Document ID: SEC-2011-0054-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-01-12T05:00Z

[Federal Register Volume 76, Number 8 (Wednesday, January 12, 2011)]
[Notices]
[Pages 2180-2182]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-435]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63647; File No. SR-Phlx-2010-148]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of a Proposed Rule Change Relating to Certain 
Membership Rules Including Affiliations and Lapse of Membership 
Applications

January 5, 2011.

I. Introduction

    On November 5, 2010, NASDAQ OMX 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 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
relating to certain membership rules. The proposed rule change was 
published for comment in the Federal Register on November 22, 2010.\3\ 
The Commission received no comment letters on the proposal. This order 
approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 63318 (November 16, 
2010), 75 FR 71155 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

A. Affiliations

    Currently, Phlx Rule 793 (``Affiliations--Dual or Multiple'') 
allows a person that holds a Phlx trading permit to associate or 
affiliate with one or more Phlx members or a non-member that is engaged 
in the securities business if such affiliation is approved in writing 
by the member and disclosed to the Exchange.\4\ However, no member may 
use his or her trading permit to qualify more than one member 
organization. Further, the rule provides that the Exchange could 
disapprove multiple affiliations that the Exchange believed were 
``inconsistent with Exchange standards of financial responsibility, 
operational capability, or compliance responsibility.''
---------------------------------------------------------------------------

    \4\ Specifically, the rule provides that ``[n]o person shall at 
the same time be a partner, * * * officer, director, stockholder, or 
associated person of more than one member or participant 
organization, nor shall he be affiliated in any manner with a non-
member or non-participant organization which is engaged in the 
securities business, unless such affiliation has been disclosed to 
and approved in writing by the member and/or participant 
organizations and such approval has been filed with the Office of 
the Secretary.''
---------------------------------------------------------------------------

    Among other things, Rule 793 allows a broker-dealer to seek an 
affiliation in order to obtain membership status without the need to 
secure a membership seat (or, subsequent to the Exchange's 
demutualization, a trading permit). Such an arrangement would have been 
appropriate, for example, where a broker-dealer sought only electronic 
access to the Exchange, since the Exchange only requires one permit to 
qualify a member organization. Another example would be applicable in 
the case of access to the Phlx trading floor. Because Phlx requires 
each person associated with a member organization on the trading floor 
who functions in a trading capacity to have a permit, and every trader 
on the floor must possess a Series A-1 permit,\5\ affiliation could 
allow floor traders to affiliate with another member organization to 
satisfy certain trading or staffing requirements.
---------------------------------------------------------------------------

    \5\ For example, a Series A-1 permit holder is required to 
display a badge when on the trading floor that identifies the member 
organization on whose behalf the trader is trading that day. A 
Series A-1 permit holder may not trade for more than one member 
organization on the same day.
---------------------------------------------------------------------------

    The Exchange now proposes to eliminate Rule 793. In its place, the 
Exchange proposes to amend existing Rule 908 (``Rights and Privileges 
of A-1 Permits'') to add a new paragraph (b)(i) to allow a trading 
permit holder on the Exchange's floor to affiliate with up to two 
member organizations that are under common ownership. Specifically, the 
proposed rule provides that: ``[n]otwithstanding applicable By-Laws and 
Rules conditioning membership, a Series A-1 permit holder on the 
Exchange's trading floor may be affiliated with up to two (2) member 
organizations (a primary and a secondary member organization) that are 
under common ownership * * *.'' The proposed rule would define ``common 
ownership'' to be at least 75% common ownership between the member 
organizations. Further, both the primary and secondary member 
organizations would need to notify the Phlx Membership Department of 
the affiliation, and such notification must include an attestation of 
common ownership, the names of the individuals responsible for 
supervision of the permit holder, and the Exchange account numbers for 
billing purposes. Under the proposed rule, a Series A-1 permit holder 
would have the ability to engage in trading activity on the Exchange's 
floor on behalf of either the primary or secondary member organization 
that the permit is affiliated with per Rule 908(b)(i).\6\
---------------------------------------------------------------------------

    \6\ A Series A-1 permit holder may not trade for more than one 
member organization on the same day.
---------------------------------------------------------------------------

