Document ID: SEC-2018-1565-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2018-10-10T04:00Z

[Federal Register Volume 83, Number 196 (Wednesday, October 10, 2018)]
[Notices]
[Pages 50981-50999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21902]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84352; File No. SR-Phlx-2018-61]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend, 
Reorganize and Enhance Membership, Registration and Qualification Rules 
and To Make Conforming Changes to Certain Other Rules

October 3, 2018.
    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 September 27, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II, below, which 
Items have been prepared by the Exchange. 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 proposes 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://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

[[Page 50982]]

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 has adopted registration requirements to ensure that 
associated persons of member organizations attain and maintain 
specified levels of competence and knowledge pertinent to their 
function. In general, the current rules require that persons engaged in 
a member organization's investment banking or securities business who 
are to function as representatives or principals register with the 
Exchange in the category of registration appropriate to their functions 
by passing one or more qualification examinations \3\ and exempt 
specified associated persons from the registration requirements.\4\ 
They also prescribe ongoing continuing education requirements for 
registered persons.\5\ The Exchange now proposes to amend, reorganize 
and enhance its rules regarding registration, qualification 
examinations and continuing education, as described below.\6\
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    \3\ See Phlx Rules 611, Principal Registration Requirements, and 
613, Representative Registration.
    \4\ See Phlx Rule 614, Persons Exempt from Registration.
    \5\ See Phlx Rule 640, Continuing Education for Registered 
Persons.
    \6\ The Exchange's rules governing these matters were 
extensively updated and amended in 2012. See Securities Exchange Act 
Release No. 66840 (April 20, 2012), 77 FR 25003 (April 26, 2012) 
(SR-Phlx-2012-23).
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    Recently, the Commission approved a Financial Industry Regulatory 
Authority (``FINRA'') proposed rule change adopting rules relating to 
qualification and registration requirements in the Consolidated FINRA 
Rulebook,\7\ restructuring the FINRA representative-level qualification 
examinations, creating a general knowledge examination and specialized 
knowledge examinations, allowing permissive registration, establishing 
an exam 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'').\8\ 
The FINRA Rule Changes will become effective on October 1, 2018.
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    \7\ The current FINRA rulebook consists of: (1) FINRA rules; (2) 
NASD rules; and (3) rules incorporated from the New York Stock 
Exchange (``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.
    \8\ See Securities Exchange Act Release No. 81098 (July 7, 
2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-
FINRA-2017-007). 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.
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    The Exchange now proposes to amend, reorganize and enhance its own 
membership, registration and qualification rules in part in response to 
the FINRA Rule Changes, and also in order to conform the Exchange's 
rules more closely to those of its affiliated exchanges in the interest 
of uniformity and to facilitate compliance with membership, 
registration and qualification regulatory requirements by members of 
multiple Nasdaq-affiliated exchanges including Phlx. Last, 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 
proposed rule change.\9\
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    \9\ See Securities Exchange Act Release No. 77551 (April 7, 
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007). In its proposed 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 this proposed rule change, current Rules 53, Liability 
for Dues Until Transfer or Military Service; 611, Principal 
Registration Requirements; 612, Categories of Principal Registration; 
613, Representative Registration; 614, Persons Exempt from 
Registration; 615, Waiver of Requirements; 616, Electronic Filing 
Requirements for Uniform Forms; 623, Fingerprinting; and 640, 
Continuing Education for Registered Persons, are proposed to be 
deleted. Rule 620, Trading Floor Registration, is proposed to be 
renumbered and amended.\10\
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    \10\ The Exchange also proposes conforming amendments to Rules 
1, Definitions; 1024, Conduct of Accounts for Options Trading; 1090, 
Clerks; 3202, Application of Other Rules of the Exchange; 9630, 
Appeal; Equity Floor Procedure Advice A-7, Failure to Timely Submit 
Amendments to Form U4, Form U5 and Form BD; Options Floor Procedure 
Advice F-34, Failure to Timely Submit Amendments to Form U4, Form U5 
and Form BD; and Section VII.C., FINRA Fees, of the Exchange's 
Pricing Schedule, and the addition of new Rule 2040, Nonregistered 
Foreign Finders. The Exchange is also proposing to amend the two 
Floor Procedure Advices to delete references to the ``Department of 
Market Regulation,'' which refer to FINRA's former Department of 
Market Regulation. FINRA amended its rules recently to reflect an 
internal reorganization of its Enforcement Operations. See 
Securities Exchange Act Release No. 83781 (August 6, 2018), 83 FR 
39802 (August 10, 2018). In July 2017, FINRA announced its plan to 
consolidate its existing enforcement functions into a unified 
Department of Enforcement. FINRA's recent rule change makes 
technical and other non-substantive changes to FINRA Rules 9000 
Series Code of Procedure to reflect the single Department of 
Enforcement, which the Exchange is mirroring in the two Floor 
Procedure Advices which will now refer only to FINRA's Department of 
Enforcement.
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    In place of the deleted rules and rule sections the Exchange 
proposes to adopt a new 1200 Series of rules captioned Registration, 
Qualification and Continuing Education generally conforming to and 
based upon FINRA's new 1200 Series of rules resulting from the FINRA 
Rule Changes, but with a number of Exchange-specific variations.\11\ 
The proposed new 1200 Series is also being proposed for adoption by 
Phlx's affiliated exchanges in order to facilitate compliance with 
membership, registration and qualification requirements by members of 
two or more of those affiliated exchanges.\12\ In the new 1200 Series 
of

[[Page 50983]]

