
[Federal Register Volume 75, Number 141 (Friday, July 23, 2010)]
[Notices]
[Pages 43217-43219]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-18037]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62524; File No. SR-BATS-2010-008]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, 
To Amend BATS Rules 2.5 and 17.2 To Establish a Registration 
Requirement for Principals

July 16, 2010.

I. Introduction

    On April 9, 2010, BATS Exchange, Inc. (``BATS'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend its registration requirements in Rules 2.5 and 17.2. The proposed 
rule change was published for comment in the Federal Register on April 
29, 2010.\3\ The Commission received one comment letter on the 
proposal.\4\ The Exchange responded on June 29, 2010.\5\ On June 30, 
2010, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\6\ This order approves the proposed rule change as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 61960 (April 22, 
2010), 75 FR 22668.
    \4\ See letter from Joan C. Conley, Senior Vice President and 
Corporate Secretary, Nasdaq OMX, to Elizabeth M. Murphy, Secretary, 
Commission, dated May 20, 2010 (``Nasdaq Comment Letter'').
    \5\ See letter from Eric J. Swanson, Senior Vice President and 
General Counsel, BATS Exchange, Inc., to Elizabeth M. Murphy, 
Secretary, Commission, dated June 29, 2010 (``BATS Response 
Letter'').
    \6\ Amendment No. 1 is a technical amendment and thus not 
subject to notice and comment.
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II. Description of the Proposal

    BATS proposes to amend BATS Rule 2.5, entitled ``Restrictions,'' to 
require each Exchange member to register with the Exchange: (i) At 
least two principals to supervise Authorized Traders of the member 
(subject to certain exceptions), one of whom must be the member's chief 
compliance officer, and (ii) at least one financial and operations 
principal.\7\
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    \7\ The Exchange also proposes a technical amendment to BATS 
Rule 17.2(g)(4) to eliminate language that will become unnecessary 
due to the changes to BATS Rule 2.5.
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BATS Rule 2.5

    BATS Rule 2.5 states that the General Securities Representative 
exam (``Series 7'') is required for registration with the Exchange as 
an Authorized Trader. The term ``Authorized Trader'' is defined as ``a 
person who may submit orders (or who supervises a routing engine that 
may automatically submit orders) to the Exchange's trading facilities 
on behalf of his or her member or sponsored participant.'' Accordingly, 
all traders that participate in the routing of orders to the Exchange, 
including proprietary traders, are required to be registered with the 
Exchange and Series 7 qualified. The term Authorized Trader includes a 
trader that submits orders, or supervises a routing engine that 
automatically submits orders, to the Exchange's equities platform, 
options platform, or both.
    With this rule change, BATS proposes to require each member to 
register with the Exchange at least two principals qualified as General 
Securities Principals \8\ (``Series 24'') (subject to certain 
exceptions) to supervise the member's Authorized Traders and one 
principal qualified as a Limited Principal--Financial and Operations 
(``Series 27'') to supervise the financial and operational activities 
of the member (``FINOP''). In addition, the proposal would require each 
chief compliance officer designated on Schedule A of

[[Page 43218]]

Form BD to register with the Exchange as a Series 24 qualified 
principal.\9\
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    \8\ In order to register as a principal, one must first be 
registered as a representative.
    \9\ In Amendment No. 1, the Exchange amended this portion of its 
rule to more closely mirror the rules of other SROs that require the 
chief compliance officers of their members to be registered. See, 
e.g., NASDAQ Rule 1022(a); NASDAQ BX Rule 1022(a); FINRA Rule 
1022(a); NYSE Arca Equities Rule 6.18(d). The amendment also deleted 
a definition of ``customer'' for purposes of proposed paragraph (g) 
that would have permitted a firm to have broker-dealer customers and 
still qualify as a ``proprietary trading firm'' for the purpose of 
the rule.
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    BATS proposes certain exceptions to the requirements that a member 
register two Series 24 qualified principals and one Series 27 qualified 
principal. First, the Exchange proposes that any member with 25 or 
fewer Authorized Traders that meets the definition of a ``proprietary 
trading firm,'' have at least one Series 24 registered principal. 
Second, under the proposed rule, the Exchange may waive the requirement 
to register two Series 24 qualified principals if the member can 
conclusively indicate that a waiver is warranted under the 
circumstances. With respect to the FINOP requirement, the Exchange may 
waive the requirement to register a Series 27 qualified FINOP if such 
registration is not required by the member's designated examining 
authority.\10\
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    \10\ BATS indicated that it did not want to independently 
require a member to have a FINOP. All members of BATS must be 
members of another SRO. See BATS Rule 2.5(4). The Commission 
understands that the vast majority of BATS members are also members 
of FINRA. All members of FINRA that are subject to Rule 15c3-1 under 
the Act must have a FINOP.
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BATS Rule 17.2