    Despite the ability to affiliate with up to two member 
organizations, the

[[Page 2181]]

proposal provides that a Series A-1 permit holder would be required to 
comply with all current membership By-Laws and Rules. Further, both the 
permit holder and the affiliated member organizations also must comply 
with all applicable trading, registration, qualification, examination, 
and other membership requirements. In particular, the Series A-1 permit 
holder is required to obtain and maintain all necessary qualifications 
(including examinations) and registrations. In addition, the Series A-1 
permit holder would be required to disclose to the Exchange the 
individuals at each member organization (both the primary and secondary 
member organization) that are responsible for supervising the Series A-
1 permit holder.
    As a consequence of the proposal, any Series A-1 permit holder that 
currently affiliates with an unrelated party would not be permitted to 
continue to qualify that member organization. In addition, a permit 
holder would not be permitted to maintain an affiliation with more than 
two member organizations, and both organizations must be under common 
ownership.
    In recognition of the proposed deletion of Rule 793 and new Rule 
908(b)(i), the Exchange also proposed to make conforming changes to 
other rules that reference affiliation. In particular, the Exchange 
proposed to amend Option Floor Procedure Advice (``OFPA'') F-9 to 
conform to new Rule 908(b)(i).\7\ In addition, the Exchange would 
remove references to ``dual affiliation'' in OFPA F-11 and Regulation 3 
in favor of a reference simply to ``affiliation,'' and would replace a 
reference to Rule 793 with Rule 908 in OFPA F-11. The Exchange further 
would amend Rule 908(h) to add an ``or'' to the text of the rule to 
make clear that a permit may be transferred either intra-firm or to an 
inactive nominee registered with the Exchange.
---------------------------------------------------------------------------

    \7\ In particular, the Exchange proposed in F-9 to remove 
references to ``dual'' so that the rule simply refers to 
affiliations; to require reports of affiliations to be sent to the 
Membership Department instead of the Exchange's Office of the 
Secretary to conform with the text of amended Rule 908; replace the 
reference to Rule 793, which is being deleted, with a reference to 
Rule 908; amend the language in OFPA F-9 to remove the requirements 
to explain compensation since affiliations would only be permitted 
for organizations that are under common ownership; and add a 
sentence indicating that floor members must adhere to the 
requirements in renamed (a) and (b), and to reference Exchange Rule 
1020 for the newly named F-9(ii)(a).
---------------------------------------------------------------------------

B. Lapsed Applications

    In addition, the Exchange proposes to amend Rule 900.2 to address 
lapsed membership applications. Pursuant to Exchange Rule 900.2, 
applicants desiring membership in the Exchange are required to submit 
information in a form prescribed by the Membership Department.\8\ 
According to the Exchange, after a 90 calendar day period has elapsed, 
the information provided by the applicant is stale and no longer 
provides a reliable or reasonable basis for the Exchange to make a 
determination on admitting a person for membership.\9\ The Exchange 
represented that the Membership Department expends a considerable 
amount of resources requesting updates from members and researching 
information to make a reasonable determination when an application is 
outdated.\10\
---------------------------------------------------------------------------

    \8\ The Membership Department posts the requisite forms on the 
Exchange's Web site at http://www.nasdaqomxtrader.com/Trader.aspx?id=membership_phlx. The Membership Department updates 
the forms from time to time and makes them available on this Web 
site.
    \9\ See Notice, supra note 3, at 71157.
    \10\ See id.
---------------------------------------------------------------------------

    To address this situation, the Exchange proposed to amend Exchange 
Rule 900.2 \11\ to require persons seeking membership to the Exchange 
to provide all information and respond to subsequent requests from the 
Membership Department for information within a 90 calendar day period. 
Any failure to respond in the prescribed period would result in the 
application lapsing. If an application lapses, the person would be 
required to submit a new application if it wants to continue with its 
application.\12\ Upon a showing of good cause, the Exchange may extend 
the timeframe.\13\ The Exchange would not refund the fee associated 
with submitting an application and the applicant would be required to 
pay a new fee to resubmit the application if it chooses to proceed with 
its application for membership.\14\
---------------------------------------------------------------------------

