
[Federal Register Volume 77, Number 45 (Wednesday, March 7, 2012)]
[Notices]
[Pages 13668-13675]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5555]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66497; File No. SR-Phlx-2012-23]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Amend Registration and Qualification 
Requirements

March 1, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on February 16, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The

[[Page 13669]]

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 delete Rule 604 as well as amend and adopt 
several new rules governing the registration and qualification of 
members and persons associated with \3\ member organizations, as 
described below. The text of the proposed rule change is available on 
the Exchange's Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, at the principal office of the Exchange, 
and at the Commission's Public Reference Room.
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    \3\ The term ``associated person'' or ``person associated with'' 
a member organization means any partner, officer, director, or 
branch manager of an Exchange member organization or applicant (or 
person occupying a similar status or performing similar functions), 
any person directly or indirectly controlling, controlled by, or 
under common control with such member organization or applicant, or 
any employee of such member or applicant, except that any person 
associated with a member organization or applicant whose functions 
are solely clerical or ministerial shall not be included in the 
meaning of such term for purposes of the Exchange Rules. See Rule 
1(b).
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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 purpose of the proposed rule change is to strengthen the 
Exchange's current registration provisions in a number of ways. In 
2010,\4\ in connection with the Exchange's proposal to launch the 
Exchange's equity trading platform for NMS Stocks, NASDAQ OMX PSX 
(``PSX''),\5\ the Exchange amended Rule 604 to adopt paragraph (h) to 
govern the registration of representatives and Supplementary Material 
.04 to Rule 604 regarding the specific category of such registration. 
In addition, with respect to principal registration, the Exchange 
adopted paragraph (g), Principal Registration, and Supplementary 
Material .01-.03 governing the specific categories of principal 
registration, to require that every member organization covered by 
those rules have at least two registered principals as well as a 
Financial/Operations Principal. The Exchange also adopted paragraph (i) 
to establish which persons are exempt from registration. These 
provisions became applicable only to PSX users pursuant to paragraph 
(f). In that filing, the Exchange stated:
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    \4\ See Securities Exchange Act Release No. 62776 (August 26, 
2010), 75 FR 53727 (September 1, 2010) (SR-Phlx-2010-91).
    \5\ See Securities Exchange Act Release No. 62877 (September 9, 
2010), 75 FR 56633 (September 16, 2010) (SR-Phlx-2010-79).

    ``The Exchange intends to separately revise its registration and 
qualification rules related to activity other than business 
conducted on PSX, including its options business. The Exchange 
understands that other self-regulatory organizations are expected to 
adopt a framework that requires more fulsome registration and 
qualification requirements clearly spelled out in rules. The 
Exchange supports the Commission's commitment to ensure that such 
rules are adopted by all self-regulatory organizations on a 
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consistent basis.''

    Accordingly, the Exchange is now proposing to extend the principal 
and representative registration requirements of Rule 604(g) and (h) to 
all members, member organizations and associated persons by adopting 
Rules 611-616 to replace Rule 604. As a result of the new registration 
requirements, additional persons will become subject to the Exchange's 
continuing education requirement in Rule 640.

Background and Current Requirements

    Currently, Rules 604(a)-(e) apply to all member organizations and 
generally require the Series 7 examination for Registered 
Representatives,\6\ off-floor traders \7\ and persons compensated 
directly or indirectly for the solicitation or handling of business in 
securities who are not otherwise required to register with the Exchange 
by Rule 604(a).\8\ Furthermore, Rule 604(f) provides that members and 
persons associated with member organizations that are registered with 
the Exchange for the purpose of trading NMS Stocks \9\ through the 
facilities of the Exchange, which is the PSX platform, are subject to 
the provisions of Rule 604(g) and (h) governing principal and 
representative registration, respectively. Thus, these provisions 
currently cover members that trade on PSX, and are substantially 
similar to the rules of The NASDAQ Stock Market LLC (``NASDAQ''), 
Financial Industry Regulatory Authority (``FINRA'') and NASDAQ OMX BX, 
Inc. (``BX'') requiring PSX users to register and qualify 
representatives and principals with the Exchange in accordance with 
such rules.
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    \6\ See Rule 604(a).
    \7\ See Rule 604(e).
    \8\ See Rule 604(d).
    \9\ See Rule 1(t).
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Proposal