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.\13\
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    \11\ The proposed Phlx 1200 Series of Rules would consist of 
Rule 1210, Registration Requirements; Rule 1220, Registration 
Categories; Rule 1230, Associated Persons Exempt from Registration; 
Rule 1240, Continuing Education Requirements; Rule 1250, Electronic 
Filing Requirements for Uniform Forms; and Rule 1260, Trading Floor 
Registration.
    \12\ The Exchange's five affiliated exchanges, The Nasdaq Stock 
Market LLC (``Nasdaq''), Nasdaq BX, Inc. (``BX''); Nasdaq ISE, LLC 
(``ISE''); Nasdaq GEMX, LLC (``GEMX''); and Nasdaq MRX, LLC 
(``MRX'') (together with Phlx, the ``Nasdaq Affiliated Exchanges'') 
are also submitting proposed rule changes to adopt the 1200 Series 
of rules. See SR-NASDAQ-2018-078, SR-BX-2018-047, SR-ISE-2018-82, 
SR-GEMX-2018-33 and SR-MRX-2018-31. The Exchange recently added a 
shell structure to its rulebook with the purpose of improving 
efficiency and readability and to align its rules closer to those of 
the other Nasdaq Affiliated Exchanges. See Securities Exchange Act 
Release No. 82169 (November 29, 2017), 82 FR 57508 (December 5, 
2017) (SR-Phlx-2017-97). Ultimately, the Exchange intends to submit 
another proposed rule change to transfer the Exchange's 1200 Series 
of rules into the new shell structure. The Phlx 1200 Series of rules 
would differ slightly from the 1200 Series of the other Nasdaq 
Affiliated Exchanges given Phlx's trading floor and its unique 
membership structure which features the concept of a ``member 
organization.'' The Phlx 1200 Series would therefore include a Rule 
1260, Trading Floor Registration. Additionally, each of the new Phlx 
1200 Series of rules (except Rule 1260) would contain a statement 
that references to a ``member'' in that rule shall be deemed to be 
references to a ``member organization.''
    \13\ See Securities Exchange Act Release No. 77551 (April 7, 
2016), 81 FR 21914 (April 13, 2016) (order approving SR-FINRA-2016-
007). In its proposed rule change to adopt this registration 
requirement, FINRA addressed the increasing significance of 
algorithmic trading strategies by proposing 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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    The proposed rule change would become operative October 1, 2018 
with the exception of the new registration requirement for developers 
of algorithmic trading strategies which would become operative April 1, 
2019.
Proposed Rules
A. Registration Requirements (Proposed Rule 1210)
    Exchange Rules 613(a) and 611(a) currently require that persons 
engaged, or to be engaged, in the investment banking or securities 
business of a member who are to function as representatives or 
principals register with the Exchange in the category of registration 
appropriate to their functions as specified in Exchange Rules 613 and 
612.\14\ The Exchange is proposing to consolidate and streamline 
provisions of Exchange Rules 613(a) and 611(a) and to adopt them as 
Exchange Rule 1210, subject to several changes.\15\
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    \14\ Section (a) of Rule 613 includes an exception for members 
whose activities are limited to the Exchange's options trading floor 
and who are registered pursuant to Rule 620(a), as well as for 
associated persons whose activities are limited to the Exchange's 
options trading floor and are registered pursuant to Rule 620(b). As 
discussed below, the Exchange proposes to preserve this exception as 
new section (c) of proposed Rule 1260.
    \15\ In general the 1200 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 and of the 
other Nasdaq Affiliated Exchanges. However, the Exchange also 
proposes to adopt Rule 1210, Supplementary Material .12, which is 
not based upon a FINRA rule but instead on current Nasdaq Rule 
1031(c), (d) and (e), which Nasdaq is proposing in SR-Nasdaq-2018-
078 to relocate to Rule 1210, Supplementary Material .12 in the 
Nasdaq rulebook. 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 Rule 1210, Supplemental Material .12, in order to 
have uniform processes and requirements in this area across the 
Nasdaq Affiliated Exchanges.
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    Proposed Rule 1210 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 Rule 1220, unless exempt from registration pursuant to 
proposed Rule 1230. Unlike current Rules 613(a) and 611(a), proposed 
Rule 1210 would not require persons engaged in the investment banking 
business of a member to register with the Exchange since a member's 
investment banking business is not the primary concern of the Exchange 
or the focus of its operations.\16\ Proposed Rule 1210 also provides 
that such person is not qualified to function in any registered 
capacity other than that for which the person is registered, unless 
otherwise stated in the rules.
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    \16\ Miami International Securities Exchange LLC (``MIAX'') Rule 
203(a) and current ISE Rule 313(a)(1) likewise require registration 
of associated persons of members engaged in the member's securities 
business, but do not require registration with the exchanges of 
associated persons of members who engage in the member's investment 
banking business. 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 Rules 1210, 1210.03, 1210.10, 
1220(a)(1), 1220(a)(2)(B), 1220(b), and 1240(b)(1), and also by 
omitting as unnecessary from Rule 1220(a)(10) 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 Rule 1210.01)
    Existing Rule 611(e), Requirement of Two Registered Principals, at 
section (i) requires members other than sole proprietorships to have at 
least two officers or partners who are registered as principals with 
respect to each aspect of the member organization's investment banking 
and securities business pursuant to the applicable provisions of Rule 
611; provided, however, that a proprietary trading firm with 25 or 
fewer registered representatives is only required to have one officer 
or partner who is registered as a principal.\17\ Under Rule 611(e)(ii) 
the Exchange may waive the provisions of paragraph (e)(i) in situations 
that indicate conclusively that only one person should be required to 
register as a principal. Additionally, Rule 611(e)(iii) requires an 
applicant for membership to have at least one person qualified for 
registration as a Limited Principal--Financial and Operations, pursuant 
to Rule 612(b)(i).\18\
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    \17\ Rule 611(e)(i)(A)-(D) defines the term ``proprietary 
trading firm''. Because the Exchange is proposing to delete Rule 611 
in its entirety, Rule 611(e)(i) (A)-(D) would be reworded and 
relocated to Rule 1, Definitions, Section (kk) as a defined term.
    \18\ The Exchange's rules currently refer to various categories 
of limited principal registration as ``Limited Principal--'' 
followed by the name of the registration category. In this proposed 
rule change, the Exchange will no longer employ the term ``Limited 
Principal--'' in discussing various principal registration 
categories. No substantive change is intended; shortening the names 
of the various principals simply improves readability of the rules.
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    The Exchange is proposing to delete these requirements and in their 
place to adopt new Rule 1210.01. The new rule would provide firms that 
limit the scope of their business with flexibility in satisfying the 
two-principal requirement. In particular, proposed Rule 1210.01 
requires that a member have a minimum of two 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.\19\ 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, Exchange 
Rule 1210.01 provides that any member with only one associated person 
is excluded from the two principal requirement. Proposed Rule 1210.01 
would provide that existing members as well as new applicants may 
request a waiver of the two-principal requirement, consistent with 
current Exchange Rule 611(e)(ii). Finally, the Exchange is proposing to 
retain the existing rule's provision 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.\20\ The Financial and

[[Page 50984]]

Operations Principal requirement of current Rules 611(e)(i) and 
612(b)(i), which it references, would be revised and relocated to 
proposed Rule 1220(a)(4)(A).
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    \19\ The principal registration categories are described in 
greater detail below.
    \20\ The Exchange is not proposing provisions conforming to the 
new FINRA Rule 1210.01 requirements that all FINRA members are 
required to have a Principal Financial Officer and a Principal 
Operations Officer, because it believes that its proposed Rule 
1220(a)(4), Financial and Operations Principal, which requires 
member firms operating pursuant to certain provisions of SEC rules 
to designate at least one Financial and Operations Principal, is 
sufficient. Further, the Exchange is not adopting the FINRA Rule 
1210.01 requirements 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 recognize the 
Investment Banking Principal or the Research Principal registration 
categories, and the Registered Options Principal registration 
requirement is set forth in Rule 1210.08 and its inclusion is 
therefore unnecessary in Rule 1210.01.
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C. Permissive Registrations (Proposed Rule 1210.02)
    Current Rule 611(a) prohibits member organizations from maintaining 
a principal registration with the Exchange for any person (A) who is no 
longer active in the member organization's investment banking or 
securities business, (B) who is no longer functioning as a principal, 
or (C) where the sole purpose is to avoid the examination requirement 
of the rule. A member organization may not make application for the 
registration of any person as principal where there is no intent to 
employ such person in the member organization's investment banking or 
securities business. However, a member organization may maintain or 
make application for the registration as a principal of a person who 
performs legal, compliance, internal audit, back-office operations, or 
similar duties for the member organization or a person engaged in the 
investment banking or securities business of a foreign securities 
affiliate or subsidiary of the member organization. Exchange Rule 
613(b) is a parallel provision applicable to representatives.
    The Exchange is proposing to replace these provisions with new Rule 
1210.02. The Exchange is also proposing to expand the scope of 
permissive registrations and to clarify a member's obligations 
regarding individuals who are maintaining such registrations.
    Specifically, proposed Rule 1210.02 allows any associated person to 
obtain and 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 Rule 1210.02 allows 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 is proposing 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 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.\21\ With respect 
to an individual who solely maintains a permissive registration, such 
as an individual working exclusively in an administrative capacity, the 
individual's day-to-day supervisor may be a nonregistered person. 
Members would be required to assign a registered supervisor to this 
person who would be responsible for periodically contacting such 
individual's day-to-day 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.\22\
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    \21\ The FINRA Proposed Rules at Rule 1210.02 cite FINRA's own 
supervision rule, by number. Because the 1200 Series of rules is 
intended to apply to the Exchange as well as to its affiliates which 
have different supervision rules, proposed Rule 1210.02 refers 
generally to the supervision rules rather than identifying them by 
number.
    \22\ 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.
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D. Qualification Examinations and Waivers of Examinations (Proposed 
Rule 1210.03)
    Current Rule 611(a) provides that before a registration can become 
effective, persons who are to function as principals must pass a 
qualification examination for principals appropriate to the category of 
registration as specified in the rule. Rule 613(d) provides that no 
member organization shall permit any member or person associated with 
it to engage in the investment banking or securities business unless 
the member organization determines that such person satisfies the 
qualification requirements established by the Board and is not subject 
to statutory disqualification as defined in Section 3(a)(39) \23\ of 
the Act. The Exchange is proposing to replace these provisions with new 
Rule 1210.03.
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    \23\ 15 U.S.C. 78c(a)(39).
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    In addition, as part of the FINRA Rule Changes FINRA has adopted a 
restructured representative-level qualification examination program 
whereby representative-level registrants would be required to take a 
general knowledge examination (the Securities Industry Essentials Exam 
or ``SIE'') and a specialized knowledge examination appropriate to 
their job functions at the firm with which they are associating. 
Therefore, proposed Rule 1210.03 provides that before the registration 
of a person as a representative can become effective under proposed 
Rule 1210, such person must pass the SIE and an appropriate 
representative-level qualification examination as specified in proposed 
Rule 1220. Proposed Rule 1210.03 also provides that before the 
registration of a person as a principal

