Document ID: SEC-2020-0064-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: MIAX PEARL, LLC
Posted Date: 2020-01-16T05:00Z

[Federal Register Volume 85, Number 11 (Thursday, January 16, 2020)]
[Notices]
[Pages 2784-2801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00589]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87941; File No. SR-PEARL-2020-01]

Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend, 
Reorganize and Enhance Its Membership, Registration and Qualification 
Rules and Consolidate These Rules Into New Chapter XXXI Registration, 
Qualification and Continuing Education

January 10, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 9, 2020, MIAX PEARL, LLC (``MIAX PEARL'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend, reorganize and enhance 
its membership, registration and qualification rules and to make 
conforming changes to certain other rules.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX 
PEARL's principal office, and at the Commission's Public Reference 
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to reorganize and enhance its membership, 
registration and qualification rules, make conforming changes to 
certain other rules, and organize the proposed changes into a new 
chapter of rules in the MIAX PEARL Rulebook. All of the proposed rules 
and changes to existing Exchange rules are based on existing rules of 
other options exchanges.\3\ The proposed rules are intended to amend, 
reorganize and enhance the Exchange's membership, registration and 
qualification requirements rules to align with recent similar changes 
by the Exchange's affiliate, MIAX,\4\ as well as the Nasdaq Stock 
Market and FINRA. MIAX PEARL proposes to adopt new Chapter XXXI \5\ to 
the Exchange's rules.
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    \3\ See Miami International Securities Exchange, LLC (``MIAX'') 
Rules, Chapter XIX, Registration, Qualification and Continuing 
Education; The Nasdaq Stock Market LLC (``Nasdaq Stock Market'') 
Rules, General 9, Regulation; Financial Industry Regulatory 
Authority, Inc. (``FINRA'') Rules, Rule 1000, Member Application and 
Associated Person Registration.
    \4\ See Securities Exchange Act Release No. 87830 (December 20, 
2019), 84 FR 72025 (December 30, 2019) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend, 
Reorganize and Enhance Its Membership, Registration and 
Qualification Rules and Consolidate These Rules Into New Chapter XIX 
Registration, Qualification and Continuing Education) (SR-MIAX-2019-
50).
    \5\ The Exchange proposes to reserve Chapters XIX through XXX 
for anticipated future use.
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Overview
    The Exchange adopted registration requirements to ensure that 
associated persons \6\ attain and maintain specified levels of 
competence and knowledge pertinent to their function. In general, the 
Exchange's current rules require that persons engaged in a Member's \7\ 
securities business who are to function as representatives \8\ or 
principals \9\ register with the Exchange in each category of 
registration appropriate to their functions by passing one or more 
qualification examinations \10\ and exempt specified associated persons 
from the registration requirements.\11\ They also prescribe ongoing 
continuing education requirements for registered persons.\12\ The 
Exchange proposes to amend, reorganize and enhance its rules regarding 
registration, qualification examinations and continuing education, as 
described below.
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    \6\ The term ``associated person'' or ``person associated with a 
Member'' means any partner, officer, director, or branch manager of 
a Member (or any person occupying a similar status or performing 
similar functions), any person directly or indirectly controlling, 
controlled by, or under common control with a Member, or any 
employee of a Member. See Exchange Rule 100. In accordance with 
other proposed changes in this filing, and as further described 
below, the Exchange proposes to amend the terms ``associated 
person'' or ``person associated with a Member.''
    \7\ The term ``Member'' means an individual or organization that 
is registered with the Exchange pursuant to Chapter II of these 
Rules for purposes of trading on the Exchange as an ``Electronic 
Exchange Member'' or ``Market Maker.'' Members are deemed 
``members'' under the Exchange Act. See Exchange Rule 100.
    \8\ A ``representative'' is any person associated with a Member, 
including assistant officers other than principals, who is engaged 
in the Member's securities business, such as supervision, 
solicitation, conduct of business in securities or the training of 
persons associated with a Member for any of these functions. See 
proposed Exchange Rule 3101.
    \9\ A ``principal'' is any person associated with a Member, 
including, but not limited to, sole proprietor, officer, partner, 
manager of office of supervisory jurisdiction, director or other 
person occupying a similar status or performing similar functions, 
who is actively engaged in the management of the Member's securities 
business, such as supervision, solicitation, conduct of business in 
securities or the training of persons associated with a Member for 
any of these functions. Such persons shall include, among other 
persons, a Member's chief executive officer and chief financial 
officer (or equivalent officers). A ``principal'' also includes any 
other person associated with a Member who is performing functions or 
carrying out responsibilities that are required to be performed or 
carried out by a principal under Exchange rules. See proposed 
Exchange Rule 3101.
    \10\ See proposed Exchange Rule 3101, Registration Categories, 
and Exchange Rule 1302, Registration of Representatives.
    \11\ See proposed Exchange Rule 3102, Associated Persons Exempt 
from Registration.
    \12\ See proposed Exchange Rule 3103, Continuing Education 
Requirements.
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    In 2017, the Commission approved a Financial Industry Regulatory 
Authority, Inc. (``FINRA'') proposed rule change consolidating and 
adopting prior National Association of Securities Dealers, Inc. 
(``NASD'') rules and rules incorporated from the New York Stock 
Exchange (``NYSE'') relating to qualification and registration 
requirements into the Consolidated FINRA Rulebook,\13\ restructuring 
the

[[Page 2785]]

FINRA representative-level qualification examinations, creating a 
general knowledge examination and specialized knowledge examinations, 
allowing permissive registration, establishing an examination waiver 
process for persons working for a financial services affiliate of a 
Member, and amending certain continuing education (``CE'') requirements 
(collectively, the ``FINRA Rule Changes'').\14\ On December 20, 2019, 
the Commission noticed a proposal by the Exchange's affiliate, MIAX, to 
amend, reorganize and enhance MIAX's own membership, registration and 
qualification requirements rules in response to the FINRA Rule 
Changes.\15\
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    \13\ The current FINRA rulebook consists of: (1) FINRA rules; 
(2) NASD rules; and (3) rules incorporated from the NYSE (the 
``Incorporated NYSE rules''). While the NASD rules generally apply 
to all FINRA members, the Incorporated NYSE rules apply only to 
those members of FINRA that are also members of the NYSE.
    \14\ See Securities Exchange Act Release No. 81098 (July 7, 
2017), 82 FR 32419 (July 13, 2017) (SR-FINRA-2017-007) (Order 
Approving Proposed Rule Change to Adopt Consolidated Registration 
Rules, Restructure the Representative-Level Qualification 
Examination Program, Allow Permissive Registration, Establish Exam 
Waiver Process for Persons Working for Financial Services Affiliate 
of Member, and Amend the Continuing Education Requirements). See 
also FINRA Regulatory Notice 17-30 (SEC Approves Consolidated FINRA 
Registration Rules, Restructured Representative-Level Qualification 
Examinations and Changes to Continuing Education Requirements) 
(October 2017). FINRA articulated its belief that the proposed rule 
change would streamline, and bring consistency and uniformity to, 
its registration rules, which would, in turn, assist FINRA members 
and their associated persons in complying with the rules and improve 
regulatory efficiency. FINRA also determined to enhance the overall 
efficiency of its representative-level examinations program by 
eliminating redundancy of subject matter content across 
examinations, retiring several outdated representative-level 
registrations, and introducing a general knowledge examination that 
could be taken by all potential representative-level registrants and 
the general public. FINRA amended certain aspects of its continuing 
education rule, including by codifying existing guidance regarding 
the effect of failing to complete the Regulatory Element on a 
registered person's activities and compensation.
    \15\ See supra note 4.
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    The Exchange now proposes to amend, reorganize and enhance its own 
membership, registration and qualification requirements rules in 
response to the changes by the Exchange's affiliate, MIAX, as well as 
the FINRA Rule Changes. In addition, the Exchange proposes to enhance 
its registration rules by adding a new registration requirement 
applicable to developers of algorithmic trading systems similar to a 
requirement adopted by FINRA pursuant to a 2016 FINRA rule change.\16\
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    \16\ See Securities Exchange Act Release No. 77551 (April 7, 
2016), 81 FR 21914 (April 13, 2016) (SR-FINRA-2016-007) (Order 
Approving a Proposed Rule Change to Require Registration as 
Securities Traders of Associated Persons Primarily Responsible for 
the Design, Development, Significant Modification of Algorithmic 
Trading Strategies or Responsible for the Day-to-Day Supervision of 
Such Activities). In that rule change, FINRA addressed the 
increasing significance of algorithmic trading strategies by 
amending its rules to require registration, as Securities Traders, 
of associated persons primarily responsible for the design, 
development or significant modification of algorithmic trading 
strategies, or who are responsible for the day-to-day supervision or 
direction of such activities.
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    As part of the Exchange's proposed rule changes, current Exchange 
Rule 203, Qualification and Registration of Members and Associated 
Persons, is proposed to be deleted. This current Exchange rule 
provision is relocated in amended form into the new proposed Chapter 
XXXI Exchange rules.
    Additionally, the Exchange proposes to amend Exchange Rule 100, 
Definitions, Exchange Rule 601, Registered Option Traders, Exchange 
Rule 1000, Disciplinary Jurisdiction, and Exchange Rule 1014, 
Imposition of Fines for Minor Rule Violations. These proposed changes 
correspond to the similar changes made by the Exchange's affiliate, 
MIAX.
    In place of the deleted rule, and parts of the amended rules, the 
Exchange proposes to adopt new Chapter XXXI, Registration, 
Qualification and Continuing Education, in the Exchange's Rulebook, 
together with conforming changes to certain existing Exchange rules. In 
the new Chapter XXXI series of rules, the Exchange would, among other 
things, recognize additional associated person registration categories, 
recognize a new general knowledge examination, permit the maintenance 
of permissive registrations, and require Securities Trader registration 
of developers of algorithmic trading strategies consistent with a 
comparable, existing FINRA registration requirement.\17\
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    \17\ See id.
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    The Exchange notes that the structure of this rule filing, as well 
as newly proposed Chapter XXXI series of rules, is based on a recent 
rule filing by the Exchange's affiliate, MIAX, as well as the Nasdaq 
Stock Market.\18\ The similar Nasdaq Stock Market filing also amended, 
reorganized and enhanced membership, registration and qualification 
rules for the Nasdaq Stock Market, and was based on the FINRA Rule 
Changes.\19\ The proposed new Chapter XXXI series of rules is also 
being proposed for adoption by MIAX PEARL's affiliate exchange, MIAX 
Emerald, LLC as new MIAX Emerald Chapter XIX, in order to facilitate 
compliance with membership, registration and qualification regulatory 
requirements by members of two or more of the affiliated exchanges 
among MIAX, MIAX PEARL and MIAX Emerald. The references throughout this 
filing to Exchange Rules 301, 1301, 1302, 1306, 1307, 1309, 1310 and 
1319 will be construed to refer to the corresponding MIAX Rules for 
those same rule numbers.
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    \18\ See Securities Exchange Act Release No. 84386 (October 9, 
2018), 83 FR 51988 (October 15, 2018) (SR-NASDAQ-2018-078) (Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change to 
Amend, Reorganize and Enhance Its Membership, Registration and 
Qualification Rules). See also supra note 4.
    \19\ See id.
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New Proposed Rules and Proposed Changes to Current Exchange Rules
A. Registration Requirements (Proposed Exchange Rule 3100)
    Exchange Rule 203(a) currently requires individuals and associated 
persons engaged, or to be engaged, in the securities business of a 
Member to be registered with the Exchange in the category of 
registration appropriate to the function to be performed as prescribed 
by the Exchange.\20\
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    \20\ In general the 3100 Series would conform the Exchange's 
rules to FINRA's rules as revised in the FINRA Rule Changes, with 
modifications tailored to the business of the Exchange. However, the 
Exchange also proposes to adopt Exchange Rule 3900, Interpretation 
and Policy .12, based upon a current Nasdaq Stock Market rule. See 
Nasdaq Stock Market, General 9, Section 1, Rule 1.1210, 
Supplementary Material .12; see also Securities Exchange Act Release 
No. 84386 (October 9, 2018), 83 FR 51988 (October 15, 2018) (SR-
NASDAQ-2018-078). These provisions govern the process for applying 
for registration and amending the registration application, as well 
as for notifying the Exchange of termination of the Member's 
association with a person registered with the Exchange. The Exchange 
proposes to adopt Exchange Rule 3900, Interpretation and Policy .12, 
in order to have uniform processes and requirements in this area 
across the Exchange.
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    Proposed Exchange Rule 3100 provides that each person engaged in 
the securities business of a Member must register with the Exchange as 
a representative or principal in each category of registration 
appropriate to his or her functions and responsibilities as specified 
in proposed Exchange Rule 3101, unless exempt from registration 
pursuant to proposed Exchange Rule 3102.\21\ Proposed Exchange Rule 
3100 also provides that such person is not qualified to function in any 
registered capacity other than that for which the