    The Exchange is proposing to extend the current principal 
requirement beyond PSX users to include all member organizations, 
including those who trade options. This more extensive principal 
requirement will be embodied in new Rules 611 and 612, which are 
substantially similar to current Rule 604(g) and Supplementary Material 
.01-.03.
    In connection with strengthening its registration rules, the 
Exchange is proposing to reorganize and renumber its registration rules 
to better align with those of NASDAQ and FINRA, albeit within its own 
rule numbering structure. The following summarizes the new rule 
numbering structure:

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                                                                                   New phlx rule
          Current phlx rule                          Topic                          NASDAQ
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604(g)........................................  Principal Registration..........             611            1021
604.01-.03....................................  Categories of Principal                      612            1022
                                                 Registration.
604(h)........................................  Representative Registration.....             613            1031
604.04........................................  Categories of Representative                 613            1032
                                                 Registration.
604(i)........................................  Persons Exempt from Registration             614            1060
604(j)........................................  Waiver..........................             615         1070(d)
None..........................................  Electronic Filing...............             616            1140
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[[Page 13670]]

Representative Registration

    Rule 604(h) currently governs the registration of representatives 
\10\ with the Exchange; specifically, Rule 604(h)(1) requires that all 
persons engaged or to be engaged in the investment banking or 
securities business \11\ of a member organization who are to function 
as representatives shall be registered as such with the Exchange 
through WebCRD \12\ in the category of registration appropriate to the 
function to be performed as specified in Supplementary Material .04 of 
Rule 604. Before their registration can become effective, they shall 
pass the Series 7 examination. Rule 604(h) is applicable today only to 
PSX users pursuant to Rule 604(f).
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    \10\ The term ``representative'' is defined in Rule 1 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. To the extent provided in Rule 604, all representatives 
are required to be registered with the Exchange, and representatives 
that are so registered are referred to herein as ``Registered 
Representatives.'' See Rule 1(cc).
    \11\ The term ``investment banking or securities business'' 
means the business, carried on by a broker or dealer, of 
underwriting or distributing issues of securities, or of purchasing 
securities and offering the same for sale as a dealer, or of 
purchasing and selling securities upon the order and for the account 
of others. See Rule 1(m). Of course, the federal securities laws may 
require broker-dealers to become members of the FINRA in order to 
perform some of these functions. See e.g., 15 U.S.C. 78o(b)(8).
    \12\ WebCRD is FINRA's automated Central Registration 
Depository.
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    The provisions currently contained in Rule 604(h) are proposed to 
be moved to new Rule 613, Representative Registration, in substantially 
the same form, except with respect to trading floor personnel subject 
to Rule 620. Specifically, new Rule 613(a) will expressly state that, 
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), 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 in the category of registration appropriate to the function to 
be performed as specified in Rule 613(e). This is the only change to 
the language currently in Rule 604(h) that is being moved to new Rule 
613.
    Accordingly, trading floor personnel will continue to be required 
to register pursuant to Rule 620, in lieu of new Rule 613,\13\ such 
that trading floor personnel will not be required to successfully 
complete the Series 7 examination, as long as their activities are 
limited to the trading floor. The Exchange believes that it is 
appropriate to permit trading floor members and associated persons to 