[[Page 50985]]

can become effective under proposed Rule 1210, such person must pass an 
appropriate principal-level qualification examination as specified in 
proposed Rule 1220.
    Further, proposed 1210.03 provides that if the job functions of a 
registered representative other than an individual registered as an 
Order Processing Assistant 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.\24\ 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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    \24\ The exception for Order Processing Assistant 
Representatives and Foreign Associates was adopted by FINRA in FINRA 
Rule 1210.03, and is included in proposed Exchange Rule 1210.03 
without the reference to Foreign Associates which is a registration 
category the Nasdaq Affiliated Exchanges do not recognize. FINRA has 
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 Rule 1210.03 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 1210.03 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 has 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 Rule 1210.03, 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 other than an individual 
registered as an Order Processing Assistant Representative, 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, they could do so by taking 
only the appropriate specialized knowledge examination.\25\ 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.\26\
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    \25\ 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.
    \26\ As discussed below, the Exchange is proposing a four-year 
expiration period for the SIE.
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    In addition, individuals, with the exception of Order Processing 
Assistant Representatives, 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 Rule 615, 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 is proposing to replace 
Rule 615 with proposed Rule 1210.03 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- or principal-level registration category. Moreover, 
proposed Rule 1210.03 states that the Exchange will consider waivers of 
the SIE alone or the SIE and the representative- and principal-level 
examination(s) for such individuals.
E. Requirements for Registered Persons Functioning as Principals for a 
Limited Period (Proposed Rule 1210.04)
    Current Rule 611(d) provides that any person associated with a 
member organization as a registered representative whose duties are 
changed by the member organization so as to require registration in any 
principal classification is allowed a period of 90 calendar days 
following the change in his or her duties during which to pass the 
appropriate qualification examination for principals. It further 
provides that any person not presently associated with a member 
organization as registered representative seeking registration as a 
principal shall submit the appropriate application for registration and 
any required registration and examination fees. Such person shall be 
allowed a period of 90 days after all applicable prerequisites are 
fulfilled to pass the appropriate qualification examination for 
principals. A person who has never been registered does not qualify for 
this exception. This provision specifically applies to a person 
associated with a member organization of another registered national 
securities exchange or association who is required to register in a 
principal classification under

[[Page 50986]]

Exchange rules but who is not required to be so registered under the 
rules of the other exchange or association, as well as to a person 
associated with a member organization who was not required to register 
with the Exchange as a principal prior to the adoption of Exchange Rule 
611.
    The Exchange is proposing to adopt these requirements of Rule 
611(d) as new Rule 1210.04, subject to certain changes. Proposed Rule 
1210.04 states that 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 limited period, 
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.\27\ This 
change is intended to ensure that representatives designated to 
function as principals for the limited period under the proposed rule 
have an appropriate level of registered representative experience. The 
proposed rule clarifies that the requirements of the rule 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. 
Similarly, the 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 Rule 1220. Proposed Rule 1210.04 would increase the 
existing rule's 90 day period to 120 days, to provide additional 
flexibility for representatives functioning as principals for a limited 
period of time.
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    \27\ 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 registration category.
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    The Exchange is not conserving in new Rule 1210.04 the language in 
existing Rule 611 that the provisions apply to a person associated with 
a member organization of another registered national securities 
exchange or association who is required to register in a principal 
classification under Exchange rules but who is not required to be so 
registered under the rules of the other exchange or association, as 
well as to a person associated with a member organization who was not 
required to register with the Exchange as a Principal prior to the 
adoption of Exchange Rule 611. The Exchange believes this language to 
be superfluous as the applicability to various individuals of proposed 
Rule 1210.04 speaks for itself and requires no elaboration.\28\
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    \28\ Proposed Rule 1210.04 omits FINRA Rule 1210.04's reference 
to Foreign Associates, which is a registration category not 
recognized by the Nasdaq Affiliated Exchanges, 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 Rule 1210.05)
    Before taking an examination, FINRA currently requires each 
candidate to agree to the 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. These 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, FINRA's Sanction Guidelines recommend a 
bar.\29\
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    \29\ See SR-FINRA-2017-007, pp. 26-27.
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    Effective October 1, 2018, FINRA has 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 version of Rule 1210.05, 
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 707.\30\ 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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    \30\ Exchange Rule 707 prohibits members, member organizations 
or persons associated with or employed by a member or member 
organization from engaging in acts or practices inconsistent with 
just and equitable principles of trade. FINRA Rule 1210.05 cites 
FINRA Rule 2010, which is a comparable rule.
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    Proposed Rule 1210.05 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 would be prohibited and 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. Finally, proposed Rule 1210.05 would prohibit an applicant from 
receiving assistance while taking the examination, and require the 
applicant to certify that no assistance was given to or received by him 
or her during the examination.\31\
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    \31\ The Exchange is not adopting portions of FINRA's 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 Rule 
1210.06)
    The Exchange proposes to adopt new Rule 1210.06, which provides 
that a person who fails an examination may retake that examination 
after 30 calendar days from the date of the person's last attempt to 
pass that examination.\32\ Proposed Rule 1210.06 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 from the date of the person's last 
attempt to pass it. These waiting periods would apply to the SIE and 
the representative- and principal-level examinations.\33\
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    \32\ Proposed Rule 1210.06 has no counterpart in existing 
Exchange rules.
    \33\ 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 is not including 
this language in proposed Rule 1210.06, as the Exchange will not 
apply the 1200 Series of rules in any event to individuals who are 
not associated persons of members.

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[[Page 50987]]

H. CE Requirements (Proposed Rule 1210.07)
    Pursuant to current Exchange Rule 640, no member organization shall 
permit any registered person to continue to, and no registered person 
shall continue to, perform duties as a registered person, unless such 
person has complied with the continuing education requirements of 
paragraph (a) of Rule 640. Under the rule the CE requirements 
applicable to registered persons consist of a Regulatory Element \34\ 
and a Firm Element.\35\ The Regulatory Element applies to registered 
persons and must be completed within prescribed time frames.\36\ For 
purposes of the Regulatory Element, a ``registered person'' is defined 
in current Rule 640 as any member, registered representative or other 
person registered or required to be registered under Exchange Rules, 
but does not include such person whose activities are limited solely to 
the transaction of business on the Exchange's trading floor, with 
members or registered broker-dealers.\37\ The Firm Element consists of 
annual, member-developed and administered training programs designed to 
keep covered registered persons current regarding securities products, 
services and strategies offered by the member. For purposes of the Firm 
Element, the term ``covered registered persons'' is defined as any 
registered person who has direct contact with customers in the conduct 
of the member organization's securities sales, trading or investment 
banking activities, and to the immediate supervisors of such 
persons.\38\
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    \34\ See Rule 640(a).
    \35\ See Rule 640(b).
    \36\ Pursuant to Rule 640(a), each registered person is required 
to complete the Regulatory Element on the occurrence of their second 
registration anniversary date(s), and every three years thereafter 
or as otherwise prescribed by the Exchange. On each occasion, the 
Regulatory Element must be completed within 120 days after the 
person's registration anniversary date.
    \37\ See Rule 640, Commentary .01.
    \38\ See Rule 640(b)(1).
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    The Exchange proposes to delete current Rule 640. The CE 
requirements set forth in Rule 640 are proposed to be reorganized and 
renumbered, and to be adopted as new Rule 1240. The Exchange believes 
that all persons registered pursuant to Rule 1210, 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.\39\ Therefore, the Exchange is proposing Rule 
1210.07, to clarify that all ``covered persons'' as defined in Rule 
1240(a)(5), including those who solely maintain a permissive 
registration, are required to satisfy the Regulatory Element, as 
specified in proposed new Rule 1240, discussed below.\40\ 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 Rule 
1210.07 would also provide that a registered person of a member who 
becomes CE inactive would not be permitted to be registered in another 
registration category with that member or be registered in any 
registration category with another member, until the person has 
satisfied the Regulatory Element.
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    \39\ The Exchange notes that Rule 625 also may require 
individuals who are not required to register pursuant to Rule 1210 
to complete mandatory training. The rule provides that all members 
and persons employed by or associated with such member or a member 
organization shall successfully complete mandatory training, as 
required by the Exchange. Training topics include, but are not 
limited to, training related to that person's function at the 
Exchange, changes in existing automated systems or any new 
technology that is utilized by the Exchange, compliance with 
Exchange Rules and federal securities laws, and issues related to 
conduct, health and safety on the trading floor. In addition, floor 
members shall complete mandatory training programs, on at least a 
semi-annual basis, that address compliance with the federal 
securities laws and the Exchange's Rules in place to prevent and 
deter unlawful trading by floor members.
    \40\ Current Rule 640 would be deleted, replaced by proposed 
Rule 1240. Rule 1240(a)(5) would define the term ``covered person'' 
as any person registered with the Exchange pursuant to Rule 1210, 
including any person who is permissively registered pursuant to Rule 
1210.02, and any person who is designated as eligible for a waiver 
pursuant to Rule 1210.09.
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    Individuals whose activities are limited solely to the transaction 
of business on the Exchange's trading floor, with members or registered 
broker-dealers, would continue to be excluded from the CE 
requirement.\41\ Pursuant to proposed Rule 1260, Section (c), members 
whose activities are limited to the Exchange's options trading floor 
and who are registered pursuant to proposed Rule 1260(a) as well as 
associated persons whose activities are limited to the Exchange's 
options trading floor and who are registered pursuant to proposed Rule 
1260(b) would be exempt from the representative registration 
requirements of proposed Rules 1210 and 1220. The CE requirements of 
proposed Rule 1240 would apply only to ``covered persons,'' defined in 
turn in proposed Rule 1240 as persons registered pursuant to Rule 1210.
---------------------------------------------------------------------------

