Document ID: SEC-2017-1831-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2017-11-08T05:00Z

[Federal Register Volume 82, Number 215 (Wednesday, November 8, 2017)]
[Notices]
[Pages 51887-51889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24256]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82005; File No. SR-PHLX-2017-055]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Approving 
Proposed Rule Changes To Amend Rules 1024, Conduct of Accounts for 
Options Trading, and 1025, Supervision of Accounts

November 2, 2017.

I. Introduction

    On September 7, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule 
changes to amend Phlx Rules 1024 (Conduct of Accounts for Options 
Trading) and 1025 (Supervision of Accounts) to conform them more 
closely to the comparable rules of the Chicago Board Options Exchange 
(``CBOE'') and to make minor clarifications and corrections to the 
text.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule changes were published for comment in the Federal 
Register on September 22, 2017.\3\ The public comment period closed on 
October 13, 2017. The Commission received no comments on the proposed 
rule changes. This order approves the proposed rule changes.
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    \3\ See Exchange Act Release No. 81642 (Sept. 18, 2017), 82 FR 
44481 (Sept. 22, 2017) (``Notice'').
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II. Description of the Proposed Rule Changes 4
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    \4\ The subsequent description of the proposed rule changes is 
substantially excerpted from the Exchange's description in the 
Notice. See Notice, 82 FR 44481-83.
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    Rules 1024 and 1025 contain regulatory requirements generally 
applicable to Phlx members and member organizations that conduct a 
public customer options business. The Exchange is proposing changes to 
certain sections of those rules to clarify the language and to correct 
inaccuracies. The Exchange also proposes to change certain rule 
language to conform the rules more closely to CBOE rules dealing with 
the same subject matter, in order to prevent inadvertent 
misunderstandings of the rules' requirements. These rule changes are 
intended to promote more effective regulatory compliance by Exchange 
members and member organizations. The proposed changes are detailed 
below.

Rule 1024(a)(i)

    Rule 1024(a)(i) governs registration of Options Principals.\5\ The 
rule currently provides that no member or member organization or 
individual associated with a member organization shall 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. Additionally, it provides that persons engaged in 
the supervision of options sales practice or a person to whom the 
designated general partner or executive officer

[[Page 51888]]

(pursuant to Rule 1025) or another Registered Options Principal \6\ 
delegates the authority to supervise options sales practices shall be 
designated as Options Principals. Finally, the rule states that all 
members and member organizations must use Web CRD to submit Form U4, 
Uniform Application for Securities Industry Registration or Transfer 
filings on behalf of their Options Principals. Members and member 
organizations are required under the rule to amend Form U4 filings not 
later than thirty (30) days after the filer knew or should have known 
of the facts which gave rise to the amendment.
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    \5\ See Rule 612(d).
    \6\ Id.
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    The Exchange is proposing to amend Rule 1024(a)(i) by adopting 
language requiring Options Principals to electronically file a Uniform 
Application for Securities Industry Registration or Transfer (Form U4) 
with Web CRD, to successfully complete an examination prescribed by the 
Exchange and specified in Rule 1024 for the purpose of demonstrating an 
adequate knowledge of the options business and of the Rules of the 
Exchange, and to further agree in the U4 filing to abide by the Bylaws 
and Rules of the Exchange and the Rules of The Options Clearing 
Corporation. The Exchange is proposing to remove the sentence that 
requires members and member organizations to amend Form U4 filings not 
later than thirty (30) days after the filer knew or should have known 
of the facts which gave rise to the amendment. However, the Exchange 
proposes to add language requiring members and member organizations 
that are required to complete Form U4 to promptly (but in any event no 
later than 30 days after the filer knew or should have known of the 
facts which gave rise to the need for the amendment) electronically 
file any required amendments to Form U4 with Web CRD. Additionally, new 
language is proposed that would require termination of employment or 
affiliation of any Registered Options Principal in such capacity to be 
promptly, but in any event no later than 30 days following the 
termination, electronically reported to Web CRD together with a brief 
statement of the reason for such termination on Form U5. The amendment 
would conform Rule 1024(a) more closely to CBOE Rule 9.2. The proposal 
would also correct a reference in the second sentence to ``options sale 
practice,'' substituting for that term ``options sales practices.''