operate pursuant to a registration and qualification framework tailored 
to their specific functions. These functions include handling and 
executing electronic and phoned-in orders on the trading floor, as well 
as providing markets, both verbally and electronically. Members on the 
trading floor will continue to be subject to the Exchange's Trading 
Floor Qualification Examination in lieu of the Series 7, which the 
Exchange believes is appropriate because the examination focuses on the 
rules and procedures most applicable to floor members.\14\ For example, 
there are questions regarding the quoting obligations of Rule 1014(b), 
crossing orders pursuant to Rule 1064, and Floor Broker obligations in 
Rule 1063.
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    \13\ However, trading floor personnel and members on the trading 
floor will be subject to new principal registration requirements, as 
described below.
    \14\ The Exchange recently revised this examination. See 
Securities Exchange Act Release No. 63603 (December 22, 2010), 75 FR 
82419 (December 30, 2010) (SR-Phlx-2010-180).
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    Respecting trading floor members, Rule 620 requires registration on 
Form U4 through WebCRD. Rule 620 will now require all trading floor 
personnel, including clerks, interns and any other associated persons, 
of a member organization not required to register pursuant to Rule 
620(a) to register on Form U4 through WebCRD. Accordingly, the same 
registration information will be available electronically within WebCRD 
for trading floor members and associated persons as is available for 
persons registered as General Securities Representatives.
    In terms of the actual category of registration that applies, 
currently, Supplementary Material .04 to Rule 604, titled Categories of 
Representative Registration--General Securities Representative, 
contains the basic requirement \15\ that each member and each person 
associated with a member organization who is included within the 
definition of a representative in Rule 1(cc) is required to register 
with the Exchange as a General Securities Representative and shall pass 
the Series 7 examination before such registration may become effective. 
The appropriate registration category on WebCRD is ``GS.'' This 
provision is not changing, and was intended to capture traditional 
securities personnel in a rule similar to that of several other 
SROs.\16\ The Exchange continues to believe that this provision is 
broad and should not generate gaps that permit a member organization to 
operate differently than under the registration rules of BX, NASDAQ or 
FINRA. The Exchange proposes to move the provisions of Rule 604(h) into 
Rule 613 and Supplementary Material .04 of Rule 604 into Rule 613(e). 
The Exchange believes that it is clearer to place the ``registered 
representative'' requirement and category of registration all in one 
rule, even though that differs from the FINRA and NASDAQ rules 
slightly.
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    \15\ This provision is the same as BX Rule 1032.
    \16\ See e.g., BX Rules 1031 and 1032, NASDAQ rules 1031 and 
1032, and NASD Rules 1031 AND 1031.
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    The Exchange also proposes to adopt a new limited category of 
representative registration as Rule 613(f). The Exchange has been 
working with other exchanges and FINRA to develop a registration 
category and qualification examination for proprietary traders in lieu 
of the Series 7, which is now available through WebCRD. Accordingly, 
the Exchange proposes to recognize the new registration category, 
Proprietary Trader, and related examination, the Series 56,\17\ and to 
incorporate it into Rule 613(f), subject to filing the Series 56 
content outline with the Commission.\18\ The Exchange intends to file 
the Series 56 content outline with the Commission shortly.\19\ Proposed 
Rule 613(f) would provide that members and associated persons engaged 
solely in proprietary trading, market making or effecting transactions 
on behalf of a broker-dealer account may register instead as a 
Proprietary Trader and pass the Series 56 examination.\20\ The term 
``persons engaged in effecting transactions on behalf of a broker-
dealer account'' is equivalent to persons engaged in proprietary 
trading or market making, because it covers persons who do not deal 
with the public. For example, this would include both Floor Brokers on 
the Exchange's trading floor as well as persons performing brokerage 
functions