[[Page 2786]]

person is registered, unless otherwise stated in the rules.
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    \21\ Because the Exchange's proposed registration rules focus 
solely on securities trading activity, the proposed rules differ 
from the FINRA Rule Changes by omitting references to investment 
banking in proposed Exchange Rules 3100, Interpretations and 
Policies .03 and .10 of Exchange Rule 3100, Exchange Rules 3101 and 
3103, and also by omitting as unnecessary from proposed Exchange 
Rule 3101, a limitation on the qualification of a General Securities 
Sales Supervisor to supervise the origination and structuring of an 
underwriting.
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B. Minimum Number of Registered Principals (Proposed Exchange Rule 
3100, Interpretation and Policy .01)
    Exchange Rule 203, Interpretation and Policy .07, requires Members 
to register with the Exchange in a heightened capacity each individual 
acting in any of the following capacities: (a) Officer; (b) partner; 
(c) director; (d) supervisor of proprietary trading, market making or 
brokerage activities; and/or (e) supervisor of those engaged in 
proprietary trading, market-making or brokerage activities with respect 
to those activities. Each Member or Member organization must register 
with the Exchange at least two individuals acting in one or more of 
these capacities (the ``two-principal requirement''). The Exchange may 
waive this requirement if a Member demonstrates conclusively that only 
one individual acting in one or more of these capacities should be 
required to register. A Member or Member organization that conducts 
proprietary trading only and has 25 or fewer registered persons may be 
required to have one officer or partner who is registered in this 
capacity.\22\
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    \22\ Currently, Exchange Rule 203, Interpretation and Policy 
.08, describes when a Member is considered to be conducting only 
proprietary trading of the Member. Because the Exchange now proposes 
to delete Exchange Rule 203 in its entirety, Interpretation and 
Policy .08 of that rule would be reworded and relocated to Exchange 
Rule 100, Definitions, as a defined term.
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    The Exchange proposes to delete these requirements and in their 
place adopt new Exchange Rule 3100, Interpretation and Policy .01. The 
proposed rule would provide firms that limit the scope of their 
business with flexibility in satisfying the two-principal requirement. 
In particular, proposed Exchange Rule 3100, Interpretation and Policy 
.01, would require each Member, except a Member with only one 
associated person, to have at least two officers or partners who are 
registered as General Securities Principals, provided that a Member 
that is limited in the scope of its activities may instead have two 
officers or partners who are registered in a principal category that 
corresponds to the scope of the Member's activities.\23\ For instance, 
if a firm's business is limited to securities trading, the firm may 
have two Securities Trader Principals, instead of two General 
Securities Principals. Additionally, proposed Exchange Rule 3100, 
Interpretation and Policy .01, would provide that any Member with only 
one associated person is excluded from the two principal requirement. 
Proposed Exchange Rule 3100, Interpretation and Policy .01, would 
provide that existing Members as well as new applicants may request a 
waiver of the two-principal requirement, consistent with current 
Exchange Rule 203, Interpretation and Policy .07. Finally, the Exchange 
proposes to retain the existing provision in Exchange Rule 203 
permitting a proprietary trading firm with 25 or fewer registered 
representatives to have just one registered principal. The FINRA Rule 
Changes do not include this provision.\24\
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    \23\ The principal registration categories are described in 
greater detail below.
    \24\ The Exchange does not propose to adopt provisions 
comparable to FINRA Rule 1210.01, which requires that all FINRA 
members have a Principal Financial Officer and a Principal 
Operations Officer, because the Exchange believes that its proposed 
Exchange Rule 3101(b)(3), Financial and Operations Principal, is 
sufficient. As described herein, proposed Exchange Rule 3101(b)(3), 
requires Member firms operating pursuant to certain provisions of 
the Commission's rules to designate at least one Financial and 
Operations Principal. Further, the Exchange does not propose to 
adopt FINRA Rule 1210.01, which requires that (1) a member engaged 
in investment banking activities have an Investment Banking 
Principal, (2) a member engaged in research activities have a 
Research Principal, or (3) a member engaged in options activities 
with the public have a Registered Options Principal. The Exchange 
does not propose to recognize the Investment Banking Principal or 
the Research Principal registration categories, and the Registered 
Options Principal registration requirement is set forth in proposed 
Exchange Rule 3101(b)(7), and its inclusion is therefore unnecessary 
in proposed Exchange Rule 3100.
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C. Permissive Registrations (Proposed Exchange Rule 3100, 
Interpretation and Policy .02)
    Current Exchange Rule 203(a) prohibits a Member from maintaining a 
registration with the Exchange for any person (1) who is no longer 
active in the Member's securities business, (2) who is no longer 
functioning in the registered capacity, or (3) where the sole purpose 
is to avoid the examination requirement. Current Exchange Rule 203(a) 
further prohibits a Member from making an application for the 
registration of any person where there is no intent to employ that 
person in the Member's securities business. A Member may, however, 
maintain or make application for the registration of an individual who 
performs legal, compliance, internal audit, back-office operations, or 
similar responsibilities for the Member, or a person who performs 
administrative support functions for registered personnel, or a person 
engaged in the securities business of a foreign securities affiliate or 
subsidiary of the Member.
    The Exchange proposes to replace these provisions with proposed 
Exchange Rule 3100, Interpretation and Policy .02. The Exchange also 
proposes to expand the scope of permissive registrations and to clarify 
a Member's obligations regarding individuals who are maintaining such 
registrations.
    Specifically, proposed Exchange Rule 3100, Interpretation and 
Policy .02, would allow any associated person to apply for or maintain 
any registration permitted by the Member. For instance, an associated 
person of a Member working solely in a clerical or ministerial 
capacity, such as in an administrative capacity, would be able to 
obtain and maintain a General Securities Representative registration 
with the Member. As another example, an associated person of a Member 
who is registered, and functioning solely as a General Securities 
Representative, would be able to obtain and maintain a General 
Securities Principal registration with the Member. Further, proposed 
Exchange Rule 3100, Interpretation and Policy .02, would allow an 
individual engaged in the securities business of a foreign securities 
affiliate or subsidiary of a Member to obtain and maintain any 
registration permitted by the Member.
    The Exchange proposes to permit the registration of such 
individuals for several reasons. First, a Member may foresee a need to 
move a former representative or principal who has not been registered 
for two or more years back into a position that would require such 
person to be registered. Currently, such persons are required to 
requalify (or obtain a waiver of the applicable qualification 
examinations) and reapply for registration. Second, the proposed rule 
change would allow Members to develop a depth of associated persons 
with registrations in the event of unanticipated personnel changes. 
Third, allowing registration in additional categories encourages 
greater regulatory understanding. Finally, the proposed rule change 
would eliminate an inconsistency in the current rules, which permit 
some associated persons of a Member to obtain permissive registrations, 
but not others who equally are engaged in the Member's business.
    Individuals maintaining a permissive registration under the 
proposed rule change would be considered registered persons and subject 
to all Exchange rules, to the extent relevant to their activities. For 
instance, an individual working solely in an administrative capacity 
would be able to maintain a General Securities Representative 
registration and would be considered a registered person for purposes 
of rules relating to borrowing from or lending to customers, but the 
rule would have no practical application to his or her

[[Page 2787]]

conduct because he or she would not have any customers.
    Consistent with the Exchange's supervision rules, Members would be 
required to have adequate supervisory systems and procedures reasonably 
designed to ensure that individuals with permissive registrations do 
not act outside the scope of their assigned functions.\25\ With respect 
to an individual who solely maintains a permissive registration, such 
as an individual working exclusively in an administrative capacity, the 
individual's direct supervisor is not required to be a registered 
person. Members would be required to assign a registered supervisor to 
this person who would be responsible for periodically contacting such 
individual's direct supervisor to verify that the individual is not 
acting outside the scope of his or her assigned functions. If such 
individual is permissively registered as a representative, the 
registered supervisor must be registered as a representative or 
principal. If the individual is permissively registered as a principal, 
the registered supervisor must be registered as a principal.\26\
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    \25\ FINRA Rule 1210.02 specifically cites FINRA's supervisory 
system rule, FINRA Rule 3110, by number. Proposed Exchange Rule 
3100, Interpretation and Policy .02, refers generally to the 
Exchange's supervision rules rather than identifying them by number.
    \26\ In either case, the registered supervisor of an individual 
who solely maintains a permissive registration would not be required 
to be registered in the same representative or principal 
registration category as the permissively-registered individual. See 
proposed Exchange Rule 3100, Interpretation and Policy .02.
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D. Qualification Examinations and Waivers of Examinations (Proposed 
Exchange Rule 3100, Interpretation and Policy .03)
    Current Exchange Rule 203(a) provides that before a registration 
can become effective, the individual Member or individual associated 
person shall submit the appropriate application for registration, pass 
the Securities Industry Essentials Examination (``SIE''), pass a 
qualification examination appropriate to the category of registration 
as prescribed by the Exchange and submit any required registration and 
examination fees. The Exchange proposes to replace this rule language 
with new Exchange Rule 3100, Interpretation and Policy .03, 
Qualification Examinations and Waivers of Examinations.
    As part of the FINRA Rule Changes, FINRA adopted a restructured 
representative-level qualification examination program whereby 
representative-level registrants would be required to take a general 
knowledge examination (the SIE) and a specialized knowledge examination 
appropriate to the representative's job functions at the firm with 
which he or she is associating.\27\ Therefore, proposed Exchange Rule 
3100, Interpretation and Policy .03, provides that before the 
registration of a person as a representative can become effective under 
proposed Exchange Rule 3100, such person must pass the SIE and an 
appropriate representative-level qualification examination as specified 
in proposed Exchange Rule 3101(c). Proposed Exchange Rule 3100, 
Interpretation and Policy .03, also provides that before the 
registration of a person as a principal can become effective under 
proposed Exchange Rule 3100, such person must pass an appropriate 
principal-level qualification examination as specified in proposed Rule 
3101(b).
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    \27\ See supra note 14.
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    Further, proposed Exchange Rule 3100, Interpretation and Policy 
.03, provides that if the job functions of a registered representative 
change and he or she needs to become registered in another 
representative-level category, he or she would not need to pass the SIE 
again. Rather, the registered person would need to pass only the 
appropriate representative-level qualification examination.\28\ Thus 
under the proposed rule change, individuals seeking registration in two 
or more representative-level categories would experience a net decrease 
in the total number of exam questions they would be required to answer 
because the SIE content would be tested only once.
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    \28\ FINRA stated that the SIE would assess basic product 
knowledge; the structure and function of the securities industry 
markets, regulatory agencies and their functions; and regulated and 
prohibited practices. Proposed Exchange Rule 3100, Interpretation 
and Policy .03, provides that all associated persons, such as 
associated persons whose functions are solely and exclusively 
clerical or ministerial, are eligible to take the SIE. Proposed Rule 
3100, Interpretation and Policy .03, also provides that individuals 
who are not associated persons of firms, such as members of the 
general public, are eligible to take the SIE. FINRA stated its 
belief that expanding the pool of individuals who are eligible to 
take the SIE would enable prospective securities industry 
professionals to demonstrate to prospective employers a basic level 
of knowledge prior to submitting a job application. Further, this 
approach would allow for more flexibility and career mobility within 
the securities industry. While all associated persons of firms as 
well as individuals who are not associated persons would be eligible 
to take the SIE pursuant to proposed Exchange Rule 3100, 
Interpretation and Policy .03, passing the SIE alone would not 
qualify them for registration with the Exchange. Rather, to be 
eligible for registration with the Exchange, an individual would be 
required to pass an applicable representative or principal 
qualification examination and complete the other requirements of the 
registration process.
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    The proposed rule change solely impacts the representative-level 
qualification requirements. The proposed rule change does not change 
the scope of the activities permitted under the existing representative 
categories. For instance, after the operative date of the proposed rule 
change, a previously unregistered individual registering as a 
Securities Trader for the first time would be required to pass the SIE 
and an appropriate specialized knowledge examination. However, such 
individual may engage only in those activities in which a current 
Securities Trader may engage under current Exchange Rules.
    Individuals who are registered on the operative date of the 
proposed rule change would be eligible to maintain those registrations 
without being subject to any additional requirements. Individuals who 
had been registered within the past two years prior to the operative 
date of the proposed rule change would also be eligible to maintain 
those registrations without being subject to any additional 
requirements, provided that they reregister with the Exchange within 
two years from the date of their last registration.
    Further, registered representatives would be considered to have 
passed the SIE in the CRD system, and thus if they wish to register in 
any other representative category after the operative date of the 
proposed rule change, could do so by taking only the appropriate 
specialized knowledge examination.\29\ However, with respect to an 
individual who is not registered on the operative date of the proposed 
rule change but was registered within the past two years prior to the 
operative date of the proposed rule change, the individual's SIE status 
in the CRD system would be administratively terminated if such 
individual does not register within four years from the date of the 
individual's last registration.\30\
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    \29\ Under the proposed rule change, only individuals who have 
passed an appropriate representative-level examination would be 
considered to have passed the SIE. Registered principals who do not 
hold an appropriate representative-level registration would not be 
considered to have passed the SIE. For example, an individual who is 
registered solely as a Financial and Operations Principal (Series 
27) today would have to take the Series 7 to become registered as a 
General Securities Representative. Under the proposed rule change, 
in the future, this individual would have to pass the SIE and the 
specialized Series 7 examination to obtain registration as a General 
Securities Representative.
    \30\ As discussed below, the Exchange proposes a four-year 
expiration period for the SIE.