    \41\ See existing Rule 640, Commentary .01, which excludes such 
individuals from the term ``registered person'' as it is used in 
Rule 640.
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I. Lapse of Registration and Expiration of SIE (Proposed Rule 1210.08)
    Existing Rule 611(c) states that any person whose registration has 
been revoked by the Exchange as a disciplinary sanction or whose most 
recent registration as principal has been terminated for two or more 
years immediately preceding the date of receipt by the Exchange of a 
new application is required to pass a qualification examination for 
Principals appropriate to the category of registration as specified in 
Rule 611. The two year period is calculated from the termination date 
to the date the Exchange receives a new application for registration. A 
comparable provision applicable to representatives is found in Rule 
613(c). The Exchange is proposing to delete existing Rules 611(c) and 
613(c), and to replace them with Rule 1210.08, Lapse of Registration 
and Expiration of SIE.
    Proposed Rule 1210.08 contains language comparable to that of 
existing Rules 611(c) and 613(c) 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 Rule 1210.08 also sets forth the expiration 
period of the SIE. Based on the content covered on the SIE, the 
Exchange is proposing 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- and principal-level

[[Page 50988]]

registrations. The representative- 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 Rule 1210.09)
    The Exchange is proposing Rule 1210.09 to provide a new process 
whereby individuals who would be working for a financial services 
industry affiliate of a member \42\ would terminate their registrations 
with the member and would 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.\43\ The purpose of the 
FSA waiver is to provide a firm greater flexibility to move personnel, 
including 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 returned to the firm.
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    \42\ Proposed Rule 1210.09 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 SEC, Commodity Futures Trading Commission 
(``CFTC''), state securities authorities, federal or state banking 
authorities, state insurance authorities, or substantially 
equivalent foreign regulatory authorities.
    \43\ There is no counterpart to proposed Rule 1210.09 in the 
Exchange's existing rules. FINRA Rule 1210.09 was recently adopted 
as a new waiver process for FINRA registrants, as part of the FINRA 
Rule Changes.
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    Under the proposed waiver process, 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.\44\ 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 \45\ 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.\46\
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    \44\ 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.
    \45\ 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.
    \46\ 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.
---------------------------------------------------------------------------

    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 is 
making corresponding changes to Rule 640, Continuing Education 
(proposed to be renumbered as Rule 1240).
    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,\47\ 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:
---------------------------------------------------------------------------

    \47\ 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.\48\ An 
individual

[[Page 50989]]

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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    \48\ 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 Rule 1210.10)
    Current Rule 53, Inactive Status of Currently Registered Persons, 
provides specific relief to registered persons serving in the Armed 
Forces of the United States. Among other things, the rule permits a 
registered person of a member or member organization 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, upon inactive 
status and remain eligible to receive ongoing transaction-related 
compensation. The rule also includes specific provisions regarding the 
deferment of the lapse of registration requirements in Rules 611, 613 
and 3228 for formerly registered person serving in the Armed Forces of 
the United States.
    The Exchange is proposing to adopt Rule 53 as Rule 1210.10 with 
certain changes. To enhance the efficiency of the current notification 
process for registered persons serving in the Armed Forces, proposed 
Rule 1210.10 requires that the member with which such person is 
registered promptly notify the Exchange of such person's return to 
employment with the member. A sole proprietor must similarly notify the 
Exchange of his or her return to participation in the securities 
business. Further, proposed Rule 1210.10 provides that the Exchange 
would also defer the lapse of the SIE for formerly registered persons 
serving in the Armed Forces of the United States.\49\
---------------------------------------------------------------------------

    \49\ Proposed Rule 1210.10 tracks FINRA Rule 1210.10 except for 
the statement that inactive registered persons are not to be 
included within the definition of ``Personnel'' for purposes of dues 
or assessments as provided in Article VI of the FINRA By-Laws. 
Instead, proposed Rule 1210.10 incorporates language from existing 
Nasdaq and BX IM-1002-2, stating that inactive persons under the 
rule are not included within the scope of fees, if any, charged by 
the Exchange with respect to registered persons.
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L. Impermissible Registrations (Proposed Rule 1210.11)
    Existing Rule 611(a) and 613(a) prohibit a member organization from 
maintaining a principal or representative registration with the 
Exchange for any person who is no longer active in the member 
organization's investment banking or securities business, who is no 
longer functioning in the registered capacity, or where the sole 
purpose is to avoid an examination requirement. The rules also prohibit 
a member organization from applying for the registration of a person as 
representative or principal where the member organization does not 
intend to employ the person in its investment banking or securities 
business. These prohibitions do not apply to the current permissive 
registration categories identified in Rules 611(a) and 613(a).\50\
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    \50\ Rules 611(a) allows for permissive principal registration 
of individuals who perform legal, compliance, internal audit, back-
office operations, or similar duties for the member organization or 
a person engaged in the investment banking or securities business of 
a foreign securities affiliate or subsidiary of the member 
organization. Rule 613(a) permits permissive registration as a 
representative of an individual who performs legal, compliance, 
internal audit, back-office operations, or similar responsibilities 
for the member organization, or a person who performs administrative 
support functions for registered personnel, or a person engaged in 
the investment banking or securities business of a foreign 
securities affiliate or subsidiary of the member organization.
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    In light of proposed Rule 1210.02, Permissive Registrations, 
discussed above the Exchange is proposing to delete these provisions of 
Rule 611(a) and 613(a) and instead adopt Rule 1210.11 prohibiting a 
member from registering or maintaining the registration of a person 
unless the registration is consistent with the requirements of proposed 
Rule 1210.\51\
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    \51\ As discussed above, the Exchange is also proposing Rule 
1210, Supplementary Material .12, Application for Registration and 
Jurisdiction, which is not included in FINRA Rule 1210. Proposed 
Exchange Rule 1210, Supplementary Material .12, is based upon 
portions of existing Nasdaq Rule 1031.
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M. Registration Categories (Proposed Rule 1220)
    The Exchange is proposing to adopt new and revised registration 
category rules and related definitions in proposed Rule 1220, 
Registration Categories.\52\
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    \52\ For ease of reference, the Exchange proposes to adopt as 
Rule 1220, Supplementary Material .07, in chart form, a Summary of 
Qualification Requirements in chart form for each of the Exchange's 
permitted registration categories discussed below.
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1. Definition of Principal (Proposed Rule 1220(a)(1))
    Current Rule 611(b) defines ``principal'' to include sole 
proprietors, officers, partners, managers of offices of supervisory 
jurisdiction and directors who are actively engaged in the management 
of the member organization's investment banking or securities business, 
such as supervision, solicitation, conduct of business or the training 
of persons associated with a member organization for any of these 
functions. The Exchange is proposing to streamline and adopt Rule 
611(b) as Rule 1220(a)(1).
    For the reason discussed above in connection with proposed Rule 
1210, proposed Rule 1220(a)(1) would not apply to individuals who are 
not engaged in the management of the member's securities business even 
if they are engaged in the management of the member's investment 
banking business. Proposed Rule 1220(a)(1) clarifies that a member's 
chief executive officer (``CEO'') and chief financial officer (``CFO'') 
(or equivalent officers) are considered principals based solely on 
their status. The proposed rule further clarifies that the term 
``principal'' includes any other associated person who is performing 
functions or carrying out responsibilities that are required to be 
performed or carried out by a principal under Exchange rules. In 
addition, the proposed rule provides that the phrase ``actively engaged 
in the management of the member's securities business'' includes 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.
2. General Securities Principal (Proposed Rule 1220(a)(2))
    Current Rule 612(a) currently requires that an associated person 
who meets the definition of ``principal'' under Rule 611 and each 
person designated as Chief Compliance Officer (``CCO'') on Schedule A 
of the member's Form BD (Uniform Application for Broker-Dealer 
Registration) register as a General Securities Principal. A person 
registering as a General Securities Principal must pass the General 
Securities Principal examination. The rule, however, provides that such 
person is not required to register as a General Securities Principal if 
the person's activities are so limited as to qualify such person for 
one or more of the limited principal categories specified in Rules 
611(b)-(e). Further, the rule does not preclude individuals registered 
in a limited principal category from registering as General Securities 
Principals. Rule 612(a) also