[[Page 13671]]

off the trading floor (``upstairs'').\21\ The Exchange believes that 
the Series 56 helps ensure that such persons are qualified, because it 
addresses industry topics that establish the foundation for the 
regulatory and procedural knowledge necessary for individuals required 
to register as a Proprietary Trader.
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    \17\ This new examination, the Series 56, would also serve as a 
prerequisite for a new principal registration category, which the 
Exchange would recognize; the Series 24 would be the appropriate 
examination for the new principal registration category, as 
described below.
    \18\ See e.g., Securities Exchange Act Release No. 64699 (June 
17, 2011) (SR-CBOE-2011-056).
    \19\ The Exchange is also proposing that the Series 56 serve as 
a prerequisite to the Series 24, as described further below.
    \20\ See supra note 17.
    \21\ This provision is the same as the provision in Chicago 
Board Options Exchange Incorporated (``CBOE'') rules which requires 
that an individual Permit Holder or associated person who effects 
transactions on behalf of a broker-dealer account register and pass 
the Series 56 examination. See CBOE Rule 3.6A, Interpretation and 
Policy .06.
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    The Exchange is proposing to delete Rule 604 in its entirety.\22\ 
With respect to paragraphs (a), (d) and (e), the Exchange believes that 
the requirements of new Rule 613 cover every person subject to 
registration as a representative and the Series 7 examination. The 
Exchange believes that Rule 613 is broader, because it is not limited 
to member organizations for which the Exchange is the designated 
examining authority (``DEA'') nor is it limited to specific categories 
of persons, such as Rule 604(e). In addition, the language of Rule 613 
more closely aligns with the rules of FINRA and NASDAQ, which should 
facilitate compliance by broker-dealers. Thus, although Rule 604 is 
being deleted, the same persons will continue to be required to 
successfully complete the Series 7 examination and be registered as a 
``Registered Representative'' on Form U4 through WebCRD. This proposal 
will extend the requirements of Rule 604(h) to all member 
organizations, whereas today Rule 604(h) only applies to member 
organizations registered to use PSX.\23\
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    \22\ The Exchange proposes to amend the following additional 
rules to replace references to Rule 604 with the new applicable rule 
number: Rule 1(cc), Rule 1090, Rule 3202, Equity Floor Procedure 
Advice (``EFPA'') A-7 and Options Floor Procedure Advice (``OFPA'') 
F-34. Rule 3202 will now refer to the applicability of Rules 611-616 
to PSX users.
    \23\ See Rule 604(f).
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Principal Registration