    \11\ The Commission notes that the Exchange proposed to renumber 
Rule 900.2(e) as 900.2(f) due to the new proposed Rule 900.2(e).
    \12\ The purpose of the new application would be to update all 
information to provide the Membership Department with current 
information on which to base a decision to accept the applicant for 
membership. The Exchange expressed its intent to file a proposal 
with the Commission to amend its Fee Schedule to reflect the lapsed 
application fee.
    \13\ See Notice, supra note 3, at 71157. The Exchange also may 
extend the time period when it makes a request for additional 
information relatively close to the 90-day deadline. See id.
    \14\ The Exchange's Application Fee can be found on the Fee 
Schedule located on the Exchange's Web site at http://www.nasdaqomxtrader.com/content/marketregulation/membership/phlx/feesched.pdf.
---------------------------------------------------------------------------

 III. Discussion

    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,\15\ and, in 
particular, the requirements of Section 6(b) of the Act \16\ and the 
rules and regulations thereunder. Specifically, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\17\ in 
that the proposal promotes just and equitable principles of trade, 
prevents fraudulent and manipulative acts, removes impediments to and 
perfects the mechanism of a free and open market and a national market 
system, and, in general, protects investors and the public interest.
---------------------------------------------------------------------------

    \15\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes the proposal, which limits the ability of a 
Series A-1 permit holder to qualify other organizations for Exchange 
membership is reasonable, as it will continue to allow flexibility in 
permitting a permit holder to qualify up to one other member 
organization (the ``secondary member organization'') for Exchange 
membership that is under common ownership with the primary member 
organization with which the permit holder is associated. While the 
Commission notes that based on the proposal, a Series A-1 permit holder 
who currently affiliates with an unrelated member organization (not 
under common ownership) to qualify the member organization for 
electronic access or access to the trading floor would not be permitted 
to continue to qualify that member organization, the Commission 
believes that the proposal is a reasonable alternative that may assist 
firms in addressing staffing issues for entities under a common 
ownership that conduct a floor-based trading business.
    The Exchange's proposal recognizes the changed environment in terms 
of the means by which persons obtain access to the Exchange. Current 
Rule 793 was adopted when the Exchange was a membership organization 
and access was obtained through ownership of a limited number of seats 
on the Exchange. Rule 793 allows persons to access and trade on the 
Exchange that might not have otherwise been able to purchase or obtain 
a membership seat. However, since it demutualized, the Exchange now 
offers access via an unlimited number of trading permits, which can be 
more readily obtained by qualified individuals compared to former 
membership seats. In this respect, the Exchange's proposal

[[Page 2182]]

modernizes the affiliation provision in recognition of the transition 
of the Exchange from a mutual to a demutualized organization.
    Furthermore, the Commission notes that the Exchange represented in 
its proposal, as described above, that the Exchange would continue to 
have access to information on an affiliation necessary to carry out its 
regulatory responsibility with respect to the member organizations and 
their affiliated persons. Further, an affiliation would not excuse a 
person from any of the Exchange's By-Laws and rules governing 
membership. Notably, both the permit holder and the affiliated member 
organizations must comply with all applicable registration, 
qualification, examination, and other membership requirements, and the 
permit holder must continue to obtain and maintain all necessary 
qualifications (including examinations) and registrations. Further, the 
Series A-1 permit holder must disclose to the Exchange the individuals 
at each member organization (both the primary and secondary member 
organization) that are responsible for supervising the Series A-1 
permit holder. The Commission believes that these provisions are 
designed to ensure compliance with applicable membership rules and 
should assure the Exchange's oversight of any affiliation.
    In addition, the Commission believes that the Exchange's proposed 
conforming changes to OFPA F-9, F-11, and Regulation 3 appropriately 
reflect the proposed deletion of Rule 793 and the new provision in Rule 
908(b)(i). Separately, the Commission believes that the proposal to 
amend the language in Rule 908(h) should provide Exchange members with 
clarity as to the transfer of permits.
    Finally, the Commission believes that requiring applicants for Phlx 
membership to respond to requests for documentation or additional 
information within a 90 calendar day period, absent a showing of good 
cause, is reasonable and should provide the Exchange's Membership 
Department up-to-date information that it can utilize to make decisions 
concerning membership applications. The 90-day response period and 
subsequent lapse of an application for non-response should encourage 
prompt replies by applicants to Exchange requests for information and 
documentation and should assure that the Exchange has reliable and 
current information on which to base membership decisions.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-Phlx-2010-148) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2).
    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-435 Filed 1-11-11; 8:45 am]
BILLING CODE 8011-01-P