Document ID: SEC-2010-1326-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-09-01T04:00Z

[Federal Register: September 1, 2010 (Volume 75, Number 169)]
[Notices]               
[Page 53727-53730]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01se10-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62776; File No. SR-Phlx-2010-91]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, 
To Amend Phlx Rule 604 Relating to Registration and Qualification 
Requirements for PSX

August 26, 2010.

I. Introduction

    On June 29, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt provisions relating to the registration and qualification of 
members and persons associated with member organizations. On July 13, 
2010, the Exchange submitted Amendment No. 1 to the proposed rule 
change. The proposed rule change was published for comment in the 
Federal Register on July 22, 2010.\3\ The Commission received no 
comment letters on the proposal. This order approves the proposed rule 
change, as modified by Amendment No. 1.
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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. 62509 (July 15, 
2010), 75 FR 42804.
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II. Description of the Proposal

    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.

Applicability--Rule 604(f)

    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.\4\
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    \4\ PSX will not be used for trading any securities other than 
NMS stocks. Existing rules would continue to govern registration of 
associated persons of member organizations that trade options, but 
not cash equities, through Phlx. The Commission understands that 
Phlx intends to amend its registration rules for its options members 
shortly.
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Principal Registration--Rule 604(g)

    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; \5\ provided, however, that 
a proprietary trading firm with 25 or fewer registered representatives 
would only be required to have one officer or partner registered as a 
principal. The proposed rule would allow Phlx to waive the two-
principal requirement in situations that indicate conclusively that 
only one person should be required to register as a principal.\6\
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    \5\ See proposed Rule 604(g)(5)(A).
    \6\ See proposed Rule 604(g)(5)(B).
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    All persons who are to function as principals \7\ would be required 
to pass the General Securities Principal Qualification Examination 
(``Series 24'') and submit a Form U4 through WebCRD reflecting 
registration as such, unless a different category of principal 
registration applies. Each person seeking to register and qualify as a 
General Securities Principal would be required to, before or concurrent 
with

[[Page 53728]]

such registration, become registered either as a General Securities 
Representative or as a Limited Representative--Corporate Securities.\8\
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    \7\ Any person associated with a member organization as a 
registered representative whose duties are changed to require 
registration in any principal classification would be allowed a 
period of 90 calendar days following the change in his duties to 
pass the appropriate principal qualification examination. Upon 
elevation, the member organization shall submit to the Exchange 
through FINRA's Central Registration Depository (``Web CRD'') an 
amended ``Uniform Application for Securities Industry Registration 
or Transfer'' (``Form U4'') and any applicable fees. No one may 
function as a principal beyond the initial 90 calendar day period 
following the change in his duties without having passed the 
appropriate qualification examination. See proposed Rule 604(g)(4).
    \8\ The Limited Representative--Corporate Securities is a FINRA 
category of registration and requires passing the Series 62 
examination. See FINRA Rule 1032(e).
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    The Exchange proposes to adopt a ``Limited Principal--General 
Securities Sales Supervisor'' category for persons whose supervisory 
responsibilities are limited.\9\ A person registered in this category 
solely on the basis of having passed the General Securities Sales 
Supervisor Qualification Examination (``Series 9/10'') would not be 
qualified to function in a principal capacity with responsibility over 
any area of business activity other than securities sales activity, nor 
be counted for purposes of fulfilling the requirement that member 
organizations have at least two principals.\10\
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    \9\ Each person associated with a member organization who is 
included in the definition of principal in Phlx Rule 604(g) may 
register as a Limited Principal--General Securities Sales Supervisor 
if: (i) His supervisory responsibilities are limited to the 
securities sales activities of a member organization; (ii) he is 
registered pursuant to Exchange Rules as a General Securities 
Representative; and (iii) he is qualified to be so registered by 
passing an appropriate examination, which is the Series 9/10.
    \10\ A Limited Principal--General Securities Sales Supervisor 
will not be qualified to perform for a member organization any of 
the following activities: (i) Supervision of the origination and 
structuring of underwritings; (ii) supervision of market making 
commitments; (iii) final approval of advertisements as these are 
defined in Phlx Rule 605; (iv) supervision of the custody of firm or 
customer funds and/or securities for purposes of Rule 15c3-3 under 
the Act; or (v) supervision of overall compliance with financial 
responsibility rules for broker/dealers promulgated pursuant to the 
provisions of the Act.
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    The Exchange also proposes to adopt a requirement that member 
organizations \11\ register as a Limited Principal--Financial and 
Operations (``FINOP''), any associated person who performs enumerated 
financial and operational management duties (one of whom must be the 
Chief Financial Officer).\12\ Each would be required to pass the 
Financial and Operations Principal Qualification Examination (``Series 
27'').
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    \11\ This applies to member organizations operating pursuant to 
Rule 15c3-1(a)(1)(ii), (a)(2)(i), or (a)(8) under the Act.
    \12\ These duties are: Final approval and responsibility for the 
accuracy of financial reports submitted to any duly established 
securities industry regulatory body; final preparation of such 
reports; supervision of individuals who assist in the preparation of 
such reports; supervision of and responsibility for individuals who 
are involved in the actual maintenance of the member organization's 
books and records from which such reports are derived; supervision 
and/or performance of the member organization's responsibilities 
under all financial responsibility rules promulgated pursuant to the 
provisions of the Act; overall supervision of and responsibility for 
the individuals who are involved in the administration and 
maintenance of the member organization's back office operations; or 
any other matter involving the financial and operational management 
of the member organization.
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    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.\13\
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    \13\ Pursuant to proposed Phlx Rule 604.01(c), a person 
registered solely as a General Securities Principal is not qualified 
to function as a FINOP or a Limited Principal--General Securities 
Sales Supervisor.
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    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.