[[Page 50990]]

includes transitioning and grandfathering provisions for CCO's.
    Rule 612(a) requires individuals seeking to register and qualify as 
a General Securities Principal, prior to or concurrent with such 
registration, to become registered as a General Securities 
Representative. It also includes a grandfathering provision for persons 
who were registered as principals before the adoption of the General 
Securities Principal registration category. Finally, it provides that 
an associated person registered solely as a General Securities 
Principal is not qualified to function as a Limited Principal--
Financial and Operations, Limited Principal--General Securities Sales 
Supervisor or Securities Trader Principal.
    The Exchange is proposing to more clearly set forth the obligation 
to register as a General Securities Principal. Specifically, proposed 
Rule 1220(a)(2)(A) states that each principal as defined in proposed 
Rule 1220(a)(1) 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 these 
categories.\53\ Proposed Rule 1220(a)(2)(A) 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 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.\54\
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    \53\ The Exchange is proposing to recognize the Compliance 
Official and Securities Trader Compliance Officer registration 
categories for the first time as a result of this proposed rule 
change.
    \54\ The Exchange's proposed Rule 1220(a)(2)(A) deviates 
somewhat from the counterpart FINRA rule in that it does not offer 
various limited registration categories provided for in FINRA's new 
Rule 1220(a)(2)(A). It therefore proposes to reserve Rules 
1220(a)(2)(A)(ii) and (iv).
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    Proposed Rule 1220(a)(2)(B) 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.
    In conjunction with the elimination of the Corporate Securities 
Representative registration category by FINRA, the Exchange is 
proposing that Rule 1220(a)(2)(B) provide that, subject to the lapse of 
registration provisions in proposed Rule 1210.08, General Securities 
Principals who obtained the Corporate Securities Representative 
prerequisite registration on the Exchange in lieu of the General 
Securities Representative prerequisite registration and individuals who 
had been registered as such within the past two years prior to the 
operative date of the proposed rule change, may continue to supervise 
corporate securities activities as currently permitted.\55\ Proposed 
Rule 1220(a)(2)(B) requires all other individuals registering as 
General Securities Principals after October 1, 2018, to first become 
registered as a General Securities Representative pursuant to Rule 
1220(b)(2).\56\
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    \55\ The Exchange itself does not recognize the Corporate 
Securities Representative registration category, but understands 
that FINRA and Nasdaq currently accept Corporate Securities 
Representative registration as a prerequisite to General Securities 
Principal registration.
    \56\ The Exchange is not adopting the FINRA Rule 1220(a)(2)(B) 
language permitting 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.
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    The Exchange is also proposing to eliminate the grandfathering 
provision for individuals who were registered as principals prior to 
the adoption of the General Securities Principal registration category 
because it no longer has any practical application. Finally, the 
Exchange is proposing to delete the provision that persons eligible for 
registration in other principal categories are not precluded from 
registering as General Securities Principals because it is 
superfluous.\57\
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    \57\ Proposed Rule 1220(a)(2) 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 
1220(a)(2)(A)(i) 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.'' Finally, proposed 
Rule 1220(a)(2)(B) specifies that registration as a Corporate 
Securities Representative must be with the Exchange in order to 
fulfill the Corporate Securities Representative registration 
prerequisite for General Securities Principal registration pursuant 
to that rule.
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3. Compliance Official (Proposed Rule 1220(a)(3))
    Current Rule 612(a) provides that each person designated as a Chief 
Compliance Officer on Schedule A of Form BD of a member organization to 
which Rule 611 applies, be required to register with the Exchange as a 
General Securities Principal and shall pass the Series 24 examination 
before such registration may become effective, unless such person's 
activities are so limited as to qualify such person for one or more of 
the limited categories of principal registration specified Rule 612(b)-
(e).\58\ The Exchange proposes to delete this provision.
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    \58\ The limited registration categories identified in Rule 
612(b)-(e) are Limited Principal--Financial and Operations, Limited 
Principal--General Securities Sales Supervisor, Limited Principal--
Registered Options Principal, and Securities Trader Principal.
---------------------------------------------------------------------------

    In its place, the Exchange proposes to adopt Rule 1220(a)(3) 
providing 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. An individual designated as a Chief Compliance Officer on 
Schedule A of Form BD of a member that is engaged in limited securities 
business could also be registered in a principal category under Rule 
1220(a) that corresponds to the limited scope of the member's business.
    Additionally, Rule 1220(a)(3) 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

[[Page 50991]]

pursuant to paragraph (b)(4) as a Securities Trader, and to pass the 
Compliance Official qualification exam.\59\
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    \59\ Proposed Rule 1220(a)(3) differs from FINRA Rule 
1220(a)(3), Compliance Officer. 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 
Rule 1220(a)(3), 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.
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4. Financial and Operations Principal (Proposed Rule 1220(a)(4))
    Existing Rule 612(b) provides that every member organization to 
which Rule 611 applies and that is operating pursuant to the provisions 
of SEC Rule 15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8) shall designate as 
Limited Principal--Financial and Operations those persons associated 
with it, at least one of whom shall be its chief financial officer, who 
perform the duties described in Rule 612(b)(ii).\60\ It requires each 
person associated with a member organization who performs such duties 
to be registered as a Limited Principal--Financial and Operations with 
the Exchange and to pass the Series 27 examination before such 
registration may become effective.
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    \60\ Those duties include (A) final approval and responsibility 
for the accuracy of financial reports submitted to any duly 
established securities industry regulatory body; (B) final 
preparation of such reports; (C) supervision of individuals who 
assist in the preparation of such reports; (D) supervision of and 
responsibility for individuals who are involved in the actual 
maintenance of the member organization's books and records from 
which such reports are derived; (E) supervision and/or performance 
of the member organization's responsibilities under all financial 
responsibility rules promulgated pursuant to the provisions of the 
Act; (F) overall supervision of and responsibility for the 
individuals who are involved in the administration and maintenance 
of the member organization's back office operations; or (G) any 
other matter involving the financial and operational management of 
the member organization. A person registered solely as a Limited 
Principal--Financial and Operations shall not be qualified to 
function in a Principal capacity with responsibility over any other 
area of business activity.
---------------------------------------------------------------------------

    The Exchange is proposing to delete Rule 612(b) and to adopt in its 
place Rule 1220(a)(4), substituting the word ``and'' for the current 
word ``or'' found in Rule 612(b)(ii)(F) in order to conform to FINRA 
Rule 1220(a)(4)(A) in describing the duties of a Financial and 
Operations Principal.\61\
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    \61\ FINRA Rule 1220(a)(4) differs from proposed Rule 1220(a)(4) 
in that it includes an Introducing Broker-Dealer Financial and 
Operations Principal registration requirement. Additionally, 
proposed Rule 1220(a)(4) 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 is not adopting a Principal Financial Officer or Principal 
Operations Officer requirement like FINRA Rule 1220(a)(4)(B), as it 
believes the Financial and Operations Principal requirement is 
sufficient. Finally, proposed Rule 1220(a)(4)(B)(v) and (vi) contain 
minor wording variations from the FINRA rule.
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5. Investment Banking Principal (Proposed Rule 1220(a)(5))
    The Exchange does not recognize the Investment Banking Principal 
registration category and is reserving Rule 1220(a)(5), retaining the 
caption solely to facilitate comparison with FINRA's rules.
6. Research Principal (Proposed Rule 1220(a)(6))
    The Exchange does not recognize the Research Principal registration 
category and is reserving Rule 1220(a)(6), retaining the caption solely 
to facilitate comparison with FINRA's rules.
7. Securities Trader Principal (Proposed Rule 1220(a)(7))
    Existing Rule 612(e) provides that each person associated with a 
member who is included within the definition of principal in Rule 
611(b) and who will have supervisory responsibility over the securities 
trading activities described in Rule 613(f) shall become qualified and 
registered as a Securities Trader Principal. To qualify for 
registration as a Securities Trader Principal, such person must become 
qualified and registered as a Securities Trader under Rule 613(f) and 
pass the General Securities Principal qualification examination. 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 Rule 613(f), unless such 
person is separately qualified and registered in another appropriate 
principal registration category, such as the General Securities 
Principal registration category. Conversely, a person who is registered 
as a General Securities Principal is not qualified to supervise the 
trading activities described in Rule 613(f), unless such person has 
also become qualified and registered as a Securities Trader under Rule 
613(f) by passing the Securities Trader qualification examination and 
become registered as a Securities Trader Principal.
    The Exchange is proposing to delete Rule 612(e) and to adopt in its 
place Rule 1220(a)(7), Securities Trader Principal. Proposed Rule 
1220(a)(7) requires that a principal responsible for supervising the 
securities trading activities specified in proposed Rule 1220(b)(4) 
\62\ 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.
---------------------------------------------------------------------------

    \62\ Proposed Rule 1220(b)(4), discussed below, provides for 
registration in the representative-level ``Securities Trader'' 
category.
---------------------------------------------------------------------------