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[[Page 2788]]

    In addition, individuals who had been registered as representatives 
two or more years, but less than four years, prior to the operative 
date of the proposed rule change would also be considered to have 
passed the SIE and designated as such in the CRD system. Moreover, if 
such individuals re-register with a firm after the operative date of 
the proposed rule change and within four years of having been 
previously registered, they would only need to pass the specialized 
knowledge examination associated with that registration position. 
However, if they do not register within four years from the date of 
their last registration, their SIE status in the CRD system would be 
administratively terminated. Similar to the current process for 
registration, firms would continue to use the CRD system to request 
registrations for representatives. An individual would be able to 
schedule both the SIE and specialized knowledge examinations for the 
same day, provided the individual is able to reserve space at one of 
FINRA's designated testing centers.
    Finally, under current Exchange Rule 203, Interpretation and Policy 
.05, the Exchange may, in exceptional cases and where good cause is 
shown, waive the applicable qualification examination and accept other 
standards as evidence of an applicant's qualifications for 
registration. The Exchange proposes to replace Exchange Rule 203, 
Interpretation and Policy .05, with proposed Exchange Rule 3100, 
Interpretation and Policy .03, with changes that track FINRA Rule 
1210.03. The proposed rule provides that the Exchange will only 
consider examination waiver requests submitted by a firm for 
individuals associated with the firm who are seeking registration in a 
representative-level or principal-level registration category. 
Moreover, proposed Exchange Rule 3100, Interpretation and Policy .03, 
states that the Exchange will consider waivers of the SIE alone or the 
SIE and the representative-level and principal-level examination(s) for 
such individuals.
E. Requirements for Registered Persons Functioning as Principals for a 
Limited Period (Proposed Exchange Rule 3100, Interpretation and Policy 
.04)
    The Exchange proposes to adopt new Exchange Rule 3100, 
Interpretation and Policy .04, which provides that subject to the 
requirements of proposed Exchange Rule 3101, Interpretation and Policy 
.03, a Member may designate any person currently registered, or who 
becomes registered, with the Member as a representative to function as 
a principal for a period of 120 calendar days prior to passing an 
appropriate principal qualification examination, provided that such 
person has at least 18 months of experience functioning as a registered 
representative within the five-year period immediately preceding the 
designation and has fulfilled all prerequisite registration, fee and 
examination requirements prior to designation as principal. These 
requirements apply to any principal category, including those 
categories that are not subject to a prerequisite representative-level 
registration requirement, such as the Financial and Operations 
Principal registration category.\31\ Similarly, the proposed rule would 
permit a Member to designate any person currently registered, or who 
becomes registered, with the Member as a principal to function in 
another principal category for a period of 120 calendar days prior to 
passing an appropriate qualification examination as specified under 
proposed Rule 3101.\32\ This provision, which has no counterpart in the 
Exchange's current rules, is intended to provide flexibility to Members 
in meeting their principal requirements on a temporary basis.
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    \31\ In this regard, the Exchange notes that qualifying as a 
registered representative is currently a prerequisite to qualifying 
as a principal on the Exchange except with respect to the Financial 
and Operations Principal.
    \32\ Proposed Exchange Rule 3100, Interpretation and Policy .04, 
omits the reference in FINRA Rule 1210.04 to Foreign Associates, 
which is a registration category not recognized by the Exchange, but 
otherwise tracks the language of FINRA Rule 1210.04.
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F. Rules of Conduct for Taking Examinations and Confidentiality of 
Examinations (Proposed Exchange Rule 3100, Interpretation and Policy 
.05)
    Before taking an examination, FINRA currently requires each 
candidate to agree to the SIE Rules of Conduct for taking a 
qualification examination. Among other things, the examination Rules of 
Conduct require each candidate to attest that he or she is in fact the 
person who is taking the examination. The Rules of Conduct also require 
that each candidate agree that the examination content is the 
intellectual property of FINRA and that the content cannot be copied or 
redistributed by any means. If FINRA discovers that a candidate has 
violated the Rules of Conduct for taking a qualification examination, 
the candidate may forfeit the results of the examination and may be 
subject to disciplinary action by FINRA. For instance, for cheating on 
a qualification examination, the FINRA Sanction Guidelines recommend 
barring the individual.\33\
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    \33\ See FINRA Sanction Guidelines (March 2019), VII. 
Qualification and Membership, pg. 38, at https://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.
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    Effective October 1, 2018, FINRA codified the requirements relating 
to the Rules of Conduct for examinations under FINRA Rule 1210.05. 
FINRA also adopted Rules of Conduct for taking the SIE for associated 
persons and non-associated persons who take the SIE.
    The Exchange proposes to adopt its own proposed Exchange Rule 3100, 
Interpretation and Policy .05, which would provide that associated 
persons taking the SIE are subject to the SIE Rules of Conduct, and 
that associated persons taking any representative or principal 
examination are subject to the Rules of Conduct for representative and 
principal examinations. Under the proposed rule, a violation of the SIE 
Rules of Conduct or the Rules of Conduct for representative and 
principal examinations by an associated person would be deemed to be a 
violation of Exchange rules requiring observance of high standards of 
commercial honor or just and equitable principles of trade, such as 
Exchange Rule 301.\34\ Further, if the Exchange determines that an 
associated person has violated the SIE Rules of Conduct or the Rules of 
Conduct for representative and principal examinations, the associated 
person may forfeit the results of the examination and may be subject to 
disciplinary action by the Exchange.
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    \34\ Exchange Rule 301, Just and Equitable Principles of Trade, 
prohibits Members from engaging in acts or practices inconsistent 
with just and equitable principles of trade. Persons associated with 
Members have the same duties and obligations as Members under 
Exchange Rule 301.
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    Proposed Exchange Rule 3100, Interpretation and Policy .05, also 
states that the Exchange considers all of the qualification 
examinations' content to be highly confidential. The removal of 
examination content from an examination center, reproduction, 
disclosure, receipt from or passing to any person, or use for study 
purposes of any portion of such qualification examination or any other 
use that would compromise the effectiveness of the examinations and the 
use in any manner and at any time of the questions or answers to the 
examinations shall be prohibited and shall be deemed to be a violation 
of Exchange rules requiring observance of high standards of commercial 
honor or just and equitable principles of trade. Finally, proposed 
Exchange Rule 3100, Interpretation and Policy .05, would prohibit an 
applicant from receiving assistance while taking

[[Page 2789]]

the examination, and require the applicant to certify that no 
assistance was given to or received by him or her during the 
examination.\35\
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    \35\ The Exchange does not propose to adopt portions of FINRA 
Rule 1210.05, which apply to non-associated persons, over whom the 
Exchange would in any event have no jurisdiction.
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G. Waiting Periods for Retaking a Failed Examination (Proposed Exchange 
Rule 3100, Interpretation and Policy .06)
    The Exchange proposes to adopt new Exchange Rule 3100, 
Interpretation and Policy .06, which provides that any person who fails 
to pass a qualification examination prescribed by the Exchange may 
retake that examination again after a period of 30 calendar days from 
the date of the person's last attempt to pass that examination.\36\ 
Proposed Exchange Rule 3100, Interpretation and Policy .06, further 
provides that if a person fails an examination three or more times in 
succession within a two-year period, the person is prohibited from 
retaking that examination until 180 calendar days has elapsed from the 
date of the person's last attempt to pass that examination. These 
waiting periods would apply to the SIE and the representative and 
principal examinations.\37\
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    \36\ Proposed Exchange Rule 3100, Interpretation and Policy .06, 
has no counterpart in existing Exchange rules.
    \37\ FINRA Rule 1210.06 requires individuals taking the SIE who 
are not associated persons to agree to be subject to the same 
waiting periods for retaking the SIE. The Exchange does not propose 
to include this language in proposed Exchange Rule 3100, 
Interpretation and Policy .06, as the Exchange will not apply the 
proposed 3100 Series of rules in any event to individuals who are 
not associated persons of Members.
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H. Continuing Education (``CE'') Requirements (Proposed Exchange Rule 
3100, Interpretation and Policy .07)
    The Exchange proposes to delete Exchange Rule 203, Interpretation 
and Policy .04, which CE requirements the Exchange proposes to 
reorganize, renumber and adopt as proposed Exchange Rule 3103. The 
Exchange believes that all registered persons, regardless of their 
activities, should be subject to the Regulatory Element of the CE 
requirements so that they can keep their knowledge of the securities 
industry current. Therefore, the Exchange proposes to adopt Exchange 
Rule 3100, Interpretation and Policy .07, to clarify that all 
registered persons, including those who solely maintain a permissive 
registration, are required to satisfy the Regulatory Element, as 
specified in proposed Exchange Rule 3103, as discussed below.\38\ 
Individuals who have passed the SIE but not a representative or 
principal-level examination and do not hold a registered position would 
not be subject to any CE requirements. Consistent with current 
practice, proposed Exchange Rule 3100, Interpretation and Policy .07, 
would also provide that if a person registered with a Member has a CE 
deficiency with respect to that registration, such person shall not be 
permitted to be registered in another registration category with the 
Exchange under proposed Exchange Rule 3101 with that Member or to be 
registered in any registration category with the Exchange under 
proposed Exchange Rule 3101 with another Member, until the person has 
satisfied the deficiency.
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    \38\ The Exchange proposes to delete Exchange Rule 203, 
Interpretation and Policy .04, in connection with the adoption of 
proposed Exchange Rule 3100, Interpretation and Policy .07.
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I. Lapse of Registration and Expiration of SIE (Proposed Exchange Rule 
3100, Interpretation and Policy .08)
    Current Exchange Rule 203(h) states that any person whose 
registration has been revoked by the Exchange as a disciplinary 
sanction or whose most recent registration has been terminated for two 
or more years immediately preceding the date of receipt by the Exchange 
of a new application shall be required to pass a qualification 
examination appropriate to the category of registration as prescribed 
by the Exchange. Any person who last passed the SIE or who was last 
registered as a Representative, whichever occurred last, four or more 
years immediately preceding the date of receipt by the Exchange of a 
new application for registration as a Representative shall be required 
to pass the SIE in addition to a representative qualification 
examination appropriate to his or her category of registration. The two 
year period is calculated from the termination date to the date the 
Exchange receives a new application for registration. The Exchange 
proposes to delete Exchange Rule 203(h), and replace it with proposed 
Exchange Rule 3100, Interpretation and Policy .08, Lapse of 
Registration and Expiration of SIE.
    Proposed Exchange Rule 3100, Interpretation and Policy .08, 
contains language comparable to that of Exchange Rule 203(h) but also 
clarifies that, for purposes of the proposed rule, an application would 
not be considered to have been received by the Exchange if that 
application does not result in a registration. Proposed Exchange Rule 
3100, Interpretation and Policy .08, also sets forth the expiration 
period of the SIE. Based on the content covered on the SIE, the 
Exchange proposes that a passing result on the SIE be valid for four 
years. Therefore, under the proposed rule change, an individual who 
passes the SIE and is an associated person of a firm at the time would 
have up to four years from the date he or she passes the SIE to pass a 
representative-level examination to register as a representative with 
that firm, or a subsequent firm, without having to retake the SIE. In 
addition, an individual who passes the SIE and is not an associated 
person at the time would have up to four years from the date he or she 
passes the SIE to become an associated person of a firm, pass a 
representative-level examination and register as a representative 
without having to retake the SIE.
    Moreover, an individual holding a representative-level registration 
who leaves the industry after the operative date of the proposed rule 
change would have up to four years to re-associate with a firm and 
register as a representative without having to retake the SIE. However, 
the four-year expiration period in the proposed rule change extends 
only to the SIE, and not the representative-level and principal-level 
registrations. The representative-level and principal-level 
registrations would continue to be subject to a two year expiration 
period as is the case today.
J. Waiver of Examinations for Individuals Working for a Financial 
Services Industry Affiliate of a Member (Proposed Exchange Rule 3100, 
Interpretation and Policy .09)
    The Exchange proposes to adopt Exchange Rule 3100, Interpretation 
and Policy .09, to provide a process whereby individuals working for a 
financial services industry affiliate of a Member \39\ would be able to 
terminate their registrations with the Member and be granted a waiver 
of their requalification requirements upon re-registering with a 
Member, provided the firm that is requesting the waiver and the 
individual satisfy the criteria for a Financial Services Affiliate 
(``FSA'') waiver.\40\ The purpose of the FSA waiver is to provide a 
firm greater flexibility to move personnel, including

[[Page 2790]]

senior and middle management, between the firm and its financial 
services affiliate(s) so that they may gain organizational skills and 
better knowledge of products developed by the affiliate(s) without the 
individuals having to requalify by examination each time they return to 
the firm.\41\
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    \39\ Proposed Exchange Rule 3100, Interpretation and Policy .09, 
defines a ``financial services industry affiliate of a Member'' as a 
legal entity that controls, is controlled by or is under common 
control with a Member and is regulated by the Commission, Commodity 
Futures Trading Commission (``CFTC''), state securities authorities, 
federal or state banking authorities, state insurance authorities, 
or substantially equivalent foreign regulatory authorities.
    \40\ There is no counterpart to proposed Exchange Rule 3100, 
Interpretation and Policy .09, in the Exchange's existing rules. 
FINRA Rule 1210.09 was adopted as a new waiver process for FINRA 
registration, as part of the FINRA Rule Changes. See supra note 14.
    \41\ See supra note 14.
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    Under the waiver process in proposed Exchange Rule 3100, 
Interpretation and Policy .09, the first time a registered person is 
designated as eligible for a waiver based on the FSA criteria, the 
Member with which the individual is registered would notify the 
Exchange of the FSA designation. The Member would concurrently file a 
full Form U5 terminating the individual's registration with the firm, 
which would also terminate the individual's other SRO and state 
registrations.
    To be eligible for initial designation as an FSA-eligible person by 
a Member, an individual must have been registered for a total of five 
years within the most recent 10-year period prior to the designation, 
including for the most recent year with that Member.\42\ An individual 
would have to satisfy these preconditions only for purposes of his or 
her initial designation as an FSA-eligible person, and not for any 
subsequent FSA designation(s). Thereafter, the individual would be 
eligible for a waiver for up to seven years from the date of initial 
designation \43\ provided that the other conditions of the waiver, as 
described below, have been satisfied. Consequently, a Member other than 
the Member that initially designated an individual as an FSA-eligible 
person may request a waiver for the individual and more than one Member 
may request a waiver for the individual during the seven-year 
period.\44\
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    \42\ For purposes of this requirement, a five year period of 
registration with the Exchange, with FINRA or with another self-
regulatory organization would be sufficient.
    \43\ Individuals would be eligible for a single, fixed seven-
year period from the date of initial designation, and the period 
would not be tolled or renewed.
    \44\ The following examples illustrate this point:
    Example 1. Firm A designates an individual as an FSA-eligible 
person by notifying the Exchange and files a Form U5. The individual 
joins Firm A's financial services affiliate. Firm A does not submit 
a waiver request for the individual. After working for Firm A's 
financial services affiliate for three years, the individual 
directly joins Firm B's financial services affiliate for three 
years. Firm B then submits a waiver request to register the 
individual.
    Example 2. Same as Example 1, but the individual directly joins 
Firm B after working for Firm A's financial services affiliate, and 
Firm B submits a waiver request to register the individual at that 
point in time.
    Example 3. Firm A designates an individual as an FSA-eligible 
person by notifying the Exchange and files a Form U5. The individual 
joins Firm A's financial services affiliate for three years. Firm A 
then submits a waiver request to reregister the individual. After 
working for Firm A in a registered capacity for six months, Firm A 
re-designates the individual as an FSA-eligible person by notifying 
FINRA and files a Form U5. The individual rejoins Firm A's financial 
services affiliate for two years, after which the individual 
directly joins Firm B's financial services affiliate for one year. 
Firm B then submits a waiver request to register the individual.
    Example 4. Same as Example 3, but the individual directly joins 
Firm B after the second period of working for Firm A's financial 
services affiliate, and Firm B submits a waiver request to register 
the individual at that point in time.
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    An individual designated as an FSA-eligible person would be subject 
to the Regulatory Element of CE while working for a financial services 
industry affiliate of a Member. The individual would be subject to a 
Regulatory Element program that correlates to his or her most recent 
registration category, and CE would be based on the same cycle had the 
individual remained registered. If the individual fails to complete the 
prescribed Regulatory Element during the 120-day window for taking the 
session, he or she would lose FSA eligibility (i.e., the individual 
would have the standard two-year period after termination to re-
register without having to retake an examination). The Exchange also 
proposes to make corresponding changes in proposed Exchange Rule 3103.
    Upon registering an FSA-eligible person, a firm would file a Form 
U4 and request the appropriate registration(s) for the individual. The 
firm would also submit an examination waiver request to the 
Exchange,\45\ similar to the process used today for waiver requests, 
and it would represent that the individual is eligible for an FSA 
waiver based on the conditions set forth below. The Exchange would 
review the waiver request and make a determination of whether to grant 
the request within 30 calendar days of receiving the request. The 
Exchange would summarily grant the request if the following conditions 
are met:
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    \45\ The Exchange would consider a waiver of the representative-
level qualification examination(s), the principal-level 
qualification examination(s) and the SIE, as applicable.
---------------------------------------------------------------------------