    Any member that conducts business on the Exchange as an Options 
Member is required by BATS Rules 17.1(b) and 17.2(g) to register an 
Options Principal with the Exchange who is responsible for that 
Member's options related activities on the Exchange. The Options 
Principal must qualify by passing the Registered Options Principal exam 
(``Series 4''). Accordingly, the proposed rule makes clear that 
paragraph (d) does not apply to a member that solely conducts business 
on the Exchange as an Options Member, and thus, that such a member is 
not also required to register Series 24 qualified principals with the 
Exchange.
    In addition to adopting the principal registration requirements 
described above, the Exchange proposes modifications to Interpretation 
and Policy .02, which currently requires Authorized Traders to complete 
continuing education requirements similar to those required by other 
national securities exchanges. Due to the addition of the principal 
registration requirements described above and the recent addition of an 
options principal requirement, the Exchange proposes to clarify that 
all Authorized Traders, principals, financial/operations principals and 
options principals are subject to continuing education requirements in 
order to maintain registration with the Exchange.\11\
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    \11\ The Exchange thus proposes to delete language from BATS 
Rule 17.2(g)(4) that states that an options principal is subject to 
continuing education requirements.
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Deadline for Compliance

    The Exchange has proposed a compliance date of September 30, 2010.

III. Comment Letter and BATS's Response

    The Commission received one comment letter on the proposed rule 
change.\12\ The commenter believed that BATS's requirement to register 
Authorized Traders is narrower than FINRA Rule 1031 which addresses 
registration of representatives. The commenter expressed concern that 
BATS's registration requirements for Authorized Traders excepted other 
associated persons that FINRA requires to be registered, and that only 
those persons supervising Authorized Traders would be required to 
register as a principal. The commenter also questioned BATS's 
requirement to register at least one FINOP, citing FINRA Rule 1022(b) 
which requires any person with a FINOP's responsibilities to register, 
including the chief financial officer.
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    \12\ See supra note 4.
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    In the BATS Response Letter,\13\ BATS explained that its 
registration rules, in particular, were tailored to ensure the 
qualification and competence of individuals responsible for sending 
orders to BATS and their supervisors. However, BATS stated that its 
rules, overall, apply to its members and their associated persons, not 
just Authorized Traders and those supervising them. In addition, BATS 
explained that, under its proposed rule, a FINOP is responsible for 
ensuring that a member firm complies with applicable financial and 
operational requirements, including those relating to the submission of 
financial reports and the maintenance of books and records. BATS stated 
that it is not requiring the chief financial officer to assume this 
responsibility as this person may not be the best person suited to be a 
FINOP, and is instead allowing the member firm to decide who needs to 
be registered as a FINOP.
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    \13\ See supra note 5.
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    The Commission believes it is reasonable for BATS to limit the 
application of its registration, examination, and continuing education 
requirements to those associated persons who conduct a securities 
business through BATS or who supervise such activity. BATS has 
represented that the scope of these requirements encompasses all 
associated persons entering orders at BATS, which the Commission 
believes provides appropriate breadth of coverage.

IV. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\14\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\15\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to, and perfect 
the mechanism of, a free and open market and a national market system 
and, in general, to protect investors and the public interest. The 
Commission believes that the proposed rule change is also consistent 
with Section 6(c)(3)(B) of the Act,\16\ which authorizes exchanges to 
prescribe standards of training, experience and competence for persons 
associated with exchange members, and gives exchanges the authority to 
bar a natural person from becoming a member or a person associated with 
a member, if the person does not meet the standards of training, 
experience and competence prescribed in the rules of the exchange. The 
Commission believes that the changes proposed by BATS to its rules will 
enhance the ability of member firms to comply with the Exchange's rules 
as well as with the Federal Securities laws.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78f(c)(3)(B).
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    Specifically, broker-dealers are required to supervise the 
activities of their associated persons.\17\ The associated persons of 
broker-dealers must register with the exchanges. Broker-dealers and 
exchanges have responsibilities under the Act with respect to 
statutorily disqualified