    With respect to principal registration on the Exchange, Rule 604(g) 
\24\ currently provides that certain member organizations must register 
at least two principals with the Exchange,\25\ unless an exception 
applies. The Exchange is proposing to adopt new Rule 611, Principal 
Registration, and to move the provisions of existing Rule 604(g) over 
into this new rule. Accordingly, the principal registration rules will 
now apply beyond PSX users to all Phlx member organizations, with the 
addition of two new registration categories to satisfy the principal 
requirement: Registered Options Principal and Proprietary Trader 
Principal.
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    \24\ This rule is similar to NASDAQ Rule 1021, BX Rule 1021 and 
NASD Rule 1021.
    \25\ All persons who engage in specified supervisory functions 
will be registered as principals. All principals are first required 
to register as and qualify as Representatives.
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    Phlx rules will require that each principal must successfully 
complete the General Securities Principal Examination (``Series 24'') 
and submit a Form U4 via WebCRD reflecting registration as such, using 
the category ``GP,'' unless a different category of principal 
registration applies to such person. Specifically, new Rule 611 will 
provide that all persons engaged or to be engaged in the investment 
banking or securities business of a member organization who are to 
function as principals shall be registered as such with the Exchange 
through WebCRD in the category of registration appropriate to the 
function to be performed as specified in Rule 612, Categories of 
Principal Registration, which replaces existing Supplementary Material 
.01-.03 of Rule 604. Before their registration can become effective, 
they shall pass a qualification examination for principals appropriate 
to the category of registration. Persons associated with a member 
organization who are actively engaged in the management of the member 
organization's investment banking or securities business, including 
supervision, solicitation, conduct of business or the training of 
persons associated with a member organization for any of these 
functions are principals. Such persons shall include: sole proprietors, 
officers, partners, managers of offices of supervisory 
jurisdiction,\26\ and directors of corporations. This requirement will 
now appear in Rule 611(b) and apply to all member organizations.
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    \26\ The Exchange defined the term ``office of supervisory 
jurisdiction'' to mean any office of a member organization at which 
any one or more of the following functions take place: order 
execution and/or market making; structuring of public offerings or 
private placements; maintaining custody of customers' funds and/or 
securities; final acceptance (approval) of new accounts on behalf of 
the member organization; review and endorsement of customer orders; 
final approval of advertising or sales literature for use by persons 
associated with the member organization, pursuant to Rule 605, 
except for an office that solely conducts final approval of research 
reports; or responsibility for supervising the activities of persons 
associated with the member organization at one or more other branch 
offices of the member organization. This definition is drawn from 
NASD Rule 3010. The Exchange is adopting the reference to this term 
in order to cover these managers in the new principal registration 
requirement. The Exchange is not, at this time, adopting a 
comprehensive program with regard to such offices, such as that 
found in NASD Rule 3010. See proposed Rule 611(b).
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    Rule 604(g)(5) currently requires at least two registered 
principals, which will now be contained in new Rule 611(e).\27\ 
Specifically, an Exchange member organization, except a sole 
proprietorship, shall 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 \28\ with 25 or fewer registered 
representatives shall only be required to have one officer or partner 
who is registered as a principal. This exception to the two principal 
requirement is similar to that of several other exchanges and reflects 
that such firms do not necessitate the same level of supervisory 
structure as firms who have customers or larger firms. This exception 
is not changing and will now be in Rule 611(e)(i), applicable to all 
member organizations.\29\
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    \27\ All persons who engage in specified supervisory functions 
must be registered as Principals.
    \28\ The term ``proprietary trading firm'' means a member 
organization or applicant with the following characteristics: (A) 
The applicant is not required by Section 15(b)(8) of the Act to 
become a FINRA member but is a member of another registered 
securities exchange not registered solely under Section 6(g) of the 
Act; (B) all funds used or proposed to be used by the applicant for 
trading are the applicant's own capital, traded through the 
applicant's own accounts; (C) the applicant does not, and will not 
have customers; and (D) all Principals and Representatives of the 
applicant acting or to be acting in the capacity of a trader must be 
owners of, employees of, or contractors to the applicant. See 
proposed Rule 611(e)(i).
    \29\ Member organizations operating on the trading floor will be 
subject to the minimum ``two principal'' requirement, except to the 
extent that the ``proprietary trading firm'' exception permits 
certain firms to have one principal.
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    Rule 611(e)(ii) will provide, like Rule 604(g) currently does, that 
the Exchange may waive the two principal requirement in situations that 
indicate conclusively that only one person should be required to 
register as a principal. This provision is identical to that of several 
other exchanges, and the Exchange believes that such waiver is 
appropriate in certain situations, but should be carefully applied; for 
example, the Exchange may determine to apply this provision to a very 
small firm, with only a few employees in one location.
    To help determine how a person should register as a principal, 
Supplementary Material .01-.03 to Rule 604 currently enumerates the 
three categories of principal registration. These categories will now 
be in new Rule 612. First, Rule 604.01, titled General Securities 
Principal, provides that each member or person associated with a member 
organization who is included within the definition of

[[Page 13672]]