    (1) Prior to the individual's initial designation as an FSA-
eligible person, the individual was registered for a total of five 
years within the most recent 10-year period, including for the most 
recent year with the Member that initially designated the individual as 
an FSA-eligible person;
    (2) The waiver request is made within seven years of the 
individual's initial designation as an FSA-eligible person by a Member;
    (3) The initial designation and any subsequent designation(s) were 
made concurrently with the filing of the individual's related Form U5;
    (4) The individual continuously worked for the financial services 
affiliate(s) of a Member since the last Form U5 filing;
    (5) The individual has complied with the Regulatory Element of CE; 
and
    (6) The individual does not have any pending or adverse regulatory 
matters, or terminations, that are reportable on the Form U4, and has 
not otherwise been subject to a statutory disqualification while the 
individual was designated as an FSA-eligible person with a Member.
    Following the Form U5 filing, an individual could move between the 
financial services affiliates of a Member so long as the individual is 
continuously working for an affiliate. Further, a Member could submit 
multiple waiver requests for the individual, provided that the waiver 
requests are made during the course of the seven-year period.\46\ An 
individual who has been designated as an FSA-eligible person by a 
Member would not be able to take additional examinations to gain 
additional registrations while working for a financial services 
affiliate of a Member.
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    \46\ For example, if a Member submits a waiver request for an 
FSA-eligible person who has been working for a financial services 
affiliate of the Member for three years and re-registers the 
individual, the Member could subsequently file a Form U5 and re-
designate the individual as an FSA-eligible person. Moreover, if the 
individual works with a financial services affiliate of the Member 
for another three years, the Member could submit a second waiver 
request and re-register the individual upon returning to the Member.
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K. Status of Persons Serving in the Armed Forces of the United States 
(Proposed Exchange Rule 3100, Interpretation and Policy .10)
    The Exchange proposes to adopt Exchange Rule 3100, Interpretation 
and Policy .10, Status of Persons Serving in the Armed Forces of the 
United States.\47\ Proposed Exchange Rule 3100, Interpretation and 
Policy .10(a), would permit a registered person of a Member who 
volunteers for or is called into active duty in the Armed Forces of the 
United States to be placed, after proper notification to the Exchange, 
on inactive status. The registered person would not need to be re-
registered by such Member upon his or her return to active employment 
with the Member. The registered person would remain eligible to receive 
transaction-related compensation, including continuing commissions, and 
the employing

[[Page 2791]]

Member may allow the registered person to enter into an arrangement 
with another registered person of the Member to take over and service 
the person's accounts and to share transaction-related compensation 
based upon the business generated by such accounts. However, because 
such persons would be inactive, they could not perform any of the 
functions and responsibilities performed by a registered person, nor 
would they be required to complete either the continuing education 
Regulatory Element or Firm Element set forth in proposed Exchange Rule 
3103 during the pendency of such inactive status.\48\
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    \47\ There is no counterpart to proposed Exchange Rule 3100, 
Interpretation and Policy .10, in the Exchange's current rules.
    \48\ The relief provided in proposed Exchange Rule 3100, 
Interpretation and Policy .10(a), would be available to a registered 
person during the period that such person remains registered with 
the Member with which he or she was registered at the beginning of 
active duty in the Armed Forces of the United States, regardless of 
whether the person returns to active employment with another Member 
upon completion of his or her active duty. The relief would apply 
only to a person registered with a Member and only while the person 
remains on active military duty. Further, the Member with which such 
person is registered would be required to promptly notify the 
Exchange of such person's return to active employment with the 
Member.
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    Pursuant to proposed Exchange Rule 3100, Interpretation and Policy 
.10(b), a Member that is a sole proprietor who temporarily closes his 
or her business by reason of volunteering for or being called into 
active duty in the Armed Forces of the United States, shall be placed, 
after proper notification to the Exchange, on inactive status while the 
Member remains on active military duty, would not be required to pay 
dues or assessments during the pendency of such inactive status and 
would not be required to pay an admission fee upon return to active 
participation in the securities business. This relief would be 
available only to a sole proprietor Member and only while the person 
remains on active military duty, and the sole proprietor would be 
required to promptly notify the Exchange of his or her return to active 
participation in the securities business.
    Pursuant to proposed Exchange Rule 3100, Interpretation and Policy 
.10(c), if a person who was formerly registered with a Member 
volunteers for or is called into active duty in the Armed Forces of the 
United States at any time within two years after the date the person 
ceased to be registered with a Member, the Exchange shall defer the 
lapse of registration requirements set forth in proposed Exchange Rule 
3100, Interpretation and Policy .08 (i.e., toll the two-year expiration 
period for representative and principal qualification examinations), 
and the lapse of the SIE (i.e., toll the four-year expiration period 
for the SIE). The Exchange would defer the lapse of registration 
requirements and the SIE commencing on the date the person begins 
actively serving in the Armed Forces of the United States, provided 
that the Exchange is properly notified of the person's period of active 
military service within 90 days following his or her completion of 
active service or upon his or her re-registration with a Member, 
whichever occurs first. The deferral will terminate 90 days following 
the person's completion of active service in the Armed Forces of the 
United States. Accordingly, if such person does not re-register with a 
Member within 90 days following his or her completion of active service 
in the Armed Forces of the United States, the amount of time in which 
the person must become re-registered with a Member without being 
subject to a representative or principal qualification examination or 
the SIE shall consist of the standard two-year period for 
representative and principal qualification examinations or the standard 
four-year period for the SIE, whichever is applicable, as provided in 
proposed Exchange Rule 3100, Interpretation and Policy .08, reduced by 
the period of time between the person's termination of registration and 
beginning of active service in the Armed Forces of the United States.
    Further, under proposed Exchange Rule 3100, Interpretation and 
Policy .10(c), if a person placed on inactive status while serving in 
the Armed Forces of the United States ceases to be registered with a 
Member, the Exchange would defer the lapse of registration requirements 
set forth in proposed Exchange Rule 3100, Interpretation and Policy .08 
(i.e., toll the two-year expiration period for representative and 
principal qualification examinations), and the lapse of the SIE (i.e., 
toll the four-year expiration period for the SIE) during the pendency 
of his or her active service in the Armed Forces of the United States. 
The Exchange would defer the lapse of registration requirements based 
on existing information in the CRD system, provided that the Exchange 
is properly notified of the person's period of active military service 
within two years following his or her completion of active service or 
upon his or her re-registration with a Member, whichever occurs first. 
The deferral would terminate 90 days following the person's completion 
of active service in the Armed Forces of the United States. 
Accordingly, if such person did not re-register with a Member within 90 
days following completion of active service, the amount of time in 
which the person must become re-registered with a Member without being 
subject to a representative or principal qualification examination or 
the SIE would consist of the standard two-year period for 
representative and principal qualification examinations or the standard 
four-year period for the SIE, whichever is applicable, as provided in 
proposed Exchange Rule 3100, Interpretation and Policy .08.\49\
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    \49\ See Nasdaq Stock Market, General 9, Regulation, Section 1 
Registration, Qualification and Continuing Education, Rule 
1.1210.10(c).
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L. Impermissible Registrations (Proposed Exchange Rule 3100, 
Interpretation and Policy .11)
    Current Exchange Rule 203(a) prohibits a Member from maintaining a 
registration with the Exchange for any person (1) who is no longer 
active in the Member's securities business, (2) who is no longer 
functioning in the registered capacity, or (3) where the sole purpose 
is to avoid an examination requirement. This rule also prohibits a 
Member from applying for the registration of a person as representative 
or principal where the Member does not intend to employ the person in 
its securities business. These prohibitions do not apply to the current 
permissive registration categories identified in Exchange Rule 203(a).
    In light of proposed Exchange Rule 3100, Interpretation and Policy 
.02, Permissive Registrations, discussed above, the Exchange proposes 
to delete these provisions of current Exchange Rule 203(a) and instead 
adopt proposed Exchange Rule 3100, Interpretation and Policy .11, 
prohibiting a Member from registering or maintaining the registration 
of a person unless the registration is consistent with the requirements 
of proposed Exchange Rule 3100.\50\
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    \50\ As discussed above, the Exchange also proposes to adopt 
Exchange Rule 3100, Interpretation and Policy .12, Application for 
Registration and Jurisdiction, which is not included in FINRA Rule 
1210. Proposed Exchange Rule 3100, Interpretation and Policy .12, is 
based upon portions of current Exchange Rules 203 and 1301. See also 
supra note 20.
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M. Registration Categories (Proposed Exchange Rule 3101)
    The Exchange proposes to adopt new and revised registration 
category rules and related definitions in proposed Exchange Rule 3101, 
Registration Categories.\51\
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    \51\ For ease of reference, the Exchange proposes to adopt as 
Exchange Rule 3101, Interpretation and Policy .07, in chart form, a 
Summary of Qualification Requirements for each of the Exchange's 
permitted registration categories discussed below.

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[[Page 2792]]