[[Page 43219]]

persons who seek to associate with a member firm.\18\
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    \17\ See Section 15(b)(4)(E) of the Act.
    \18\ See Section 6(c)(2) of the Act and Rule 19h-1 under the 
Act.
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    In order to meet its obligations under Section 6 of the Act \19\ to 
enforce compliance by member firms and their associated persons with 
the Act, the rules thereunder, and the exchange's own rules, an 
exchange must have baseline registration and examination or 
qualification requirements for all persons conducting business on an 
exchange, as well as for those supervising such activity. In addition, 
most SROs have continuing education requirements for registered persons 
which help ensure that associated persons are up to date on changes to 
rules and regulations that govern their activities. Furthermore, an 
exchange must know if an associated person of a member firm is subject 
to a statutory disqualification.\20\ This information is elicited by 
the Uniform Application for Securities Industry Registration or 
Transfer (``Form U4''), which is used by most exchanges and FINRA to 
register associated persons.
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    \19\ Section 6 requires exchanges to have the ability to enforce 
compliance by their members and associated persons with the federal 
securities laws and with their own rules. 15 U.S.C. 78f.
    \20\ In addition, the Commission believes that it is important 
to ensure that information, such as whether an associated person is 
subject to a statutory disqualification, is available to exchanges 
and other regulators, including the Commission and the state 
securities regulators, through FINRA's Central Registration 
Depository System (``WebCRD'') as well as members of the public 
through BrokerCheck, which derives information from WebCRD.
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    The Commission believes that the requirement that firms have a 
minimum of two principals responsible for oversight of Authorized 
Traders and activity on BATS who must be registered and pass the Series 
24 exam should help BATS strengthen the regulation of its member firms. 
Requiring a minimum of two persons, both of whom meet specified 
proficiency standards, should help ensure that member firms have 
adequate supervision, and that those overseeing member firms are 
prepared for the responsibility. The nature of the firm, however, may 
dictate that more than two principals are needed to provide appropriate 
supervision. In addition, the Commission believes that requiring chief 
compliance officers and any employee operating in the capacity of a 
FINOP to register with the Exchange as principals and take either the 
Series 24 or Series 27, respectively, is appropriate based on the 
heightened level of accountability inherent in the duty of overseeing 
compliance by an Exchange member, and in the oversight and preparation 
of financial reports and the oversight of those employed in the 
financial and operational capacities at each firm.
    The Commission believes BATS's proposed exceptions from the above 
requirements are appropriate. The Commission notes that a member 
seeking a waiver from BATS's FINOP requirement must prove that it has 
satisfied the financial and operational requirements of its designated 
examining authority applicable to registration.\21\ Additionally, any 
member seeking an exception from BATS's requirement that each firm have 
two principals must provide evidence that conclusively indicates to the 
Exchange that only one principal is necessary. The Commission expects 
this authority to be used sparingly as principals are charged with 
oversight of the operations of member firms, and provide the first line 
of defense in ensuring that member firms are complying with the rules 
of the exchange as well as the federal securities laws.
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    \21\ See footnote 10 infra.
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    Additionally, the Commission believes that the proposed rule change 
is consistent with the principles of Section 11A(a)(1) \22\ of the Act 
in that it seeks to assure fair competition among brokers and dealers 
and among exchange markets. The Commission believes that the proposed 
rule will promote uniformity of regulation across markets, thus 
reducing opportunities for regulatory arbitrage. BATS' proposed rule 
change helps ensure that all persons conducting a securities business 
through BATS are appropriately supervised, as the Commission expects of 
all SROs. In addition, the exceptions to the general rules in BATS's 
proposed rule change are substantively the same as exceptions provided 
to similar rules at other SROs.
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    \22\ 15 U.S.C. 78k-1(a)(1).
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    Finally, the Commission believes that the compliance date proposed 
by the Exchange of September 30, 2010 will provide the Exchange's 
members adequate time to pass any qualification examinations necessary 
to become compliant with the proposed rules.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-BATS-2010-008), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18037 Filed 7-22-10; 8:45 am]
BILLING CODE 8010-01-P


