Document ID: SEC-2016-2262-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX LLC
Posted Date: 2016-12-22T05:00Z

[Federal Register Volume 81, Number 246 (Thursday, December 22, 2016)]
[Notices]
[Pages 93986-93988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30794]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79583; File No. SR-Phlx-2016-104]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Approving 
Proposed Rule Change To Amend Phlx Rule 748, Supervision

December 16, 2016.

I. Introduction

    On October 14, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend several provisions of 
Rule 748 in order to modernize, upgrade, and strengthen the Exchange's 
rules pertaining to supervisory obligations of its members and member 
organizations.
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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 change was published for comment in the Federal 
Register on November 3, 2016.\3\ The public comment period closed on 
November 25, 2016. The Commission received no comments in response to 
the Notice.
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    \3\ See Exchange Act Release No. 79185 (Oct. 28, 2016), 81 FR 
76637 (Nov. 3, 2016) (File No. SR-Phlx-2016-104) (``Notice'').
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    This order grants approval of the proposed rule change.

II. Description of the Proposed Rule Change \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.
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Rule 748(a)

    Rule 748(a) currently provides in the first paragraph that each 
office, location, department, or business activity of a member or 
member organization (including foreign incorporated branch offices) 
shall be under the supervision and control of the member or member 
organization establishing it and of an appropriately qualified 
supervisor. The Exchange is amending the first paragraph of Rule 748(a) 
to clarify and state clearly that each trading system and internal 
surveillance system of a member or member organization (including 
foreign incorporated branch offices) shall, inasmuch as they are 
aspects of their business activity, be under the supervision and 
control of the member or member organization establishing it and of an 
appropriately qualified supervisor.

Rule 748(b)

    Rule 748(b), Designation of Supervisor by Member Organizations, 
currently provides in relevant part that the general partners or 
directors of each member organization shall provide for appropriate 
supervisory control and shall designate a general partner or principal 
executive officer to assume overall authority and responsibility for 
internal supervision and control of the organization and compliance 
with securities' (sic) laws and regulations, including the By-Laws and 
Rules of the Exchange. It provides that the designated person shall 
delegate to qualified principals or qualified employees responsibility 
and authority for supervision and control of each office, location, 
department, or business activity, (including foreign incorporated 
branch offices), and provide for appropriate written procedures of 
supervision and control. The Exchange proposes to amend Rule 748(b) to 
provide that the delegated person shall likewise delegate to qualified 
principals or qualified employees responsibility and authority for 
supervision and control of each trading system and internal 
surveillance system.\5\
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    \5\ The Exchange also proposes to delete the extraneous 
apostrophe following the word ``securities.''
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Rule 748(c)

    Rule 748(c) currently provides that each person with supervisory 
control, as described in paragraphs (a) and (b) of Rule 748, must meet 
the Exchange's qualification requirements for supervisors, including 
successful completion of the appropriate examination. The Exchange 
proposes to add to Rule 748(c) a new requirement that each member or 
member organization must make reasonable efforts to determine that each 
person with supervisory control, as described in paragraphs (a) and (b) 
of Rule 748, is qualified by virtue of experience or training to carry 
out his or her assigned responsibilities.

Rule 748(g)

    Rule 748(g), Office Inspections, currently provides that each 
member or member organization for which the Exchange is the Designated 
Examining Authority shall inspect each office or location (including 
foreign incorporated branch offices) of the member or member 
organization according to a cycle that shall be established in its 
written supervisory procedures. In establishing such inspection cycle, 
the member or member organization shall give consideration to the 
nature and complexity of the securities activities for which the office 
or location is responsible, the volume of business done, and the number 
of registered representatives, employees, and associated persons at 
each office or location. Rule 748(g) is proposed to be amended to 
provide that an inspection may not be conducted by any person within 
that office or location who has supervisory responsibilities or by any 
individual who is directly or indirectly supervised by such person. The 
Exchange also proposes to add language requiring the examination 
schedule and an explanation of the factors considered in determining 
the frequency of the examinations in the cycle to be set forth in the 
member or member organization's written supervisory procedures. It also 
proposes to require that the inspection be reasonably designed to 
assist in preventing and detecting violations of, and achieving 
compliance with, applicable securities laws and regulations, and with 
applicable Exchange rules.