Representative Registration--Rule 604(h) and Supplementary Material .04

    Proposed Phlx Rule 604(h) and Supplementary Material .04 would 
govern the registration of representatives \14\ with the Exchange. All 
persons engaged or to be engaged in the investment banking or 
securities business of a member organization who are to function as 
representatives would be required to pass the Series 7, register as a 
General Securities Representative, and submit a Form U4 through WebCRD 
reflecting their registration status. Any person whose registration has 
been revoked by the Exchange as a disciplinary sanction or whose most 
recent registration as a representative or 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 would be required 
to pass the Series 7 examination. No member organization would be able 
to permit any member or person associated with it \15\ to engage in the 
investment banking or securities business \16\ unless the member 
organization determines that the person satisfies the qualification 
requirements and is not subject to statutory disqualification.\17\
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    \14\ Phlx proposes to define ``representative'' as a member or 
an associated person of a registered broker or dealer, including 
assistant officers other than principals, who is engaged in the 
investment banking or securities business for the member 
organization including the functions of supervision, solicitation or 
conduct of business in securities or who is engaged in training of 
persons associated with a broker or dealer for any of these 
functions. To the extent provided in Phlx Rule 604, all 
representatives are required to be registered with the Exchange and 
are referred to in Phlx's rulebook as ``Registered 
Representatives.'' See proposed Phlx Rule 1(uu).
    \15\ The term ``associated person'' or ``person associated 
with'' a member organization means any partner, officer, director, 
or branch manager of an Exchange member organization or applicant 
(or person occupying a similar status or performing similar 
functions), any person directly or indirectly controlling, 
controlled by, or under common control with such member organization 
or applicant, or any employee of such member or applicant, except 
that any person associated with a member organization or applicant 
whose functions are solely clerical or ministerial shall not be 
included in the meaning of such term for purposes of the Exchange 
rules. See proposed Phlx Rule 1(vv). See also 15 U.S.C. 78c(a)(18).
    \16\ 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 proposed Phlx Rule 1(ww).
    \17\ See Section 3(a)(39) of the Act; 15 U.S.C. 78c(a)(39).
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Phlx Rule 604(i)(1)

    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.