Rule 1024(b)(ii)

    Rule 1024(b)(ii) generally provides that, in approving a customer's 
account for options transactions, a member or member organization shall 
exercise due diligence to learn the essential facts as to the customer 
and his investment objectives and financial situation, and shall make a 
record of such information. It also provides for approval and for 
confirmation of approval of the customer's account by a Registered 
Options Principal qualified individual.
    For purposes of clarity, the Exchange proposes to eliminate 
references in Rule 1024(b)(ii) to a ``specific'' or ``specified'' 
Registered Options Principal. It also proposes to delete the words 
``qualified individual'' as they appear following references to 
Registered Options Principals to eliminate any ambiguity, as it is not 
clear what a Registered Options Principal qualified individual means if 
not a Registered Options Principal. Finally, the Exchange proposes to 
relocate the phrase ``within a reasonable period of time'' simply to 
conform the rule in this respect more closely to CBOE Rule 9.7.

Rule 1024(c)(v)

    Rule 1024(c)(v) is proposed to be amended by changing an inaccurate 
internal cross reference, from Rule 1029(c) to Rule 1029(b).

Rule 1024 Commentary .01 Section 8

    The Exchange is proposing to delete the word ``other'' as 
unnecessary and to correct the placement of a closing parenthesis, 
moving it from after the word ``transactions'' to after the word 
``commodities.''

Rule 1024 Commentary .03

    The Exchange is proposing to add the inadvertently omitted word 
``an'' before the word ``opportunity.''

Rule 1024 Commentary .06

    The Exchange is proposing to reword the sentence for clarity, so 
that it states that individuals engaged in the supervision of options 
sales practices are required to be designated as Options Principals and 
are required to qualify as an Options Principal by passing one of the 
examinations referred to in the rule. The Exchange also proposes to 
amend the rule's reference to the Series 9/10 examination, in order to 
use the same name that the Financial Industry Regulatory Authority 
(``FINRA'') uses for that examination.

Rule 1024 Commentary .07

    The Exchange proposes to add the inadvertently dropped word 
``reviewing'' to a sentence that requires individuals who are delegated 
responsibility for reviewing, among other things, the acceptance of 
discretionary accounts, to be designated as Options Principals and pass 
the Series 4 examination.

Rule 1025(a)(iii)A

    The Exchange proposes to substitute the word ``responsibility'' for 
the word ``responsibilities'' simply to conform the rule more closely 
to CBOE Rule 9.8(a)(3)(i).

Rule 1025(b)(i)

    The Exchange proposes to make non-substantive wording changes to 
conform the rule language more closely to that of CBOE Rule 9.8(b)(1) 
by removing the unnecessary words ``above-noted,'' by replacing the 
words ``requirements applicable to'' with the words ``responsibility 
of,'' by deleting the unnecessary words ``however, the,'' and by 
replacing the words ``other than the principal supervisory office if 
such documents and information'' with the words ``off premises so long 
as the records.''

Rule 1025(b)(iii)

    The Exchange proposes to capitalize the word ``Rule'' in a 
reference to SEC Rule 17a-4, to conform the language more closely to 
CBOE Rule 9.8(b)(3).

Rule 1025(b) Concluding Sentence

    The words ``any person'' are proposed to be substituted for the 
words ``a person'', and an inaccurate reference to ``this paragraph 
(b)(3)'' is proposed to be corrected to read ``this paragraph 
(b)(iii).''

Rule 1025(d)

    An extraneous word ``the'' is proposed to be deleted before the 
word ``proximity'' to conform more closely to CBOE Rule 9.8(d)(1)(i), 
and an inaccurate reference to Rule 1025(c) is proposed to be corrected 
to read Rule 1025(e).

Rule 1025(e)

    The Exchange proposes to remove an extraneous comma to conform the 
rule more closely to CBOE Rule 9.8(e)(1) and to change an incorrect 
internal cross reference from paragraph (e)(1) to paragraph (e)(i).

Rule 1025(g)

    Currently, Rule 1025(g) requires each member organization that 
conducts a non-member customer business to submit each year to the 
Exchange a written report on the member organization's supervision and 
compliance effort during the preceding year. The Exchange proposes to 
expand the requirement to conform it more closely to CBOE Rule 9.8(g), 
by

[[Page 51889]]

specifying that the report must also detail the adequacy of the member 
organization's ongoing compliance processes and procedures. The 
proposed amendments to Rule 1025(g) would also require the Chief 
Executive Officer (or equivalent) to certify that the member 
organization has in place processes to test the effectiveness of 
policies and procedures on a periodic, rather than on a regular, basis. 
This change would conform the Exchange's requirement more closely to 
the comparable CBOE Rule 9.8(g)5(i)(C) requirement. The proposal would 
also correct the spelling of the word ``preceding'' in Rule 
1025(g)(ii), add missing semicolons to an itemized list found in Rule 
1025(g)(iii), correct inaccurate internal cross references in Rules 
1025(g)(v)(C) and (D), as well as correct the placement of a closing 
parenthesis in Rule 1025(g)(v)(C). Finally, it would replace the 
awkward phrase ``this requirement of this Rule'' with ``the 
requirements of this Rule.''