1. Definitions (Proposed Exchange Rule 3101(a)) \52\
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    \52\ The Exchange notes that proposed Exchange Rule 3101 differs 
from the Nasdaq Stock Market rule filing in that the Exchange has 
consolidated the definitions for various registration categories 
into one section, proposed Exchange Rule 3101(a), whereas the Nasdaq 
Stock Market filing includes the registration category definition in 
each individual section pertaining to that specific registration 
category type. See supra note 18.
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    The Exchanges proposes to adopt Exchange Rule 3101(a) to define 
certain registration categories and terms used throughout the 
Exchange's new proposed 3100s Series of rules. First, the Exchange 
proposes to adopt a definition for the term ``actively engaged in the 
management of the Member's securities business,'' which is used to 
describe the functions of a ``principal,'' as more fully discussed 
below.\53\ The Exchange proposes that the term ``actively engaged in 
the management of the Member's securities business'' means the 
management of, and the implementation of corporate policies related to, 
such business, as well as managerial decision-making authority with 
respect to the Member's securities business and management-level 
responsibilities for supervising any aspect of such business, such as 
serving as a voting member of the Member's executive, management or 
operations committees.
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    \53\ See also supra note 9.
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    Next, the Exchange proposes to adopt a definition for the term 
``Financial and Operations Principal,'' which the Exchange proposes to 
mean a person associated with a Member whose duties include (i) final 
approval and responsibility for the accuracy of financial reports 
submitted to any duly established securities industry regulatory body; 
(ii) final preparation of such reports; (iii) supervision of 
individuals who assist in the preparation of such reports; (iv) 
supervision of and responsibility for individuals who are involved in 
the actual maintenance of the Member's books and records from which 
such reports are derived; (v) supervision and/or performance of the 
Member's responsibilities under all financial responsibility rules 
promulgated pursuant to the provisions of the Act; (vi) overall 
supervision of and responsibility for the individuals who are involved 
in the administration and maintenance of the Member's back office 
operations; and (vii) any other matter involving the financial and 
operational management of the Member.
    Next, the Exchange proposes to adopt a definition for the term 
``principal'' and include it in newly proposed Exchange Rule 3101(a). 
The Exchange proposes to adopt a definition of ``principal,'' which 
would mean any person associated with a Member, including, but not 
limited to, sole proprietor, officer, partner, manager of office of 
supervisory jurisdiction, director or other person occupying a similar 
status or performing similar functions, who is actively engaged in the 
management of the Member's securities business, such as supervision, 
solicitation, conduct of business in securities or the training of 
persons associated with a Member for any of these functions. Such 
persons shall include, among other persons, a Member's chief executive 
officer and chief financial officer (or equivalent officers). The term 
``principal'' also includes any other person associated with a Member 
who is performing functions or carrying out responsibilities that are 
required to be performed or carried out by a principal under Exchange 
rules.
    Finally, the Exchange proposes to adopt a definition for the term 
``representative'' in proposed Exchange Rule 3101(a). Currently, the 
Exchange's rules do not define the term ``representative.'' Proposed 
Exchange Rule 3101(a) would define the term ``representative'' as any 
person associated with a Member, including assistant officers other 
than principals, who is engaged in the Member's securities business, 
such as supervision, solicitation, conduct of business in securities or 
the training of persons associated with a Member for any of these 
functions.
2. Principal Registration Categories (Proposed Exchange Rule 3101(b))
i. General Securities Principal (Proposed Rule 3101(b)(1))
    The Exchange currently does not impose a General Securities 
Principal registration obligation. The Exchange proposes to adopt 
Exchange Rule 3101(b)(1), which would establish an obligation to 
register as a General Securities Principal, subject to certain 
exceptions.\54\ Proposed Exchange Rule 3101(b)(1) states that each 
principal is required to register with the Exchange as a General 
Securities Principal, except that if a principal's activities are 
limited to the functions of a Compliance Official, a Financial and 
Operations Principal, a Securities Trader Principal, a Securities 
Trader Compliance Officer, or a Registered Options Principal, then the 
principal shall appropriately register in one or more of those 
categories.\55\ Proposed Exchange Rule 3101(b)(1)(i)(C) further 
provides that if a principal's activities are limited solely to the 
functions of a General Securities Sales Supervisor, then the principal 
may appropriately register in that category in lieu of registering as a 
General Securities Principal, provided, however, that if the principal 
is engaged in options sales activities, he or she would be required to 
register as a General Securities Sales Supervisor or as a Registered 
Options Principal.\56\
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    \54\ There is no counterpart to proposed Exchange Rule 
3101(b)(1) in the Exchange's current rules.
    \55\ The Exchange proposes to recognize the General Securities 
Principal registration category for the first time in this proposed 
rule change.
    \56\ See Nasdaq Stock Market, General 9, Regulation, Section 1, 
Registration, Qualification and Continuing Education, Rule 
1.1220(a)(2)(A)(i)-(iv). Proposed Exchange Rule 3901(b)(1) deviates 
somewhat from the counterpart FINRA rule in that it does not offer 
various limited registration categories provided for in FINRA Rule 
1220(a)(2)(A). The Exchange therefore proposes to reserve Exchange 
Rules 3901(b)(1)(i)(B) and (D).
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    Proposed Exchange Rule 3101(b)(1)(ii) requires that an individual 
registering as a General Securities Principal satisfy the General 
Securities Representative prerequisite registration and pass the 
General Securities Principal qualification examination.
    The Exchange does not propose to adopt FINRA Rule 1220(a)(2)(B), 
which permits an individual registering as a General Securities 
Principal after October 1, 2018 to register as a General Securities 
Sales Supervisor and to pass the General Securities Principal Sales 
Supervisor Module qualification examination. The Exchange believes that 
individuals registering as General Securities Principals should be 
required to demonstrate their competence for that role by passing the 
General Securities Principal qualification examination.\57\
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    \57\ Proposed Exchange Rule 3101(b)(1) generally tracks FINRA 
Rule 1220(a)(2), except that it omits references to a number of 
registration categories which FINRA recognizes but that the Exchange 
does not, and it includes a reference to the Securities Trader 
Compliance Officer category which the Exchange proposes to 
recognize, but which FINRA does not. Additionally, proposed Rule 
3101(b)(1)(i)(A) extends that provision's exception to the General 
Securities Principal registration requirement to certain principals 
whose activities are ``limited to'' (rather than ``include'') the 
functions of a more limited principal. The Exchange believes that 
activities ``limited to'' expresses the intent of that exception 
more accurately than activities that ``include.''
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ii. Compliance Official (Proposed Exchange Rule 3101(b)(2))
    Currently, Exchange Rule 203(f) requires each Member and Member 
organization that is a registered broker-dealer to designate a Chief 
Compliance Officer on Schedule A of Form BD and requires individuals 
designated as a Chief Compliance Officer to register

[[Page 2793]]

with the Exchange and pass the appropriate heightened qualification 
examination(s) as prescribed by the Exchange.\58\
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    \58\ Exchange Rule 203(f) further provides that a person who has 
been designated as a Chief Compliance Officer on Schedule A of Form 
BD for at least two years immediately prior to January 1, 2002, and 
who has not been subject within the last ten years to: (1) Any 
statutory disqualification as defined in Section 3(a)(39) of the 
Act; (2) a suspension; (3) the imposition of a fine of $5,000 or 
more for a violation of any provision of any securities law or 
regulation, or any agreement with, rule or standard of conduct of 
any securities governmental agency, or securities self-regulatory 
organization; or (4) the imposition of a fine of $5,000 or more by 
any such regulatory or self-regulatory organization in connection 
with a disciplinary proceeding; shall be required to register in 
this heightened category of registration as prescribed by the 
Exchange, but shall be exempt from the requirement to pass the 
heightened qualification examination as prescribed by the Exchange.
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    The Exchange proposes to delete Exchange Rule 203(f) and adopt 
Exchange Rule 3101(b)(2) in its place. Proposed Exchange Rule 
3101(b)(2) would provide that each person designated as a Chief 
Compliance Officer on Schedule A of Form BD shall be required to 
register with the Exchange as a General Securities Principal, provided 
that such person may instead register as a Compliance Official if his 
or her duties do not include supervision of trading. All individuals 
registering as Compliance Official would be required, prior to or 
concurrent with such registration, to pass the Compliance Official 
qualification examination. However, pursuant to Exchange Rule 
3101(b)(2)(iii), an individual designated as a Chief Compliance Officer 
on Schedule A of Form BD of a Member that is engaged in limited 
securities business may be registered in a principal category under 
proposed Exchange Rule 3101(b) that corresponds to the limited scope of 
the Member's business.
    Additionally, proposed Exchange Rule 3101(b)(2)(iv) would provide 
that an individual designated as a Chief Compliance Officer on Schedule 
A of Form BD may register and qualify as a Securities Trader Compliance 
Officer if, with respect to transactions in equity, preferred or 
convertible debt securities, or options such person is engaged in 
proprietary trading, the execution of transactions on an agency basis, 
or the direct supervision of such activities other than a person 
associated with a Member whose trading activities are conducted 
principally on behalf of an investment company that is registered with 
the SEC pursuant to the Investment Company Act and that controls, is 
controlled by, or is under common control with a Member. All 
individuals registering as Securities Trader Compliance Officers would 
be required to first become registered pursuant to paragraph (c)(3) as 
a Securities Trader, and to pass the Compliance Official qualification 
exam.\59\
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    \59\ Proposed Exchange Rule 3101(b)(2) differs from FINRA Rule 
1220(a)(3), Compliance Officer, as the Exchange does not recognize 
the Compliance Officer registration category. Similarly, FINRA does 
not recognize the Compliance Official or the Securities Trader 
Compliance Officer registration categories which the Exchange 
proposes to recognize. However, FINRA Rule 1220(a)(3), like proposed 
Exchange Rule 3101(b)(2), offers an exception pursuant to which a 
Chief Compliance Officer designated on Schedule A of Form BD may 
register in a principal category that corresponds to the limited 
scope of the Member's business.
---------------------------------------------------------------------------

iii. Financial and Operations Principal (Proposed Exchange Rule 
3101(b)(3))
    Current Exchange Rule 203(e) provides that each Member subject to 
Rule 15c3-1 of the Act must designate a Financial/Operations Principal. 
It specifies that the duties of a Financial/Operations Principal shall 
include taking appropriate actions to assure that the Member complies 
with applicable financial and operational requirements under the Rules 
and the Act, including but not limited to those requirements relating 
to the submission of financial reports and the maintenance of books and 
records. It requires Financial/Operations Principal to have 
successfully completed the Financial and Operations Principal 
Examination (Series 27 Exam). It further provides that each Financial/
Operations Principal designated by a Member shall be registered in that 
capacity with the Exchange as prescribed by the Exchange, and that a 
Financial/Operations Principal of a Member may be a full-time employee, 
a part-time employee or independent contractor of the Member.
    The Exchange proposes to delete Exchange Rule 203(e) and adopt in 
its place Exchange Rule 3101(b)(3). Under the new rule, every Member of 
the Exchange that is operating pursuant to the provisions of Rules 
15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8) of the Commission, shall 
designate at least one Financial and Operations Principal who shall be 
responsible for performing the duties described in paragraph (a) of 
proposed Exchange Rule 3101. In addition, each person associated with a 
Member who performs such duties shall be required to register as a 
Financial and Operations Principal with the Exchange.
    Proposed Exchange Rule 3101(b)(3)(ii) would require all individuals 
registering as a Financial and Operations Principal to pass the 
Financial and Operations Principal qualification examination before 
such registration may become effective. Finally, proposed Exchange Rule 
3101(b)(3)(iii) would prohibit a person registered solely as a 
Financial and Operations Principal from functioning in a principal 
capacity with responsibility over any area of business activity not 
described in paragraph (a) of the rule for a Financial and Operations 
Principal.\60\
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    \60\ FINRA Rule 1220(a)(4) differs from proposed Exchange Rule 
3101(b)(3) in that it includes an Introducing Broker-Dealer 
Financial and Operations Principal registration requirement. 
Additionally, proposed Exchange Rule 3101(b)(3) contains a 
requirement, which the FINRA rule does not, that each person 
associated with a Member who performs the duties of a Financial and 
Operations Principal must register as such with the Exchange. 
Further, as discussed above, the Exchange does not propose to adopt 
a Principal Financial Officer or Principal Operations Officer 
requirement similar to FINRA Rule 1220(a)(4)(B), as it believes the 
Financial and Operations Principal requirement is sufficient.
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iv. Investment Banking Principal (Proposed Exchange Rule 3101(b)(4))
    The Exchange does not recognize the Investment Banking Principal 
registration category and proposes to reserve Exchange Rule 3101(b)(4), 
retaining the caption solely to facilitate comparison with FINRA's 
rules.
v. Research Principal (Proposed Exchange Rule 3101(b)(5))
    The Exchange does not recognize the Research Principal registration 
category and proposes to reserve Exchange Rule 3101(b)(5), retaining 
the caption solely to facilitate comparison with FINRA's rules.
vi. Securities Trader Principal (Proposed Exchange Rule 3101(b)(6))
    Current Exchange Rule 203(c) provides that Members that are 
individuals and associated persons of Members included within the 
definition of Option Principal in Exchange Rule 100 and who will have 
supervisory responsibility over the securities trading activities 
described in Exchange Rule 203(d) shall become qualified and registered 
as a Securities Trader Principal. To qualify for registration as a 
Securities Trader Principal, such person shall become qualified and 
registered as a Securities Trader under Rule 1302(e) and pass the SIE 
and General Securities Principal qualification examination (Series 24). 
A person who is qualified and registered as a Securities Trader 
Principal under this provision may only have supervisory responsibility 
over the Securities Trader activities specified in Exchange Rule 
203(d), unless such person is separately qualified and

[[Page 2794]]

registered in another appropriate principal registration category, such 
as the General Securities Principal registration category. Current 
Exchange Rule 203(c)(2) provides that a person who is registered as a 
General Securities Principal shall not be qualified to supervise the 
trading activities described in Exchange Rule 203(d), unless such 
person has also become qualified and registered as a Securities Trader 
under Exchange Rule 1302(e) and become registered as a Securities 
Trader Principal.
    The Exchange proposes to delete Exchange Rule 203(c) and adopt in 
its place Exchange Rule 3101(b)(6), Securities Trader Principal. 
Proposed Exchange Rule 3101(b)(6) would require that a principal 
responsible for supervising the securities trading activities specified 
in proposed Exchange Rule 3101(c)(3) \61\ register as a Securities 
Trader Principal. The proposed rule requires individuals registering as 
Securities Trader Principals to be registered as Securities Traders and 
to pass the General Securities Principal qualification examination.
---------------------------------------------------------------------------

    \61\ Proposed Exchange Rule 3101(c)(3), discussed below, 
provides for representative-level registration in the ``Securities 
Trader'' category.
---------------------------------------------------------------------------

vii. Registered Options Principal (Proposed Exchange Rule 3101(b)(7))
    The Exchange proposes to adopt Exchange Rule 3101(b)(7), Registered 
Options Principal, which would require that each Member that is engaged 
in transactions in options with the public have at least one Registered 
Options Principal.\62\ Currently, Exchange Rule 100, Definitions, 
provides a definition for an ``Options Principal.'' In accordance with 
the proposal to adopt Exchange Rule 3101(b)(7), Registered Options 
Principal, the Exchange proposes to delete the definition for ``Options 
Principal'' in Exchange Rule 100, Definitions. As discussed below, the 
Exchange proposes to adopt a corresponding definition for a 
``Registered Options Principal'' in Exchange Rule 100, which would 
refer to proposed Exchange Rule 3101(b)(7). In addition, each principal 
as defined in proposed Exchange Rule 3101(a) who is responsible for 
supervising a Member's options sales practices with the public would be 
required to register with the Exchange as a Registered Options 
Principal, with one exception, as follows. If a principal's options 
activities are limited solely to those activities that may be 
supervised by a General Securities Sales Supervisor, then such person 
may register as a General Securities Sales Supervisor pursuant to 
paragraph (b)(9) of this Rule in lieu of registering as a Registered 
Options Principal.\63\
---------------------------------------------------------------------------

    \62\ Proposed Exchange Rule 3101(b)(7) differs from FINRA Rule 
1220(a)(8) in that it omits certain references to other specific 
FINRA rules.
    \63\ Current Exchange Rule 1301(a) provides that no Member shall 
be approved to transact options business with the public until those 
associated persons who are designated as Options Principals have 
been approved by and registered with the Exchange. Persons engaged 
in the supervision of options sales practices or a person to whom 
the designated general partner or executive officer (pursuant to 
Exchange Rule 1308) or another Registered Options Principal 
delegates the authority to supervise options sales practices shall 
be designated as Options Principals. Exchange Rule 1301(b) provides 
that individuals who are delegated responsibility pursuant to 
Exchange Rule 1308 for the acceptance of discretionary accounts, for 
approving exceptions to a Member's criteria or standards for 
uncovered options accounts, and for approval of communications, 
shall be designated as Options Principals and are required to 
qualify as an Options Principal by passing the SIE, the General 
Securities Representative qualification examination (Series 7) and 
the Registered Options Principal Qualification Examination (Series 
4). The foregoing provisions of Exchange Rule 1301 are specific to 
conducting an options business with the public and are not proposed 
to be amended in this proposed rule change, other than conforming 
all references to ``Options Principal'' with ``Registered Options 
Principal,'' as more fully discussed herein. Exchange Rule 203(g), 
which merely serves as a cross-reference to Exchange Rules 1301 and 
1302, is unnecessary and is therefore proposed to be deleted with 
the rest of Exchange Rule 203.
---------------------------------------------------------------------------

