Document ID: SEC-2017-1572-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX LLC
Posted Date: 2017-09-21T04:00Z

[Federal Register Volume 82, Number 182 (Thursday, September 21, 2017)]
[Notices]
[Pages 44222-44224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20087]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81630; File No. SR-PHLX-2017-56]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Approving 
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

September 15, 2017.

I. Introduction

    On July 20, 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 Rule 1027 (Discretionary Accounts).
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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 August 4, 2017.\3\ The public comment period closed on 
August 25, 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. 81270 (Jul. 31, 2017), 82 FR 
36469 (Aug. 4, 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 change is 
substantially excerpted from the Exchange's description in the 
Notice. See Notice, 82 FR 36469-71.
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    Rule 1027 generally imposes restrictions and various requirements 
on

[[Page 44223]]

members \5\ and partners and employees of member organizations \6\ 
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 Accounts.\7\
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    \5\ 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.
    \6\ 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.''
    \7\ 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) Authorization and Approval Required

    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.
    The Exchange proposes to amend Rule 1027(a)(i) to include index 
options, as their current exclusion from the rule is without a rational 
basis and was likely an oversight. The Exchange also proposes to expand 
the rule to cover member organizations, to be more consistent with the 
comparable CBOE rule which applies to CBOE Trading Permit Holder 
(``TPH'') organizations.\8\ 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 Rule 1027(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.
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    \8\ Rule 1027(a)(ii) addresses 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 Rule 1027(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 Rule 1027(a)(iii) to the duplicative language deleted from Rule 
1027(a)(i) as described above. The Exchange also proposes to delete the 
last sentence of Rule 1027(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 Rule 1027(a)(iii).
    The Exchange is proposing no changes to Rule 1027(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 
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,

[[Page 44224]]

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) Discretion as to Time or Price Excepted

    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).''

III. Discussion and Commission Findings

    After careful review of the proposed rule change, 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.\9\ Specifically, the 
Commission finds that the proposed rule changes are consistent with 
Section 6(b)(5) of the Exchange Act,\10\ 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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    \9\ In approving this rule change, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
See 15 U.S.C. 78c(f).
    \10\ 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 
eliminating redundant rule text, clarifying certain rule text, and 
conforming parts of the rule more closely to CBOE Rule 9.10, 
Discretionary Accounts.'' \11\ The Commission notes that Phlx believes 
that harmonizing its rule regarding discretionary accounts with its 
CBOE counterpart 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.'' 
\12\ The Commission further notes that Phlx believes that harmonizing 
Rule 1027 with its CBOE counterpart will ``further the goal of 
harmonized examinations and enforcement of similar rules, thus reducing 
duplicative regulatory efforts'' and thus lowering overall regulatory 
costs imposed on member organizations and, by extension, the general 
public.\13\ The Commission notes that the proposal received no comments 
from the public. Taking into consideration the Exchange's views about 
the proposed amendments, the Commission believes that the proposal will 
promote regulatory efficiency through more streamlined rule text that 
avoids unnecessary redundancy, clarification of the meaning and scope 
of the rule, 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 change 
is consistent with the Exchange Act and the rules and regulations 
thereunder.
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    \11\ Notice, 82 FR at 36471.
    \12\ Id.
    \13\ See id.
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IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) \14\ of the 
Exchange Act that the proposal (SR-PHLX-2017-56), be and hereby is 
approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-20087 Filed 9-20-17; 8:45 am]
 BILLING CODE 8011-01-P