[[Page 53729]]

Phlx Rule 604(j)

    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.\18\
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    \18\ Advanced age or physical infirmity will not alone 
constitute sufficient grounds to waive a qualification examination. 
Experience in fields ancillary to the investment banking or 
securities business may constitute sufficient grounds to waive a 
qualification examination.
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Other Changes

    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.\19\
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    \19\ Phlx also proposes to amend Rule 640, Commentary .01 to 
delete an outdated reference to ``XLE,'' the Exchange's former 
trading system for NMS stocks, since XLE ceased operations in 2008.
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III. Discussion and Commission Findings

    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.\20\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\21\ 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,\22\ 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. The 
Commission believes that the changes proposed by Phlx to its rules will 
strengthen the regulatory structure of the Exchange and should enhance 
the ability of member firms to comply with the Exchange's rules as well 
as with the Federal securities laws.
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    \20\ 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).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78f(c)(3)(B).
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    Additionally, the Commission believes that the proposed rule change 
is consistent with the principles of Section 11A(a)(1) \23\ 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 will promote uniformity of regulation across markets, thus 
reducing opportunities for regulatory arbitrage. The proposed rule 
helps ensure that all persons conducting a securities business through 
Phlx are subject to registration, qualification and continuing 
education requirements, and are appropriately supervised, as the 
Commission expects of all self-regulatory organizations (``SROs'').
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    \23\ 15 U.S.C. 78k-1(a)(1).
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    In order to meet its obligations under Section 6 of the Act \24\ to 
enforce compliance by member firms \25\ and their associated persons 
with the Act, the rules thereunder, and the exchange's own rules, an 
exchange must have baseline registration and examination or 
qualification requirements for all persons conducting business on an 
exchange, as well as for those supervising such activity. In addition, 
SROs should have continuing education requirements for registered 
persons which help ensure that members and persons associated with 
their members are up to date on amendments to SRO rules and securities 
laws, rules, and regulations that govern their activities. Furthermore, 
an exchange must know if an associated person of a member firm is 
subject to a statutory disqualification.\26\ This information is 
elicited by the Form U4, which is used by most exchanges and FINRA to 
register associated persons.
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    \24\ 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.
    \25\ Broker and dealers are required to supervise the activities 
of their associated persons. See Section 15(b)(4)(E) of the Act.
    \26\ See Section 6(c)(2) of the Act and Rule 19h-1 under the 
Act. The Commission believes that it is important that certain 
registration information, such as whether an associated person is 
subject to a statutory disqualification, is available to exchanges 
and other regulators, including the Commission and the State 
securities regulators, through WebCRD as well as members of the 
public through BrokerCheck, which derives information from WebCRD.
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    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.\27\ The requirements apply broadly and are intended to help 
close a regulatory gap which has resulted in varying registration, 
qualification, and supervision requirements across markets. Phlx will 
not allow any member organization to permit any person associated with 
it to engage in the investment banking or securities business through 
its facilities unless the member organization determines that such 
person satisfies the registration and qualification requirements and is 
not subject to statutory disqualification.
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    \27\ Exchange Rule 748, Supervision, requires that all locations 
and activities of a member organization be supervised by a qualified 
supervisor. The principal registration requirement in proposed Rule 
604(g) supplements Rule 748.
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    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

[[Page 53730]]

prepare those individuals for their responsibilities.
    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.\28\ Overall, the proposed new 
principal registration and qualification requirements should expand and 
strengthen the framework of supervisory rules that apply to Exchange 
member organizations and their associated persons doing business on 
PSX.
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    \28\ A Limited Principal--General Securities Sales Supervisor 
may only supervise sales activities. Persons qualified only as 
Limited Principals--General Securities Sales Supervisors do not 
count toward the two-principal requirement of Rule 604(g)(5).
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    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; \29\ the Commission believes this 
authority also should be used sparingly. The Commission expects the 
Exchange to maintain records and to utilize careful judgment in 
providing waivers. Finally, the Commission notes that these exceptions 
are substantively the same as exceptions provided to similar rules at 
other SROs.\30\
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    \29\ See proposed Rule 604(j).
    \30\ See, e.g., FINRA Rule 1070(d) and NASDAQ Rule 1070(d) 
regarding the examination waiver. See, e.g., FINRA Rule 1021(e)(2) 
and NASDAQ Rule 1021(e)(2) regarding the two-principal requirement 
waiver.
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    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.\31\
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    \31\ See NASDAQ Rule 1060(b) and NASDAQ OMX BX Rule 1060(b).
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    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.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\32\ that the proposed rule change (SR-Phlx-2010-91), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-21850 Filed 8-31-10; 8:45 am]
BILLING CODE 8010-01-P