[[Page 93987]]

Rule 748(h)

    Rule 748(h) in the first paragraph currently requires each member 
or member organization to establish, maintain, and enforce written 
supervisory procedures, and a system for applying such procedures, to 
supervise the types of business(es) in which the member or member 
organization engages and to supervise the activities of all registered 
representatives, employees, and associated persons. The written 
supervisory procedures and the system for applying such procedures 
shall reasonably be expected to prevent and detect, insofar as 
practicable, violations of the applicable securities laws and 
regulations, including the By-Laws and Rules of the Exchange. The 
Exchange proposes to substitute the word ``designed'' for the word 
``expected.''
    Rule 748(h) in the second paragraph currently requires that the 
written supervisory procedures set forth the supervisory system 
established by the member or member organization and include the name, 
title, registration status, and location of all supervisory personnel 
required by this rule, the dates for which supervisory designations 
were or are effective, and the responsibilities of supervisory 
personnel as these relate to the types of business(es) the member or 
member organization engages in, and securities laws and regulations, 
including the By-Laws and Rules of the Exchange. The Exchange proposes 
to add a requirement that this record be preserved for a period of not 
less than three years, the first two in an easily accessible place.
    Rule 748(h) in the third paragraph currently requires a copy of the 
written supervisory procedures to be kept and maintained at each 
location where supervisory activities are conducted on behalf of the 
member or member organization. It requires each member or member 
organization to amend its written supervisory procedures as appropriate 
within a reasonable time after changes occur in supervisory personnel 
or supervisory procedures, and to communicate such changes throughout 
its organization within a reasonable time. The Exchange proposes to 
amend Rule 748(h) to likewise amend and communicate changes to its 
written supervisory procedures as appropriate within a reasonable time 
after changes occur in applicable securities laws and regulations and 
Exchange rules.

III. Comment Summary

    As noted above, the Commission received no comments on the proposed 
rule change.

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposal. Based on its 
review of the record, 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.\6\ Specifically, the Commission finds that the rule change is 
consistent with Section 6(b)(5) of the Exchange Act,\7\ 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, and, in general, to 
protect investors and the public interest.
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    \6\ 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).
    \7\ 15 U.S.C. 78f(b)(5).
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    As stated in the Notice, the Exchange believes that ``[r]equiring 
increased comprehensive supervision by members and member organizations 
of their activities should promote the Exchange's ability to enforce 
compliance by members and member organizations with the [Exchange] Act 
and the regulations thereunder.'' \8\ With respect to the proposed 
amendments of Rule 748(a) and (b), the Exchange believes that these 
amendments ``should protect investors and the public interest by 
specifically requiring supervision and control'' of trading systems and 
internal surveillance systems to be supervised and controlled by ``an 
appropriately qualified individual.'' \9\ The Exchange believes that 
the proposed amendments to Rule 748(c) ``should protect investors and 
the public interest by requiring that each person with supervisory 
control as described in Rules 748(a) and (b) to be qualified by virtue 
of experience or training to carry out his or her assigned 
responsibilities, such that the individual has the actual capacity to 
fulfill those responsibilities.'' \10\
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    \8\ Notice at 76638.
    \9\ Id.
    \10\ Id.
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    Further, the Exchange believes that the proposed amendments to Rule 
748(g) will ``minimiz[e] the potential for conflicts of interest in the 
conduct of office inspections'' by prohibiting those inspections ``from 
being conducted by any person within that office or location who has 
supervisory responsibilities or by any individual who is directly or 
indirectly supervised by such a person who may be incentivized to 
minimize any compliance issues identified in the inspection.'' \11\ The 
Exchange also believes ``[t]he proposed amendments to Rule 748(g) 
concerning the examination schedule and specifically requiring that the 
inspection be reasonably designed to assist in preventing and detecting 
violations of, and achieving compliance with, applicable securities 
laws and regulations and with applicable Exchange rules should assure 
that inspections take place with a predictable and adequate frequency 
and are reasonably designed to identify violations of applicable law 
and rules.'' \12\
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    \11\ Id. at 76638-39.
    \12\ Id. at 76639.
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    The Exchange believes that the proposed amendments to Rule 748(h), 
which address the design and maintenance of written supervisory 
procedures, will ``facilitate identification of instances where the 
procedures were not followed'' and also ``clarif[y] the affirmative 
nature of the member or member organization's obligations under the 
rule when creating such procedures.'' \13\ Finally, the Exchange 
believes that the proposed amendment to Rule 748(h) with respect to 
updating written supervisory procedures ``should promote the continued 
usefulness of the procedures in the context of ongoing changes in the 
regulatory environment in which members and member organizations 
conduct their business.'' \14\
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    \13\ Id.
    \14\ Id.
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    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 
help protect investors and the public interest by strengthening and 
clarifying the supervisory obligations of Exchange members and member 
organizations. 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.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \15\ of the 
Exchange Act,\16\ that the proposed rule change

[[Page 93988]]

(SR-Phlx-2016-104) be, and hereby is, approved.
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    \15\ Id.
    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30794 Filed 12-21-16; 8:45 am]
 BILLING CODE 8011-01-P