8. Registered Options Principal (Proposed Rules 1220(a)(8))
    Rule 612(d) provides that each person associated with a member 
organization to which Rule 611 applies and who is included in the 
definition of principal in Rule 611 may register with the Exchange as a 
Limited Principal--Registered Options Principal if: (A) His or her 
supervisory responsibilities in the investment banking and securities 
business are limited exclusively to the options activities of a member 
organization, (B) he or she is registered pursuant to Exchange rules as 
a General Securities Representative, and (C) he or she is qualified to 
be so registered by passing the Series 4 examination. It also provides 
that a person registered in this category solely on the basis of having 
passed the Series 4 examination for Limited Principal--Registered 
Options Principal shall not be qualified to function in a principal 
capacity with responsibility over any area of business activity not 
described in paragraph (d)(i)(A).
    The Exchange is proposing to delete Rule 612(d) and to adopt Rule 
1220(a)(8)(A), Registered Options Principal, which would require under 
its section (a)(8)(A) that each member that is engaged in transactions 
in options with the public to have at least one Registered Options 
Principal.\63\
---------------------------------------------------------------------------

    \63\ Proposed Rule 1220(a)(8) differs from FINRA Rule 1220(a)(8) 
in that it omits certain references to other specific FINRA rules.
---------------------------------------------------------------------------

    In addition, each principal as defined in paragraph (a)(1) of the 
rule 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, subject to the following 
exception. 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 (a)(10) of the Rule in lieu of 
registering as a Registered Options Principal.\64\
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    \64\ Current Exchange Rule 1024, Conduct of Accounts for Options 
Trading, provides that members, member organizations and individuals 
associated with member organizations shall not be approved to 
transact options business with the public until such persons, who 
are designated as Options Principals, have been approved by and 
registered with the Exchange. Further, persons engaged in the 
supervision of options sales practice or a person to whom the 
designated general partner or executive officer (pursuant to Rule 
1025) or another Registered Options Principal delegates the 
authority to supervise options sales practices shall be designated 
as options principals. Rule 1024, Commentary .06 provides that 
individuals engaged in the supervision of options sales practices 
and designated as Options Principals are required to qualify as an 
Options Principal by passing the Registered Options Principal 
Qualification Examination (Series 4) or the Sales Supervisor 
Qualification Examination (Series 9/10), and is proposed to be 
deleted in view of new Rule 1220(a)(8)(a). Under Rule 1024.07, 
individuals who are delegated responsibility pursuant to Rule 1025 
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 Registered Options Principal Qualification 
Examination (Series 4). Further, Exchange Rule 1024.08 states that a 
person accepting orders from non-member customers (unless such 
customer is a broker-dealer registered with the Securities and 
Exchange Commission) is required to register with the Exchange and 
to be qualified by passing the General Securities Registered 
Representative Examination (Series 7). Except for Rule 1024, 
Commentary .06, the foregoing provisions of Rule 1024 are specific 
to conducting an options business with the public and are not 
proposed to be amended in this proposed rule change. However, Rule 
1024(a) also contains provisions regarding submission of Forms U4 
and U5 to WebCRD that are duplicative of the proposed 1200 Series of 
rules, in particular proposed Rules 1210.12, Application for 
Registration and Jurisdiction, and 1250, Electronic Filing 
Requirements for Electronic Forms, and are therefore proposed to be 
deleted.

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[[Page 50992]]

    Pursuant to proposed Rule 1220(a)(8)(B), subject to the lapse of 
registration provisions in Rule 1210.08, each person registered 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 paragraph 
Rule 1220(b)(2) of the Rule as a General Securities Representative and 
pass the Registered Options Principal qualification examination.\65\
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    \65\ The Exchange is also proposing to adopt Rule 1220, 
Supplementary Material .02, which provides that each person who is 
registered with the Exchange as a Registered Options Principal (or 
as a General Securities Representative, Options Representative, 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 
Rule 1240 that addresses security futures products before such 
person engages in security futures activities. Unlike FINRA Rule 
1220.02, proposed Exchange Rule 1220.02 omits references to United 
Kingdom Securities Representatives and Canada Securities 
Representatives, which are registration categories the Exchange does 
not recognize. In any event, the Exchange does not currently offer 
security futures products for trading. In addition, the Exchange is 
also proposing to adopt Rule 1220, Supplementary Material .03 which 
requires notification to the Exchange in the event such person 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.
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9. Government Securities Principal. [sic] (Rule 1220(a)(9))
    The Exchange does not recognize the Government Securities Principal 
registration category and is reserving Rule 1220(a)(9), retaining the 
caption solely to facilitate comparison with FINRA's rules.
10. General Securities Sales Supervisor (Proposed Rules 1220(a)(10) and 
1220.04)
    Current Rule 612(c) provides that each person associated with a 
member organization to which Rule 611 applies and who is included in 
the definition of Principal in Rule 611 may register with the Exchange 
as a Limited Principal--General Securities Sales Supervisor if: (A) His 
or her supervisory responsibilities in the investment banking and 
securities business are limited to the securities sales activities of a 
member organization, including the training of sales and sales 
supervisory personnel and the maintenance of records of original entry 
and/or ledger accounts of the member organization required to be 
maintained in branch offices by SEC record keeping rules; (B) he or she 
is registered pursuant to Exchange Rules as a General Securities 
Representative; and (C) he or she is qualified to be so registered by 
passing the Series 9 or Series 10 examination. Under the rule a person 
registered in this category solely on the basis of having passed the 
Series 9 or Series 10 examination for Limited Principal--General 
Securities Sales Supervisor is not qualified to: (A) Function in a 
Principal capacity with responsibility over any area of business 
activity not described in paragraph (c)(i)(A); (B) be included for 
purposes of the Principal numerical requirements of Rule 611(e); or (C) 
perform for a member organization any or all of the following 
activities: (1) Supervision of the origination and structuring of 
underwritings; (2) supervision of market making commitments; (3) final 
approval of advertisements as these are defined in Rule 605; (4) 
supervision of the custody of firm or customer funds and/or securities 
for purposes of SEC Rule 15c3-3; or (5) supervision of overall 
compliance with financial responsibility rules for broker/dealers 
promulgated pursuant to the provisions of the Act. Rule 612(c)(iii) 
explains the purpose of the General Securities Sales Supervisor 
registration category.
    The Exchange is proposing to adopt Rule 612(c)(i) and (ii) and Rule 
612(c)(iii), with changes, as Rules 1220(a)(10) and 1220.04, 
respectively.\66\ Rule 1220(a)(10), however, omits the current Rule 
1022(g) prohibition against supervision of the origination and 
structuring of underwritings, as that activity does not fall within the 
new, more limited scope of ``securities trading'' covered by the new 
1200 Series of rules.
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    \66\ The Exchange is not proposing to carry over into proposed 
Rule 1220(a)(10) the current Rule 612(c)(ii)(C)(3) prohibition 
against final approval of advertisements by General Securities Sales 
Supervisors. The Exchange notes that FINRA removed this prohibition 
several years ago from NASD Rule 1022(g) (Limited Principal--General 
Securities Sales Supervisor) and NASD IM-1022-2 (Limited Principal--
General Securities Sales Supervisor). See Securities Exchange Act 
Release No. 68918 (February 13, 2013), 78 FR 11925 (February 20, 
2013) (SR-FINRA-2013-014). Also, unlike FINRA Rule 1220.04, proposed 
Exchange Rule 1220.04 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.
---------------------------------------------------------------------------

    Each person seeking to register as a General Securities Sales 
Supervisor would be required, prior to or concurrent with such 
registration, to become registered pursuant to Rule 1220(b)(2) of the 
rule as a General Securities Representative and pass the General 
Securities Sales Supervisor qualification examinations.
11. Investment Company and Variable Contracts Products Principal and 
Direct Participation Programs Principal (Rules 1220(a)(11) and (a)(12))
    The Exchange does not recognize the Investment Company and Variable 
Contracts Products Principal and the Direct Participation Programs 
Principal registration categories and is reserving Rule 1220(a)(11) and 
(a)(12), retaining the captions solely to facilitate comparison with 
FINRA's rules.
12. Private Securities Offerings Principal (Rule 1220(a)(13))
    The Exchange does not recognize the Private Securities Offerings 
Principal registration category and is reserving Rule 1220(a)(13), 
retaining the caption solely to facilitate comparison with FINRA's 
rules.