Rule 1025(h)

    Rule 1025(h) currently provides that each member organization shall 
submit the report required by Rule 1024(g) to its one or more control 
persons or, if the member organization has no control person, to the 
audit committee of its board of directors or its equivalent committee 
or group. The Exchange proposes to replace the inaccurate reference to 
Rule 1024(g) with a correct reference to Rule 1025(g). The Exchange 
proposes to add language to the end of the rule to establish the 
meaning of ``control person,'' proposed to be defined as a person who 
controls the member organization. The new language would define the 
term ``control'' as meaning the power to exercise a controlling 
influence over the management or policies of the member organization, 
unless such power is solely the result of an official position with the 
member organization. Finally, the new language would state that any 
person who owns beneficially, directly or indirectly, more than 20% of 
the voting power in the election of directors of the member 
organization, or more than 25% of the voting power in the election of 
directors of any other corporation which directly or through one or 
more affiliates owns beneficially more than 25% of the voting power in 
the election of directors of the member organization, shall be presumed 
to control the member organization. The proposed new language is based 
on CBOE Rules 9.8(h) and 1.1(k), which is incorporated by reference 
into CBOE Rule 9.8(h).

Rule 1025 Commentary .02 and .03

    Rule 1025 Commentary .02 is proposed to be amended by deleting the 
introductory phrase ``In meeting their supervisory responsibilities'' 
in order to conform the language more closely to CBOE Rule 9.8, 
Interpretations and Policies .01. The rule currently requires member 
organizations conducting a non-member customer business to enforce 
written procedures governing the conduct of options accounts. As 
revised, the written procedures would be required to detail the 
specific methods used to supervise all non-member customer accounts and 
all orders in such accounts. This amendment would also provide greater 
clarity regarding the required content of the procedures and also would 
conform the rule more closely to CBOE Rule 9.8, Interpretations and 
Policies .01. The last sentence of Commentary .02 would be revised by 
replacing the phrase ``short uncovered'' options positions with the 
phrase ``uncovered short'' options positions. Finally, the Exchange 
proposes to amend Rule 1025 Commentary .03 by adding the word ``shall'' 
to the first sentence, to conform the language more closely to CBOE 
Rule 9.8, Interpretations and Policies .02.

IV. Discussion and Commission Findings

    After careful review of the proposed rule changes, the Commission 
finds that the proposal is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities exchange.\7\ Specifically, the 
Commission finds that the proposed rule changes are consistent with 
Section 6(b)(5) of the Exchange Act,\8\ 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. Section 
6(b)(5) also requires that the rules of an exchange not be designed to 
permit unfair discrimination among customers, issuers, brokers, or 
dealers.
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    \7\ In approving these rule changes, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The proposal is designed to ``remove impediments to and perfect the 
mechanism of a free and open market and a national market system, by 
correcting various aspects of the rules and by adding additional 
clarity to the rules.'' \9\ The Commission notes that Phlx believes 
that conforming its rules regarding conduct of accounts for options 
trading and supervision of accounts more closely to the corresponding 
CBOE rules will create ``more efficient regulatory compliance by 
members of both exchanges due to reduction of differences in wording 
and consequent potential for inadvertent regulatory noncompliance.'' 
\10\ The Commission further notes that Phlx believes that the minor 
corrections and clarifications of the rules in the proposal will 
``improve the accuracy of the rules'' and ``improve their readability, 
making them more understandable and thereby facilitating easier 
compliance.'' \11\ The Commission notes that the proposal received no 
comments from the public.
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    \9\ See Notice, 82 FR at 44483.
    \10\ See id.
    \11\ See id.
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    The Commission believes that the proposal will promote regulatory 
efficiency through more precise rule text and greater harmonization of 
regulatory requirements across national securities exchanges, thereby 
reducing regulatory burdens, without undermining strong regulatory 
protections for investors. The Commission believes that the approach 
proposed by the Exchange is appropriate and designed to protect 
investors and the public interest, consistent with Section 6(b)(5) of 
the Exchange Act. For these reasons, the Commission finds that the 
proposed rule changes are consistent with the Exchange Act and the 
rules and regulations thereunder.

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) \12\ of the 
Exchange Act that the proposal (SR-PHLX-2017-055), be and hereby is 
approved.
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    \12\ 15 U.S.C. 78s(b)(2).
    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24256 Filed 11-7-17; 8:45 am]
 BILLING CODE 8011-01-P