transactions for an account in respect to which a member or 
member organization or a partner, officer or employee of a member 
organization is vested with any discretionary authority, and to detail 
the required content of the record. The revision proposed for Rule 
1027(d) would conform the rule more closely to CBOE Rule 9.10, 
Discretionary Accounts, section (b), which extends to CBOE TPH 
organizations, except that the Exchange proposes to retain the existing 
requirement that the transaction record clearly reflect that the member 
(or, as the rule is proposed to be amended, member organization) or a 
partner, officer or employee of a member organization has exercised 
discretionary authority, as the Exchange believes this to be important 
information with respect to a transaction.
Rule 1027(e)
    As discussed above the Exchange proposes to amend Rule 1027(e), 
which generally excludes price and time discretion from the 
requirements of Rule 1027, to cover foreign currency options. The 
Exchange also proposes to correct an internal cross reference to ``this 
paragraph (d)'' which should read ``this paragraph (e)''.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ 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. 
The amendment of the requirements associated with discretionary 
accounts should remove impediments to and perfect the mechanism of a 
free and open market and a national market system, by eliminating 
redundant rule text, clarifying certain rule text, and conforming parts 
of the rule more closely to CBOE Rule 9.10, Discretionary Accounts 
which should create greater regulatory parity among options exchanges 
regarding obligations toward customers' discretionary accounts--
reducing a source of potential regulatory arbitrage--and by creating 
more efficient regulatory compliance by members of both exchanges due 
to reduction of differences in wording and consequent potential for 
inadvertent regulatory noncompliance. The Exchange believes it is in 
the public interest for a more consistently worded regulatory policy 
and standard regarding discretionary accounts to be in effect across 
options exchanges, for the benefit of customers. The harmonized rules 
are designed to further the goal of harmonized examinations and 
enforcement of similar rules, thus reducing duplicative regulatory 
efforts, thus lowering regulatory cost passed on to member 
organizations and the general public.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2017-56 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-2017-56. 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 Web site (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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-Phlx-2017-56 and 
should be submitted on or before August 25, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16405 Filed 8-3-17; 8:45 am]
 BILLING CODE 8011-01-P