[[Page 50993]]

13. Supervisory Analyst (Rule 1220(a)(14))
    The Exchange does not recognize the Supervisory Analyst 
registration category and is reserving Rule 1220(a)(14), retaining the 
caption solely to facilitate comparison with FINRA's rules.
14. Definition of Representative (Proposed Rule 1220(b)(1))
    Current Rule 1(a)(ee) defines ``Representative'' as a member or an 
associated person of a registered broker or dealer, including assistant 
officers other than principals, who is engaged in the investment 
banking or securities business for the member organization including 
the functions of supervision, solicitation or conduct of business in 
securities or who is engaged in the training of persons associated with 
a broker or dealer for any of these functions.
    The Exchange now proposes to amend Exchange Rule 1(a)(ee) to 
incorporate by reference a new definition of ``representative'' in 
proposed Rule 1220(b)(1). Proposed 1220(b)(1) 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.
15. General Securities Representative (Proposed Rule 1220(b)(2))
    Under Rule 613(a), except for members whose activities are limited 
to the Exchange's options trading floor and who are registered pursuant 
to Rule 620(a) as well as associated persons whose activities are 
limited to the Exchange's options trading floor and who are registered 
pursuant to Rule 620(b), all persons engaged or to be engaged in the 
investment banking or securities business of a member organization who 
are to function as representatives shall be registered as such with the 
Exchange through WebCRD under PHLX in the category of registration 
appropriate to the function to be performed as specified in paragraph 
(e),\67\ Categories of Representative Registration--General Securities 
Representative or (f), Securities Trader.
---------------------------------------------------------------------------

    \67\ Rule 613(e) provides that individuals required to register 
with the Exchange as a General Securities Representative under the 
rule must pass the Series 7 examination before such registration may 
become effective.
---------------------------------------------------------------------------

    The Exchange proposes to delete those provisions of Rule 613(a) and 
to adopt new Rule 1220(b)(2), General Securities Representative. 
Proposed Rule 1220(b)(2)(A) states that each representative as defined 
in proposed Rule 1220(b)(1) 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 Rule 1220(b)(2), then such person shall 
appropriately register as a Securities Trader.
    Further, consistent with the proposed restructuring of the 
representative-level examinations, proposed Rule 1220(b)(2)(B) 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\
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    \68\ Proposed Rule 1220(b)(2)(B) differs from FINRA Rule 
1220(b)(2)(B) 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 is proposing to adopt Rule 1220.01 to 
provide individuals who are associated persons of firms and who hold 
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. Under proposed Rule 1220.01, 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. The proposed approach would 
provide individuals with a United Kingdom or Canadian qualification 
more flexibility to obtain an Exchange representative-level 
registration.
16. Operations Professional, Securities Trader, Investment Banking 
Representative, Research Analyst, Investment Company and Variable 
Contracts Products Representative, Direct Participation Programs 
Representative and Private Securities Offerings Representative (Rules 
1220(b)(3), 1220(b)(4), 1220(b)(5), 1220(b)(6), 1220(b)(7), 1220(b)(8), 
1220(b)(9) and 1220.05)
    Operations Professional, Investment Banking Representative, 
Research Analyst, Investment Company and Variable Products 
Representative, Direct Participation Programs Representative and 
Private Securities Offerings Representative. The Exchange does not 
recognize these registration categories for its associated persons. The 
Exchange is therefore reserving Rules 1220(b)(3)--Operations 
Professional, and related Rule 1220.05, Scope of Operations 
Professional Requirement; 1220(b)(5)--Investment Banking 
Representative; 1220(b)(6)--Research Analyst; 1220(b)(7)--Investment 
Company and Variable Products Representative; 1220(b)(8)--Direct 
Participation Programs Representative; and 1220(b)(9)--Private 
Securities Offerings Representative, retaining the captions for each of 
them solely to facilitate comparison with FINRA's rules.
    Securities Trader--Proposed Rule 1220(b)(4). Pursuant to current 
Exchange Rule 613(f)(1) and (2), associated persons must pass the 
qualification examination for Securities Trader (the Series 57 
examination) and 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.\69\
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    \69\ Rule 613(f)(3) provides that a person registered as a 
Securities Trader is not qualified to function in any other 
registration category, unless he or she is also qualified and 
registered in such other registration category.
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    The Exchange now proposes to delete Exchange Rule 613(f) and to 
replace it with proposed Rule 1220(b)(4).\70\ Rule

[[Page 50994]]

1220(b)(4) would require each representative as defined in Rule 
1220(b)(1) of the rule to register with the Exchange as a Securities 
Trader if, with respect to transactions in equity, preferred or 
convertible debt securities, or options \71\ 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. Rule 
1220(b)(4) would require individuals registering as Securities Traders 
to pass the SIE as well as the Securities Trader qualification exam.
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    \70\ Proposed Rule 1220(b)(4)(A) 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.
    \71\ Current Rule 613(f) refers to transactions in foreign 
currency options. Proposed Rule 1220(b)(4) would instead refer to 
``options'' generally, to clarify that equity options as well as 
foreign currency options are products with respect to which 
Securities Trader registration requirements would apply.
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    Additionally, proposed Rule 1220(b)(4)(A) 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.\72\
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    \72\ As noted above, this new registration requirement was 
recently 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) (Order Approving File No. SR-FINRA-2016-007).
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    For purposes of this proposed new registration requirement an 
``algorithmic trading strategy'' is 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.\73\
---------------------------------------------------------------------------

    \73\ See Securities Exchange Act Release No. 77551 (April 7, 
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007).
---------------------------------------------------------------------------

    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.
    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 Rule 1220(b)(4)(B) 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.
17. Eliminated Registration Categories (Proposed Rule 1220.06)
    Proposed Rule 1220.06 has no practical relevance to the Exchange, 
but is included because the Nasdaq Affiliated Exchanges are also 
proposing to adopt the new 1200 Series, on a uniform basis. Proposed 
Rule 1220.06 will be relevant to Nasdaq and BX which, unlike the 
Exchange, are proposing to eliminate a number of existing registration 
categories that are not currently recognized by the Exchange.\74\
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    \74\ See SR-Nasdaq-2018-078.
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    Proposed Rule 1220.06 provides that, subject to the lapse of 
registration provisions in proposed Rule 1210.08, individuals who are 
registered with the Exchange in any capacity recognized by

[[Page 50995]]

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. In addition, proposed Rule 
1220.06 would include the current restrictions to which Order 
Processing Assistant Representatives are subject under Nasdaq 
rules.\75\ As stated above, Rule 1220.06 would have no application to 
the Exchange as a practical matter.\76\
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    \75\ See Nasdaq Rule 1042.
    \76\ Proposed Exchange Rule 1220.06 omits references to a number 
of registration categories it does not propose to recognize, but 
which FINRA refers to in its own Rule 1220.06.
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18. Grandfathering Provisions
    In addition to the grandfathering provisions in proposed Rule 
1220(a)(2) (relating to General Securities Principals) and proposed 
Rule 1220.06 (relating to the eliminated registration categories), the 
Exchange is proposing to include grandfathering provisions in proposed 
Rule 1220(a)(8) (Registered Options Principal), 1220(b)(2) (General 
Securities Representative), and 1220(b)(4) (Securities Trader). 
Specifically, the proposed grandfathering provisions provide that, 
subject to the lapse of registration provisions in proposed Rule 
1210.08, 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 Rules 1230 and 
1230.01)
    Existing Rule 614 currently provides that the following persons 
associated with a member organization are not required to register:
    (i) Persons associated with a member organization whose functions 
are solely and exclusively clerical or ministerial;
    (ii) persons associated with a member organization who are not 
actively engaged in the investment banking or securities business;
    (iii) persons associated with a member organization whose functions 
are related solely and exclusively to the member organization's need 
for nominal corporate officers or for capital participation; and
    (iv) persons associated with a member organization whose functions 
are related solely and exclusively to effecting transactions on the 
floor of another national securities exchange and who are registered as 
floor members with such exchange; transactions in municipal securities; 
transactions in commodities; transactions in security futures, provided 
that any such person is registered with FINRA or a registered futures 
association; transactions in variable contracts and insurance premium 
funding programs and other contracts issued by an insurance company; 
transactions in direct participation programs; transactions in 
government securities; or effecting sales as part of a primary offering 
of securities not involving a public offering pursuant to Section 3(b), 
4(2), or 4(6) of the Securities Act of 1933 and the rules and 
regulations thereunder.
    The Exchange is proposing to adopt Rule 614 as Rule 1230 subject to 
certain changes. Rule 614 exempts from registration those associated 
persons who are not actively engaged in the securities business. It 
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.\77\ 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 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. The 
Exchange therefore is proposing to delete these exemptions. Rule 
614(a)(iv)(a) 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 Rule 1230 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.\78\ 
Additionally, the Exchange proposes to add Section 3 of Rule 1230, 
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.\79\
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    \77\ 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.
    \78\ Proposed Rule 1230 differs from FINRA Rule 1230 in that it 
includes a number of exemptions based upon current Nasdaq Rule 
1060(a) which are not found in FINRA Rule 1230.
    \79\ Individuals described by Section 3 of Rule 1230 who are 
associated with FINRA members may be registered with FINRA as 
Foreign Associates pursuant to FINRA Rule 1220.06. FINRA is 
eliminating this registration category effective October 1, 2018, 
and the Exchange has never recognized it.
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    The Exchange proposes to adopt Rule 1230.01 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 registered person contacts the 
customer to confirm the order details before entering the order.
O. Changes to Continuing Education Requirements (Proposed Rule 1240)
    As described above, existing Rule 640, 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 
CE requirements set forth in Rule 640 have been reorganized and 
renumbered,