    Pursuant to proposed Exchange Rule 3101(b)(7)(ii), subject to the 
lapse of registration provisions in proposed Exchange Rule 3100, 
Interpretation and Policy .08, each person registered with the Exchange 
as a Registered Options Principal on October 1, 2018 and each person 
who was registered as a Registered Options Principal within two years 
prior to October 1, 2018 would be qualified to register as a Registered 
Options Principal without passing any additional qualification 
examinations. All other individuals registering as Registered Options 
Principals after October 1, 2018 would, prior to or concurrent with 
such registration, be required to become registered pursuant to 
proposed Exchange Rule 3101(c)(1) as a General Securities 
Representative and pass the Registered Options Principal qualification 
examination.\64\
---------------------------------------------------------------------------

    \64\ Although the Exchange does not currently list security 
futures products, it also proposes to adopt Exchange Rule 3101, 
Interpretation and Policy .02, which provides that each person who 
is registered with the Exchange as a General Securities 
Representative, Registered Options Principal, or General Securities 
Sales Supervisor shall be eligible to engage in security futures 
activities as a principal provided that such individual completes a 
Firm Element program as set forth in proposed Exchange Rule 3103 
that addresses security futures products before such person engages 
in security futures activities. Unlike FINRA Rule 1220.02, proposed 
Exchange Rule 3101, Interpretation and Policy .02, omits references 
to United Kingdom Securities Representatives and Canada Securities 
Representatives, which are registration categories the Exchange does 
not recognize. In addition, the Exchange also proposes to adopt 
Exchange Rule 3101, Interpretation and Policy .03, which requires 
notification to the Exchange in the event a Member's sole Registered 
Options Principal is terminated, resigns, becomes incapacitated or 
is otherwise unable to perform the duties of a Registered Options 
Principal, and imposes certain restrictions on the Member's options 
business in that event.
---------------------------------------------------------------------------

viii. Government Securities Principal (Proposed Exchange Rule 
3101(b)(8))
    The Exchange does not recognize the Government Securities Principal 
registration category and proposes to reserve Exchange Rule 3101(b)(8), 
retaining the caption solely to facilitate comparison with FINRA's 
rules.
ix. General Securities Sales Supervisor (Proposed Exchange Rules 
3101(b)(9) and Interpretation and Policy .04)
    The Exchange proposes to adopt Exchange Rule 3101(b)(9), General 
Securities Sales Supervisor, as well as Interpretation and Policy .04 
to Exchange Rule 3101, which explains the purpose of the General 
Securities Sales Supervisor registration category.\65\ Proposed 
Exchange Rule 3101(b)(9) provides that each principal, as defined in 
proposed paragraph (a) of this Rule, may register with the Exchange as 
a General Securities Sales Supervisor if his or her supervisory 
responsibilities in the securities business of a Member are limited to 
the securities sales activities of the Member, including the approval 
of customer accounts, training of sales and sales supervisory personnel 
and the maintenance of records of original entry or ledger accounts of 
the Member required to be maintained in branch offices by Exchange Act 
record-keeping rules. Further, a person registered solely as a General 
Securities Sales Supervisor would not be qualified to perform any of 
the following activities: (i) Supervision of market making commitments; 
(ii) supervision of the custody of broker-dealer or customer funds or 
securities for purposes of Exchange Act Rule 15c3-3; or (iii) 
supervision of overall compliance with financial responsibility rules 
for broker-dealers promulgated pursuant to the provisions of the 
Exchange Act.\66\
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    \65\ Proposed Exchange Rule 3101(b)(9) has no counterpart in the 
Exchange's current rules.
    \66\ Proposed Exchange Rule 3101(b)(9), however, omits the FINRA 
Rule 1220(a)(10) prohibition against supervision of the origination 
and structuring of underwritings as unnecessary, as this kind 
activity does not fall within the scope of ``securities trading'' 
covered by the Exchange's new 3100 Series of rules.
---------------------------------------------------------------------------

    Each person seeking to register as a General Securities Sales 
Supervisor would be required, prior to or concurrent with such 
registration, to

[[Page 2795]]

become registered pursuant to proposed Exchange Rule 3101(c)(1) of the 
rule as a General Securities Representative and pass the General 
Securities Sales Supervisor qualification examinations.\67\
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    \67\ Unlike FINRA Rule 1220.04, proposed Exchange Rule 3101, 
Interpretation and Policy .04, refers to ``multiple exchanges'' 
rather than listing the various exchanges where a sales principal 
might be required to qualify in the absence of the General 
Securities Sales Supervisor registration category. It also omits 
FINRA internal cross-references.
---------------------------------------------------------------------------

x. Investment Company and Variable Contracts Products Principal 
(Proposed Exchange Rule 3101(b)(10))
    The Exchange does not recognize the Investment Company and Variable 
Contracts Products Principal category and is reserving proposed 
Exchange Rule 3101(b)(10), retaining the caption solely to facilitate 
comparison with FINRA's rules.
xi. Direct Participation Programs Principal (Proposed Exchange Rule 
3101(b)(11))
    The Exchange does not recognize the Direct Participation Programs 
Principal registration category and is reserving proposed Exchange Rule 
3101(b)(11), retaining the caption solely to facilitate comparison with 
FINRA's rules.
xii. Private Securities Offerings Principal (Proposed Exchange Rule 
3101(b)(12))
    The Exchange does not recognize the Private Securities Offerings 
Principal registration category and is reserving proposed Exchange Rule 
3101(b)(12), retaining the caption solely to facilitate comparison with 
FINRA's rules.
xiii. Supervisory Analyst (Proposed Exchange Rule 3101(b)(13))
    The Exchange does not recognize the Supervisory Analyst 
registration category and is reserving proposed Exchange Rule 
3101(b)(13), retaining the caption solely to facilitate comparison with 
FINRA's rules.
3. Representative Registration Categories (Proposed Exchange Rule 
3101(c))
i. General Securities Representative (Proposed Exchange Rule 
3101(c)(1))
    The Exchange proposes to adopt Exchange Rule 3101(c)(1), General 
Securities Representative. Proposed Exchange Rule 3101(c)(1)(i) would 
state that each representative as defined in proposed Exchange Rule 
3101(a) is required to register with the Exchange as a General 
Securities Representative, subject to the exception that if a 
representative's activities include the functions of a Securities 
Trader, as specified in this Rule, then such person shall appropriately 
register as a Securities Trader.
    Further, consistent with the proposed restructuring of the 
representative-level examinations, proposed Exchange Rule 
3101(c)(1)(ii) would require that individuals registering as General 
Securities Representatives pass the SIE and the General Securities 
Representative examination except that individuals registered as a 
General Securities Representatives within two years prior to October 1, 
2018 would be qualified to register as General Securities 
Representatives without passing any additional qualification 
examinations.\68\
---------------------------------------------------------------------------

    \68\ Proposed Exchange Rule 3101(c)(1)(i) differs from FINRA 
Rule 1220(b)(2)(A) in that it omits references to various 
registration categories which FINRA recognizes but which the 
Exchange does not propose to recognize.
---------------------------------------------------------------------------

    In addition, the Exchange proposes to adopt Exchange Rule 3101, 
Interpretation and Policy .01, to provide certain individuals who are 
associated persons of firms and who hold specific foreign registrations 
an alternative, more flexible, process to obtain an Exchange 
representative-level registration. The Exchange believes that there is 
sufficient overlap between the SIE and these foreign qualification 
requirements to permit them to act as exemptions to the SIE. In 
particular, pursuant to proposed Exchange Rule 3101, Interpretation and 
Policy .01, individuals who are in good standing as representatives 
with the Financial Conduct Authority in the United Kingdom or with a 
Canadian stock exchange or securities regulator would be exempt from 
the requirement to pass the SIE, and thus would be required only to 
pass a specialized knowledge examination to register with the Exchange 
as a representative. This proposed rule would provide individuals with 
a United Kingdom or Canadian qualification more flexibility to obtain 
an Exchange representative-level registration.
ii. Operations Professional (Proposed Exchange Rule 3101(c)(2))
    The Exchange does not recognize the Operations Professional 
registration category for its associated persons. The Exchange 
therefore proposes to reserve Exchange Rule 3101(c)(2), Operations 
Professional, and related Interpretation and Policy .05 to proposed 
Exchange Rule 3101, Scope of Operations Professional Requirement, 
retaining the caption solely to facilitate comparison with FINRA's 
rules.
iii. Securities Trader (Proposed Exchange Rule 3101(c)(3))
    Pursuant to current Exchange Rule 203(d)(1) and (2), Members that 
are individuals and associated persons of Members must register with 
the Exchange as a Securities Trader if, with respect to transactions in 
equity, preferred or convertible debt securities, or foreign currency 
options on the Exchange, such person is engaged in proprietary trading, 
the execution of transactions on an agency basis, or the direct 
supervision of such activities, other than any person associated with a 
Member whose trading activities are conducted principally on behalf of 
an investment company that is registered with the Commission pursuant 
to the Investment Company Act of 1940 and that controls, is controlled 
by or is under common control, with the Member.
    The Exchange proposes to delete Exchange Rule 203(d), and replace 
it with proposed Exchange Rule 3101(c)(3).\69\ Proposed Exchange Rule 
3101(c)(3) would require each representative as defined in paragraph 
(a) of this Rule to register with the Exchange as a Securities Trader 
if, with respect to transactions in equity, preferred or convertible 
debt securities, or options such person is engaged in proprietary 
trading, the execution of transactions on an agency basis, or the 
direct supervision of such activities other than a person associated 
with a Member whose trading activities are conducted principally on 
behalf of an investment company that is registered with the Commission 
pursuant to the Investment Company Act of 1940 and that controls, is 
controlled by, or is under common control with a Member.
---------------------------------------------------------------------------

    \69\ Proposed Exchange Rule 3101(c)(3)(i) differs from FINRA 
Rule 1220(b)(4)(A) in that it applies to trading on the Exchange 
while the FINRA rule is limited to the specified trading which is 
``effected otherwise than on a securities exchange.'' Additionally, 
the FINRA rule does not specifically extend to options trading.
---------------------------------------------------------------------------

    Additionally, proposed Exchange Rule 3101(c)(3)(i) would require 
each person associated with a Member who is: (i) Primarily responsible 
for the design, development or significant modification of an 
algorithmic trading strategy relating to equity, preferred or 
convertible debt securities or options; or (ii) responsible for the 
day-to-day supervision or direction of such activities to register with 
the Exchange as a Securities Trader.\70\
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    \70\ As noted above, this new registration requirement was added 
to the FINRA rulebook. The Exchange has determined to add a parallel 
requirement to its own rules, but also to add options to the scope 
of products within the proposed rule's coverage. See Securities 
Exchange Act Release No. 77551 (April 7, 2016), 81 FR 21914 (April 
13, 2016) (SR-FINRA-2016-007) (Order Approving a Proposed Rule 
Change to Require Registration as Securities Traders of Associated 
Persons Primarily Responsible for the Design, Development, 
Significant Modification of Algorithmic Trading Strategies or 
Responsible for the Day-to-Day Supervision of Such Activities).

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

[[Page 2796]]

    For purposes of this proposed new registration requirement an 
``algorithmic trading strategy'' would be an automated system that 
generates or routes orders (or order-related messages) but does not 
include an automated system that solely routes orders received in their 
entirety to a market center. The proposed registration requirement 
applies to orders and order related messages whether ultimately routed 
or sent to be routed to an exchange or over the counter. An order 
router alone would not constitute an algorithmic trading strategy. 
However, an order router that performs any additional functions would 
be considered an algorithmic trading strategy. An algorithm that solely 
generates trading ideas or investment allocations--including an 
automated investment service that constructs portfolio 
recommendations--but that is not equipped to automatically generate 
orders and order-related messages to effectuate such trading ideas into 
the market--whether independently or via a linked router--would not 
constitute an algorithmic trading strategy.\71\ The associated persons 
covered by the expanded registration requirement would be required to 
pass the requisite qualification examination and be subject to the same 
continuing education requirements that are applicable to individual 
Securities Traders. The Exchange believes that potentially problematic 
conduct stemming from algorithmic trading strategies--such as failure 
to check for order accuracy, inappropriate levels of messaging traffic, 
and inadequate risk management controls--could be reduced or prevented, 
in part, through improved education regarding securities regulations 
for the specified individuals involved in the algorithm design and 
development process.
---------------------------------------------------------------------------

    \71\ See supra note 16.
---------------------------------------------------------------------------

    The proposal is intended to ensure the registration of one or more 
associated persons that possesses knowledge of, and responsibility for, 
both the design of the intended trading strategy and the technological 
implementation of the strategy, sufficient to evaluate whether the 
resulting product is designed to achieve regulatory compliance in 
addition to business objectives. For example, a lead developer who 
liaises with a head trader regarding the head trader's desired 
algorithmic trading strategy and is primarily responsible for the 
supervision of the development of the algorithm to meet such objectives 
must be registered under the proposal as the associated person 
primarily responsible for the development of the algorithmic trading 
strategy and supervising or directing the team of developers. 
Individuals under the lead developer's supervision would not be 
required to register under the proposal if they are not primarily 
responsible for the development of the algorithmic trading strategy or 
are not responsible for the day-to-day supervision or direction of 
others on the team. Under this scenario, the person on the business 
side that is primarily responsible for the design of the algorithmic 
trading strategy, as communicated to the lead developer, also would be 
required to register. In the event of a significant modification to the 
algorithm, Members, likewise, would be required to ensure that the 
associated person primarily responsible for the significant 
modification (or the associated person supervising or directing such 
activity), is registered as a Securities Trader.
    A Member employing an algorithm is responsible for the algorithm's 
activities whether the algorithm is designed or developed in house or 
by a third-party. Thus, in all cases, robust supervisory procedures, 
both before and after deployment of an algorithmic trading strategy, 
are a key component in protecting against problematic behavior stemming 
from algorithmic trading. In addition, associated persons responsible 
for monitoring or reviewing the performance of an algorithmic trading 
strategy must be registered, and a Member's trading activity must 
always be supervised by an appropriately registered person. Therefore, 
even where a firm purchases an algorithm off-the-shelf and does not 
significantly modify the algorithm, the associated person responsible 
for monitoring or reviewing the performance of the algorithm would be 
required to be registered.
    Pursuant to proposed Exchange Rule 3101(c)(3)(ii), each person 
registered as a Securities Trader on October 1, 2018 and each person 
who was registered as a Securities Trader within two years prior to 
October 1, 2018 would be qualified to register as a Securities Trader 
without passing any additional qualification examinations. All other 
individuals registering as Securities Traders after October 1, 2018 
would be required, prior to or concurrent with such registration, to 
pass the SIE and the Securities Trader qualification examination.
    Further, the Exchange proposes to adopt Exchange Rule 3101(c)(3), 
which defines the requirements and qualifications for a Securities 
Trader, as well as its proposal to amend Exchange Rule 100 to insert 
definitions for ``proprietary trading'' and ``proprietary trading 
firm,'' as described below.
iv. Investment Banking Representative (Proposed Exchange Rule 
3101(c)(4))
    The Exchange does not recognize the Investment Banking 
Representative registration category for its associated persons. The 
Exchange therefore proposes to reserve Exchange Rule 3101(c)(4), 
Investment Banking Representative, retaining the caption solely to 
facilitate comparison with FINRA's rules.
v. Research Analyst (Proposed Exchange Rule 3101(c)(5))
    The Exchange does not recognize the Research Analyst registration 
category for its associated persons. The Exchange therefore proposes to 
reserve Exchange Rule 3101(c)(5), Research Analyst, retaining the 
caption solely to facilitate comparison with FINRA's rules.
vi. Investment Company and Variable Products Representative (Proposed 
Exchange Rule 3101(c)(6))
    The Exchange does not recognize the Investment Company and Variable 
Products Representative registration category for its associated 
persons. The Exchange therefore proposes to reserve Exchange Rule 
3101(c)(6), Investment Company and Variable Products Representative, 
retaining the caption solely to facilitate comparison with FINRA's 
rules.
vii. Direct Participation Programs Representative (Proposed Exchange 
Rule 3101(c)(7))
    The Exchange does not recognize the Direct Participation Programs 
Representative registration category for its associated persons. The 
Exchange therefore proposes to reserve Exchange Rule 3101(c)(7), Direct 
Participation Programs Representative, retaining the caption solely to 
facilitate comparison with FINRA's rules.
viii. Private Securities Offerings Representative (Proposed Exchange 
Rule 3101(c)(8))
    The Exchange does not recognize the Private Securities Offerings 
Representative registration category for its associated persons. The 
Exchange therefore proposes to reserve Exchange Rule 3101(c)(8), 
Private Securities

[[Page 2797]]

Offerings Representative, retaining the caption solely to facilitate 
comparison with FINRA's rules.
4. Eliminated Registration Categories (Proposed Exchange Rule 3101, 
Interpretation and Policy .06)
    Proposed Exchange Rule 3101, Interpretation and Policy .06, has no 
practical relevance to the Exchange, but is included because the 
Exchange proposes to adopt rules similar to FINRA's 1200 Series, on a 
near uniform basis. Accordingly, proposed Exchange Rule 3101, 
Interpretation and Policy .06, provides that, subject to the lapse of 
registration provisions in proposed Exchange Rule 3100, Interpretation 
and Policy .08, individuals who are registered with the Exchange in any 
capacity recognized by the Exchange immediately prior to October 1, 
2018, and each person who was registered with the Exchange in such 
categories within two years prior to October 1, 2018, shall be eligible 
to maintain such registrations with the Exchange. However, if 
individuals registered in such categories terminate their registration 
with the Exchange and the registration remains terminated for two or 
more years, they would not be able to re-register in that category.
5. Grandfathering Provisions
    In addition to the grandfathering provisions in proposed Exchange 
Rule 3101(b)(1)(ii) (relating to General Securities Principals) and 
proposed Exchange Rule 3101, Interpretation and Policy .06 (relating to 
the eliminated registration categories), the Exchange proposes to 
include grandfathering provisions in proposed Exchange Rule 3101(b)(7) 
(Registered Options Principal), Exchange Rule 3101(c)(1) (General 
Securities Representative), and Exchange Rule 3101(c)(3) (Securities 
Trader). Specifically, the proposed grandfathering provisions provide 
that, subject to the lapse of registration provisions in proposed 
Exchange Rule 3100, Interpretation and Policy .08, individuals who are 
registered in specified registration categories on the operative date 
of the proposed rule change and individuals who had been registered in 
such categories within the past two years prior to the operative date 
of the proposed rule change would be qualified to register in the 
proposed corresponding registration categories without having to take 
any additional examinations.
N. Associated Persons Exempt From Registration (Proposed Exchange Rules 
3902 and Interpretation and Policy .01)
    Current Exchange Rule 203(b) currently provides that the following 
individual Members and individual associated persons of Members are not 
required to register:
    (1) Individual associated persons whose functions are solely and 
exclusively clerical or ministerial;
    (2) individual Members and individual associated persons who are 
not actively engaged in the securities business;
    (3) individual associated persons whose functions are related 
solely and exclusively to the Member's need for nominal corporate 
officers or for capital participation; (4) individual associated 
persons whose functions are related solely and exclusively to:
    (i) Transactions in commodities;
    (ii) transactions in security futures; and/or
    (iii) effecting transactions on the floor of another securities 
exchange and who are registered floor members with such exchange.
    The Exchange proposes to delete Exchange Rule 203(b) and adopt 
provisions of Exchange Rule 203(b) in the newly proposed Exchange Rule 
3102, subject to certain changes. Current Exchange Rule 203(b)(2) 
exempts from registration those individual Members and individual 
associated persons of Members who are not actively engaged in the 
securities business. Exchange Rule 203(b)(3) also exempts from 
registration those associated persons whose functions are related 
solely and exclusively to a Member's need for nominal corporate 
officers or for capital participation.\72\ The Exchange believes that 
the determination of whether an associated person is required to 
register must be based on an analysis of the person's activities and 
functions in the context of the various registration categories. The 
Exchange does not believe that categorical exemptions for individual 
Members and individual associated persons who are not ``actively 
engaged'' in a Member's securities business, associated persons whose 
functions are related only to a Member's need for nominal corporate 
officers or associated persons whose functions are related only to a 
Member's need for capital participation is consistent with this 
analytical framework.\73\ The Exchange therefore proposes to delete 
these exemptions. Exchange Rule 203(b)(4)(iii) further exempts from 
registration associated persons whose functions are related solely and 
exclusively to effecting transactions on the floor of another national 
securities exchange as long as they are registered as floor members 
with such exchange. Because exchanges have registration categories 
other than the floor member category, proposed Exchange Rule 3102 
clarifies that the exemption applies to associated persons solely and 
exclusively effecting transactions on the floor of another national 
securities exchange, provided they are appropriately registered with 
such exchange.\74\ Additionally, the Exchange proposes to adopt 
paragraph (c) of proposed Exchange Rule 3102, pursuant to which persons 
associated with a Member that are not citizens, nationals, or residents 
of the United States or any of its territories or possessions, that 
will conduct all of their securities activities in areas outside the 
jurisdiction of the United States, and that will not engage in any 
securities activities with or for any citizen, national or resident of 
the United States need not register with the Exchange.\75\
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    \72\ These exemptions generally apply to associated persons who 
are corporate officers of a Member in name only to meet specific 
corporate legal obligations or who only provide capital for a 
Member, but have no other role in a Member's business.
    \73\ The Exchange also proposes to delete Exchange Rule 203, 
Interpretation and Policy .06, which specifies circumstances in 
which the Exchange considers an individual Member or an individual 
associated person to be engaged in the securities business of a 
Member or Member organization. The Exchange believes these 
determinations may be made on case by case basis, depending upon 
facts and circumstances.
    \74\ Proposed Exchange Rule 3102 differs from FINRA Rule 1230 in 
that it contains a number of additional exemptions, based upon 
current Nasdaq Stock Market Rule 1.1230, which are not included in 
FINRA Rule 1230. See Nasdaq Stock Market, General 9, Regulations, 
Section 1, Registration, Qualification and Continuing Education, 
Rule 1.1230.
    \75\ Individuals described by paragraph (c) of proposed Exchange 
Rule 3102 who are associated with FINRA members may be registered 
with FINRA as Foreign Associates pursuant to FINRA Rule 1220.06. 
FINRA eliminated this registration category effective October 1, 
2018, and the Exchange never recognized it.
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    The Exchange proposes to adopt Exchange Rule 3102, Interpretation 
and Policy .01, to clarify that the function of accepting customer 
orders is not considered a clerical or ministerial function and that 
associated persons who accept customer orders under any circumstances 
are required to be appropriately registered. However, the proposed rule 
provides that an associated person is not accepting a customer order 
where occasionally, when an appropriately registered person is 
unavailable, the associated person transcribes the order details and 
the

[[Page 2798]]

registered person contacts the customer to confirm the order details 
before entering the order.
O. Changes to Continuing Education Requirements (Proposed Exchange Rule 
3103)
    Continuing education for registered persons includes a Regulatory 
Element and a Firm Element. The Regulatory Element applies to 
registered persons and consists of periodic computer-based training on 
regulatory, compliance, ethical, supervisory subjects and sales 
practice standards. The Firm Element consists of at least annual, 
member-developed and administered training programs designed to keep 
covered registered persons current regarding securities products, 
services and strategies offered by the Member. The Exchange proposes to 
adopt Exchange Rule 3103 to better organize the continuing education 
requirements.\76\
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    \76\ Proposed Exchange Rule 3103 also differs slightly from 
FINRA Rule 1240 in that it omits references to certain registration 
categories which the Exchange does not recognize as well as an 
internal cross reference to FINRA Rule 4517.
---------------------------------------------------------------------------

1. Regulatory Element
    The Exchange proposes to adopt the term ``covered person'' in 
proposed Exchange Rule 3103(a). For purposes of the Regulatory Element, 
the Exchange proposes to define the term ``covered person'' in proposed 
Exchange Rule 3103(a)(5), as any person registered pursuant to proposed 
Exchange Rule 3100, including any person who is permissively registered 
pursuant to proposed Exchange Rule 3100, Interpretation and Policy .02, 
and any person who is designated as eligible for an FSA waiver pursuant 
to proposed Exchange Rule 3100, Interpretation and Policy .09. The 
purpose of this change is to ensure that all registered persons, 
including those with permissive registrations, keep their knowledge of 
the securities industry current. The inclusion of persons designated as 
eligible for an FSA waiver under the term ``covered persons'' 
corresponds to the requirements of proposed Exchange Rule 3100, 
Interpretation and Policy .09. In addition, consistent with proposed 
Exchange Rule 3100, Interpretation and Policy .09, proposed Exchange 
Rule 3103(a)(1) provides that an FSA-eligible person would be subject 
to a Regulatory Element program that correlates to his or her most 
recent registration category, and CE would be based on the same cycle 
had the individual remained registered. The proposed rule also provides 
that if an FSA-eligible person fails to complete the Regulatory Element 
during the prescribed time frames, he or she would lose FSA 
eligibility.
    Further, the Exchange proposes to add a rule to address the impact 
of failing to complete the Regulatory Element on a registered person's 
activities and compensation. Specifically, proposed Exchange Rule 
3103(a)(2) provides that any person whose registration has been deemed 
inactive under the rule may not accept or solicit business or receive 
any compensation for the purchase or sale of securities. However, like 
the FINRA rule, the proposed rule provides that such person may receive 
trail or residual commissions resulting from transactions completed 
before the inactive status, unless the Member with which the person is 
associated has a policy prohibiting such trail or residual commissions.
2. Firm Element
    The Exchange believes that training in ethics and professional 
responsibility should apply to all covered registered persons. 
Therefore, proposed Exchange Rule 3103(b)(2)(ii), which provides that 
the Firm Element training programs must cover applicable regulatory 
requirements, would also require that a firm's training program cover 
training in ethics and professional responsibility.
P. Electronic Filing Requirements for Uniform Rules (Proposed Exchange 
Rule 3104)
    Current Exchange Rule 203, Interpretations and Polices .01-.03, 
state that each individual required to register shall electronically 
file a Uniform Application for Securities Industry Registration (``Form 
U4'') through the Central Registration Depository system (``Web CRD'') 
operated by FINRA and to electronically submit to Web CRD any required 
amendments to Form U4. Further, any Member or Member organization that 
discharges or terminates the employment or retention of an individual 
required to register must comply with certain termination filing 
requirements, which include the filing of a Form U5.
    The Exchange proposes to delete current Exchange Rule 203, 
Interpretations and Polices .01-.03, and to replace them with proposed 
Exchange Rule 3104, Electronic Filing Requirements for Uniform Forms, 
which will consolidate Form U4 and Form U5 electronic filing 
requirements into a single rule. The proposed rule provides that all 
forms required to be filed under the Exchange's registration rules 
including the Exchange Rule 3100 Series shall be filed through an 
electronic process or such other process as the Exchange may prescribe 
to the Central Registration Depository. It also would impose certain 
new requirements.
    Under proposed Exchange Rule 3104(b), each Member would be required 
to designate registered principal(s) or corporate officer(s) who are 
responsible for supervising a firm's electronic filings. The registered 
principal(s) or corporate officer(s) who has or have the responsibility 
to review and approve the forms filed pursuant to the rule would be 
required to acknowledge, electronically, that he or she is filing this 
information on behalf of the Member and the Member's associated 
persons. Under proposed Exchange Rule 3104, Interpretation and Policy 
.01, the registered principal(s) or corporate officer(s) could delegate 
filing responsibilities to an associated person (who need not be 
registered) but could not delegate any of the supervision, review, and 
approval responsibilities mandated in proposed Exchange Rule 3104(b). 
The registered principal(s) or corporate officer(s) would be required 
to take reasonable and appropriate action to ensure that all delegated 
electronic filing functions were properly executed and supervised.
    Pursuant to proposed Exchange Rule 3104(c)(1), every initial and 
transfer electronic Form U4 filing and any amendments to the disclosure 
information on Form U4 must be based on a manually signed Form U4 
provided to the Member or applicant for membership by the person on 
whose behalf the Form U4 is being filed. As part of the Member's 
recordkeeping requirements, it would be required to retain the person's 
manually signed Form U4 or amendments to the disclosure information on 
Form U4 in accordance with Exchange Act Rule 17a-4(e)(1) under the Act 
and make them available promptly upon regulatory request. An applicant 
for membership must also retain every manually signed Form U4 it 
receives during the application process and make them available 
promptly upon regulatory request. Proposed Exchange Rule 3104(c)(2) and 
Interpretations and Policies .03 and .04 to proposed Exchange Rule 
3104, provide for the electronic filing of Form U4 amendments without 
the individual's manual signature, subject to certain safeguards and 
procedures.
    Proposed Exchange Rule 3104(d) provides that upon filing an 
electronic Form U4 on behalf of a person applying for registration, a 
Member must promptly submit fingerprint information for that person and 
that the Exchange may make a registration effective pending receipt of 
the fingerprint