[[Page 50996]]

and are now proposed to be adopted with amendments as new Rule 
1240.\80\
---------------------------------------------------------------------------

    \80\ Proposed Rule 1240 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 is proposing to replace the term ``registered person'' 
in current Rule 640 with the term ``covered person'' and make 
conforming changes to proposed Rule 1240(a). For purposes of the 
Regulatory Element, the Exchange is proposing to define the term 
``covered person'' in Rule 1240(a)(5) as any person registered pursuant 
to proposed Rule 1210, including any person who is permissively 
registered pursuant to proposed Rule 1210.02, and any person who is 
designated as eligible for an FSA waiver pursuant to proposed Rule 
1210.09. 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 Rule 1210.09. In 
addition, consistent with proposed Rule 1210.09, proposed Rule 1240(a) 
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 is proposing 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 Rule 
1240(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 Rule 1240(b)(2)(B), 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 Rules
    Existing Rule 616 states that forms required to be filed under the 
Rule 600 Series shall be filed electronically through WebCRD, including 
initial filings and amendments of Forms U4 and U5. It also provides for 
prompt filing of amendments, and that records of filed documents be 
retained for a period of not less than three years, the first two years 
in an easily accessible place, in accordance with Exchange Act Rule 
17a-4. Electronic filing requirements are also found in a number of 
other rules.
    The Exchange is proposing to delete existing Rule 616 and to 
replace it with new Rule 1250, Electronic Filing Requirements for 
Uniform Forms, which will consolidate Form U4 and U5 electronic filing 
requirements in a single location.\81\ The new rule provides that all 
forms required to be filed under the Exchange's registration rules 
including the Rule 1200 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.
---------------------------------------------------------------------------

    \81\ Proposed Rule 1250 is based upon current Nasdaq Rule 1140.
---------------------------------------------------------------------------

    Under Rule 1250(b) members 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 is filing this information on 
behalf of the member and the member's associated persons. Under Rule 
1250, Supplementary Material .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 Rule 1250(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.
    Under Rule 1250(c)(1), initial and transfer electronic Form U4 
filings 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 
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. Rule 1250(c)(2) 
and Supplementary Material .03 and 04 provide for the electronic filing 
of Form U4 amendments without the individual's manual signature, 
subject to certain safeguards and procedures.
    Rule 1250(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 
information.\82\ 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 the 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 1220. Upon application 
and a showing of good cause, the Exchange could extend the 30-day 
period.
---------------------------------------------------------------------------

    \82\ Proposed Rule 1250(d) covers the same subject matter as 
current Rules 616, Electronic Filing Requirements for Uniform Forms, 
and 623, Fingerprinting, which would be deleted.
---------------------------------------------------------------------------

    Rule 1250(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

[[Page 50997]]

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 Rule 1250, Supplementary Material .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. Trading Floor Registration (Rule 1260)
    Currently, Rules 620(a) and (b) govern trading floor member 
registration and non-member clerk registration. Rule 620(a) requires 
each Floor Broker, Specialist and Registered Options Trader on the 
Exchange trading floor to be registered as ``Member Exchange'' (``ME'') 
under ``PHLX'' on Form U4, and to successfully complete the appropriate 
floor trading examination(s), if prescribed by the Exchange, in 
addition to requirements imposed by other Exchange rules. Under the 
rule the Exchange may also require periodic examinations due to changes 
in trading rules, products or automated systems. Rule 620(b) requires 
all trading floor personnel, including clerks, interns, stock execution 
clerks and any other associated persons, of a member organization not 
required to register pursuant to Rule 620(a) to be registered as 
``Floor Employee'' (``FE'') under ``PHLX'' on Form U4. Under the rule 
the Exchange may require these individuals to also successfully 
complete an examination, and may require periodic examinations due to 
changes in trading rules, products or automated systems. To consolidate 
these registration rules into the new Rule 1200 series, Rule 620 is 
being renumbered as Rule 1260.\83\
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    \83\ Exhibit 5 simply reflects the proposed new rule number of 
current Rule 620 rather than the deletion of the entire rule and the 
subsequent reinsertion of the entire rule following Rule 1250. In 
the rulebook, Rule 1260 will appear immediately following Rule 1250.
---------------------------------------------------------------------------

    The Exchange proposes to adjust internal cross references as 
required by this proposed rule change, but not to make substantive 
changes to Rule 620(a) and (b). However, the Exchange proposes to adopt 
new section (c) to exempt certain individuals on the Exchange's trading 
floor from the representative registration requirements of proposed 
rules 1210 and 1220. Rule 1260(c) would provide that members \84\ whose 
activities are limited to the Exchange's options trading floor and who 
are registered pursuant to Rule 1260(a), as well as associated persons 
whose activities are limited to the Exchange's options trading floor 
and are registered pursuant to Rule 1260(b) are exempt from the 
representative registration requirements (but not the principal 
registration requirements, including any prerequisite representative 
registration requirement) of Rules 1210 and 1220. Rule 1260(c) is 
intended to preserve the current exclusion of these individuals from 
the representative registration requirements of Rule 613.\85\
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    \84\ In Rule 1260, unlike the other 1200 Series of proposed 
rules, the word ``member'' is not used to mean ``member 
organization.''
    \85\ Current Rule 613(a) imposes representative registration 
requirements upon persons engaged or to be engaged in the investment 
banking or securities business of a member organization except 
members whose activities are limited to the Exchange's options 
trading floor and who are registered pursuant to Rule 620(a), as 
well as associated persons whose activities are limited to the 
Exchange's options trading floor and are registered pursuant to Rule 
620(b).
---------------------------------------------------------------------------

R. Other Rules
    The Exchange is deleting Rule 614, Persons Exempt from 
Registration, as explained above. Rule 614(b), however, contains 
provisions dealing with Nonregistered Foreign ``Finders'' and is simply 
being relocated with nonsubstantive changes to new Rule 2040.\86\ The 
remaining rules identified above under ``Overview'' which are to be 
amended in this proposed rule change simply update citations and/or 
make technical or nonsubstantive changes to the proposed new rules.
---------------------------------------------------------------------------

    \86\ The FINRA counterpart to Rule 614(b) occupies a similar 
location in the FINRA rulebook. See FINRA Rule 2040(c), 
Nonregistered Foreign Finders.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\87\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\88\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78f(b).
    \88\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change will 
streamline, and bring consistency and uniformity to, the registration 
rules, which will, in turn, assist members and their associated persons 
in complying with these rules and improve regulatory efficiency. The 
proposed rule change 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 change 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 change 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 change 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

[[Page 50998]]

education of firm personnel may reduce the potential for problematic 
market conduct and manipulative trading activity.
    Finally, the proposed rule change makes organizational changes to 
the Exchange's registration and qualification rules to align them with 
registration and qualification rules of the Nasdaq Affiliated 
Exchanges, 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 change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change is 
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 1200 Series of rules, which 
are similar in many respects to the registration-related requirements 
adopted by FINRA effective October 1, 2018, 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 Nasdaq Affiliated 
Exchanges, thereby promoting uniformity of regulation across markets. 
The new 1200 Series should in fact remove administrative burdens that 
currently exist for members seeking to register associated persons on 
multiple Nasdaq Affiliated Exchanges featuring varying registration-
related requirements. Additionally, all similarly-situated associated 
persons of members will be treated similarly under the new 1200 Series 
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 ``day-to-day'' supervision 
or direction of the covered activities.

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

    No written comments were either solicited or 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 \89\ and Rule 19b-
4(f)(6) thereunder.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78s(b)(3)(A).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days from the date of filing. However, Rule 
19b-4(f)(6)(iii) \90\ 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 asked the Commission to waive the 
30-day operative delay so that the proposal may become operative on 
October 1, 2018 to coincide with the effective date of FINRA's proposed 
rule change on which the proposal is based.\91\ The waiver of the 
operative delay would make the Exchange's qualification requirements 
consistent with those of FINRA, as of October 1, 2018. Therefore, the 
Commission believes that the waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest and 
hereby waives the 30-day operative delay and designates the proposal 
operative on October 1, 2018.\92\
---------------------------------------------------------------------------

    \90\ 17 CFR 240.19b-4(f)(6)(iii).
    \91\ See supra note 7. As discussed above, the Exchange has 
stated that the new registration requirements for developers of 
algorithmic trading strategies would become operative on April 1, 
2019.
    \92\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    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.

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 [email protected]. Please include 
File Number SR-Phlx-2018-61 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-Phlx-2018-61. 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

[[Page 50999]]

business days between the hours of 10 a.m. and 3 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-
Phlx-2018-61 and should be submitted on or before October 31, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\93\
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    \93\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21902 Filed 10-9-18; 8:45 am]
 BILLING CODE 8011-01-P