[[Page 2799]]

information. It further provides that if a Member fails to submit the 
fingerprint information within 30 days after filing of an electronic 
Form U4, the person's registration will be deemed inactive, requiring 
the person to immediately cease all activities requiring registration 
or performing any duties and functioning in any capacity requiring 
registration. Under this proposed rule, the Exchange must 
administratively terminate a registration that is inactive for a period 
of two years. A person whose registration is administratively 
terminated could reactivate the registration only by reapplying for 
registration and meeting the qualification requirements of the 
applicable provisions of proposed Exchange Rule 3101. Upon application 
and a showing of good cause, the Exchange could extend the 30-day 
period.
    Proposed Exchange Rule 3104(e) would require initial filings and 
amendments of Form U5 to be submitted electronically. As part of the 
Member's recordkeeping requirements, it would be required to retain 
such records for a period of not less than three years, the first two 
years in an easily accessible place, in accordance with Rule 17a-4 
under the Act, and to make such records available promptly upon 
regulatory request.
    Finally, under proposed Exchange Rule 3104, Interpretation and 
Policy .02, a Member could enter into an agreement with a third party 
pursuant to which the third party agrees to file the required forms 
electronically on behalf of the Member and the Member's associated 
persons. Notwithstanding the existence of such an agreement, the Member 
would remain responsible for complying with the requirements of the 
Rule.
Q. Exchange Rule 100, Definitions
    The Exchange proposes to amend Exchange Rule 100, Definitions, to 
amend the term ``associated person'' or ``person associated with a 
Member.'' Currently, the term associated person or person associated 
with a Member means any partner, officer, director, or branch manager 
of a Member (or any person occupying a similar status or performing 
similar functions), any person directly or indirectly controlling, 
controlled by, or under common control with a Member, or any employee 
of a Member.
    The Exchange proposes to amend the term associated person or person 
associated with a Member to insert, at the end of the definition, the 
phrase ``except that any person associated with a Member whose 
functions are solely clerical or ministerial shall not be included in 
the meaning of such term for purposes of these Rules.'' With the 
proposed change, the definition for associated person or person 
associated with a Member would be as follows:

    The term ``associated person'' or ``person associated with a 
Member'' means any partner, officer, director, or branch manager of 
a Member (or any person occupying a similar status or performing 
similar functions), any person directly or indirectly controlling, 
controlled by, or under common control with a Member, or any 
employee of a Member, except that any person associated with a 
Member whose functions are solely clerical or ministerial shall not 
be included in the meaning of such term for purposes of these Rules.

    Additionally, the Exchange proposes to amend Exchange Rule 100, 
Definitions to adopt definitions for the following terms: Person, 
proprietary trading, and proprietary trading firm. The Exchange 
proposes that the term ``person'' shall refer to a natural person, 
corporation, partnership (general or limited), limited liability 
company, association, joint stock company, trust, trustee of a trust 
fund, or any organized group of persons whether incorporated or not and 
a government or agency or political subdivision thereof.
    The Exchange proposes that the term ``proprietary trading'' for the 
purpose of proposed Exchange Rule 3100, means trading done by a Member 
having the following characteristics: (i) The Member is not required by 
Section 15(b)(8) of the Act to become a FINRA member but is a Member of 
another registered securities exchange not registered solely under 
Section 6(g) of the Act; (ii) all funds used or proposed to be used by 
the Member are the trading member's own capital, traded through the 
Member's own accounts; (iii) the Member does not, and will not, have 
customers; and (iv) all persons registered on behalf of the Member 
acting or to be acting in the capacity of a trader must be owners of, 
employees of, or contractors to the Member.
    The Exchange proposes that the term ``proprietary trading firm'' 
for the purpose of proposed Exchange Rule 3100, means a Member 
organization or applicant with the following characteristics: (i) The 
applicant is not required by Section 15(b)(8) of the Act to become a 
FINRA Member but is a Member of another registered securities exchange 
not registered solely under Section 6(g) of the Act; (ii) all funds 
used or proposed to be used by the applicant for trading are the 
applicant's own capital, traded through the applicant's own accounts; 
(iii) the applicant does not, and will not have customers; and (iv) all 
principals and representatives of the applicant acting or to be acting 
in the capacity of a trader must be owners of, employees of, or 
contractors to the applicant.
    As described above, in connection with the Exchange's proposal to 
adopt Exchange Rule 3101(b)(7), Registered Options Principal, the 
Exchange proposes to delete the definition for ``Options Principal'' 
from Exchange Rule 100 in order to provide consistency and clarity 
within the rule text. In proposed Exchange Rule 3101(b)(7), the 
Exchange sets forth the requirements and qualifications for a 
``Registered Options Principal,'' which incorporates, and adds to, the 
rule text for the Exchange's current definition for ``Options 
Principal.'' Accordingly, the Exchange proposes to delete the term 
``Options Principal'' and replace all references in the rule text to 
``Options Principal'' with the new proposed term ``Registered Options 
Principal.'' The Exchange also proposes to adopt a definition for a 
``Registered Options Principal'' in Exchange Rule 100, that will 
provide a cross-reference to Exchange Rule 3101(b)(7).
R. Exchange Rule 601, Registered Options Traders
    In accordance with the proposed change to delete Exchange Rule 203 
in its entirety, revise and relocate the provisions of Exchange Rule 
203 to the newly proposed 3100 Series, the Exchange proposes to amend a 
cross-reference in Exchange Rule 601(b)(2). Currently, Exchange Rule 
601(b)(2) has a cross-reference to Exchange Rule 203(a). The Exchange 
proposes to amend that cross-reference to proposed Exchange Rule 3100.
S. Exchange Rule 1000, Disciplinary Jurisdiction
    The Exchange proposes to amend a cross-reference in Exchange Rule 
1000(c). Currently, Exchange Rule 1000(c) has a cross-reference to 
Exchange Rule 1302. The Exchange proposes to amend that cross-reference 
to proposed Exchange Rule 3100, Interpretation and Policy .12.
T. Exchange Rule 1014, Imposition of Fines for Minor Rule Violations
    The Exchange proposes to amend the cross-references in Exchange 
Rule 1014(d)(14) that are to current Exchanges Rules 1301, 1302 and 
1303. The Exchange proposes to amend the cross-references in Exchange 
1014(d)(14) that are to Exchange Rules 1301, 1302 and 1303 to the newly 
proposed Exchange Rule 3104, which incorporates that deleted rule text. 
Accordingly, the Exchange proposes to

[[Page 2800]]

amend the cross-reference in Exchange Rule 1014(d)(14) to now be to 
proposed Exchange Rule 3104.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\77\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \78\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \79\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \77\ 15 U.S.C. 78f(b).
    \78\ 15 U.S.C. 78f(b)(5).
    \79\ Id.
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule changes will 
streamline, and bring consistency and uniformity to, the Exchange's 
registration rules. The Exchange believes that this will, in turn, 
assist Members and their associated persons in complying with these 
rules and improve regulatory efficiency. The proposed rule changes will 
also improve the efficiency of the examination program, without 
compromising the qualification standards, by eliminating duplicative 
testing of general securities knowledge on examinations and by removing 
examinations that currently have limited utility. In addition, the 
proposed rule changes will expand the scope of permissive 
registrations, which, among other things, will allow Members to develop 
a depth of associated persons with registrations to respond to 
unanticipated personnel changes and will encourage greater regulatory 
understanding. Further, the proposed rule changes will provide a more 
streamlined and effective waiver process for individuals working for a 
financial services industry affiliate of a Member, and it will require 
such individuals to maintain specified levels of competence and 
knowledge while working in areas ancillary to the securities business. 
The proposed rule changes will improve the supervisory structure of 
firms by imposing an experience requirement for representatives that 
are designated by firms to function as principals for a 120-day period 
before having to pass an appropriate principal qualification 
examination. The proposed rule change will also prohibit unregistered 
persons from accepting customer orders under any circumstances, which 
will enhance investor protection.
    The Exchange believes that, with the introduction of the SIE and 
expansion of the pool of individuals who are eligible to take the SIE, 
the proposed rule change has the potential of enhancing the pool of 
prospective securities industry professionals by introducing them to 
securities laws, rules and regulations and appropriate conduct before 
they join the industry in a registered capacity.
    The extension of the Securities Trader registration requirement to 
developers of algorithmic trading strategies requires associated 
persons primarily responsible for the design, development or 
significant modification of an algorithmic trading strategy or 
responsible for the day-to-day supervision or direction of such 
activities to register and meet a minimum standard of knowledge 
regarding the securities rules and regulations applicable to the Member 
employing the algorithmic trading strategy. This minimum standard of 
knowledge is identical to the standard of knowledge currently 
applicable to traditional securities traders. The Exchange believes 
that improved education of firm personnel may reduce the potential for 
problematic market conduct and manipulative trading activity.
    The proposed rule changes, including additional definitions and 
changes to cross-references, make organizational changes to the 
Exchange's registration and qualification rules, in order to prevent 
unnecessary regulatory burdens and to promote efficient administration 
of the rules. The change also makes minor updates and corrections to 
the Exchange's rules which improve readability.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule changes are 
designed to ensure that all associated persons of Members engaged in a 
securities business are, and will continue to be, properly trained and 
qualified to perform their functions, will be supervised, and can be 
identified by regulators. The proposed new 3100 Series of rules, which 
are similar in many respects to the registration-related requirements 
adopted by FINRA effective October 1, 2018, as well as the Exchange's 
affiliate, MIAX, should enhance the ability of member firms to comply 
with the Exchange's rules as well as with the Federal securities laws. 
Additionally, as described above, the Exchange intends the amendments 
described herein to eliminate inconsistent registration-related 
requirements across the Exchange, thereby promoting uniformity of 
regulation across markets. The proposed 3100 Series of rules should in 
fact remove administrative burdens that currently exist for Members 
seeking to register associated persons on the Exchange featuring 
varying registration-related requirements. Additionally, all similarly-
situated associated persons of Members will be treated similarly under 
the new 3100 Series of rules in terms of standards of training, 
experience and competence for persons associated with Exchange Members.
    With respect in particular to registration of developers of 
algorithmic trading strategies, the Exchange recognizes that the 
proposal would impose costs on member firms employing associated 
persons engaged in the activity subject to the registration 
requirement. Specifically, among other things, additional associated 
persons would be required to become registered under the proposal, and 
the firm would need to establish policies and procedures to monitor 
compliance with the proposed requirement on an ongoing basis. However, 
given the prevalence and importance of algorithmic trading strategies 
in today's markets, the Exchange believes that associated persons 
engaged in the activities covered by this proposal must meet a minimum 
standard of knowledge regarding the applicable securities rules and 
regulations. To mitigate the costs imposed on member firms, the 
proposed rule change limits the scope of registration requirement by 
excluding technological or development support personnel who are not 
primarily responsible for the covered activities. It also excludes 
supervisors who are not responsible for the covered activities. It also 
excludes supervisors who are not responsible for the ``day-to-day'' 
supervision or direction of the covered activities.

[[Page 2801]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \80\ and Rule 19b-
4(f)(6) thereunder.\81\
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    \80\ 15 U.S.C. 78s(b)(3)(A).
    \81\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \82\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \83\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the proposed rule change may become effective and operative 
immediately upon filing. According to the Exchange, the proposal is 
part of a larger effort to create uniform rules relating to 
registration, qualification examinations and continuing education of 
associated persons of Members among the Exchange and its affiliates, 
MIAX and MIAX Emerald, LLC. For this reason, the Commission believes 
that waiver of the 30-day operative delay is consistent with the 
protection of investors and the public interest. Accordingly, the 
Commission hereby waives the operative delay and designates the 
proposed rule change operative upon filing.\84\
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    \82\ 17 CFR 240.19b-4(f)(6).
    \83\ 17 CFR 240.19b-4(f)(6)(iii).
    \84\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-PEARL-2020-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-PEARL-2020-01. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-PEARL-2020-01, and should be submitted 
on or before February 6, 2020.
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    \85\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\85\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00589 Filed 1-15-20; 8:45 am]
 BILLING CODE 8011-01-P