principal, and 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 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 in 
Rule 612.\30\ The Exchange proposes to move these provisions of Rule 
604.01 to new Rule 612(a), also titled General Securities Principal.
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    \30\ However, pursuant to Rule 604.01(c), a person registered 
solely as a General Securities Principal shall not be qualified to 
function as a FINOP or a Limited Principal--General Securities Sales 
Supervisor unless that person is also qualified and registered as 
such.
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    The Exchange also proposes to recognize two new principal 
registration categories. First, the Exchange proposes to adopt Rule 
612(d) in order to permit Registered Options Principals to satisfy the 
principal registration requirements of Rule 611. Specifically, each 
member or person associated with a member organization who is included 
within the definition of principal, and each person designated as a 
Chief Compliance Officer on Schedule A of Form BD of a member 
organization may register as a Registered Options Principal and 
successfully complete the Series 4 examination, instead of registering 
as a General Securities Principal and successfully completing the 
Series 24 examination, if such person's activities are limited solely 
to options. Specifically, Rule 612(d) will provide that such person's 
supervisory responsibilities in the investment banking and securities 
business must be limited to the options activities of a member 
organization, that he or she must be registered pursuant to Exchange 
Rules as a General Securities Representative, that he or she is 
qualified to be so registered by passing the Series 4 examination, and 
that he or she shall not be qualified to function in a principal 
capacity with responsibility over any area of business activity other 
than the supervision of persons involved exclusively in options 
activity. The Exchange believes that the Registered Options Principal 
category is appropriate for a principal whose activities are limited 
solely to options.\31\ The Series 4 examination covers options-related 
topics, which should help ensure that principals whose activities are 
limited to options are properly qualified. Furthermore, Rule 1024 
currently requires persons who supervise options sales practice 
activities to register as a Registered Options Principal; thus, the 
Exchange believes that some member organizations have already 
registered certain associated persons in this category, such that these 
persons could satisfy the new principal registration requirement for 
applicable firms.
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    \31\ This is similar to BATS Exchange, Inc. (``BATS'') Rule 
17.1(g).
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    Second, the Exchange proposes to recognize the new Proprietary 
Trader Principal category as a limited principal category in Rule 
612(e). It would apply to persons whose supervisory responsibilities in 
the investment banking and securities business are limited to the 
activities of a member organization that involve proprietary trading, 
market making and effecting transactions on behalf of broker-dealers. 
It would require that he or she be registered pursuant to Exchange 
Rules as a Proprietary Trader, be qualified to be so registered by 
passing the Series 24 examination, and not function in a principal 
capacity with responsibility over any area of business activity other 
than proprietary trading, market making and effecting transactions on 
behalf of broker-dealer accounts.
    The Exchange has been working with other exchanges and FINRA to 
develop this registration category, which is limited to persons who 
supervise persons engaged in proprietary trading, market making or 
effecting transactions on behalf of broker-dealer accounts.\32\ This 
category is in lieu of registration as a General Securities Principal, 
for which the prerequisite qualification examination is the Series 7. 
The appropriate qualification examination for the proposed new 
registration category of Proprietary Trader Principal is the Series 24, 
which is the same qualification required for registration as a General 
Securities Principal; no new examination has been developed. However, 
the prerequisite examination for the new Proprietary Trader Principal 
category is the new Series 56, which is described above. Accordingly, a 
person who has passed the Series 56 can register as a Proprietary 
Trader Principal and take the Series 24 examination, under this 
proposal, but cannot register as a General Securities Principal without 
first qualifying as a General Securities Representative and passing the 
Series 7. Thus, although the Series 24 will now be the appropriate 
qualification examination for both categories (General Securities 
Principal and Proprietary Trader Principal), different prerequisites 
apply and different registration categories result.
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    \32\ In effect, supervisors who supervise persons engaged only 
in activities covered by the proposed new Proprietary Trader 
registration category can meet the principal registration 
requirement by registering as a Proprietary Trader Principal.
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    The new Proprietary Trader Principal category is expected to become 
available to Phlx member organizations in WebCRD soon and the Exchange 
will communicate the implementation date to the membership. The 
Exchange believes that the new principal registration category is an 
appropriate corollary to the new representative registration category 
discussed above and reflects a substantial joint-exchange effort to 
develop a registration framework specific to principals supervising 
persons engaged in proprietary trading, market making and effecting 
transactions on behalf of broker-dealer accounts. Furthermore, the 
Exchange believes that the Series 24 is the appropriate examination for 
Proprietary Trader Principals, because it tests knowledge and 
understanding of supervision-related rules.
    Both the Registered Options Principal and the Proprietary Trader 
Principal registrations count towards the minimum two principal 
requirement in Rule 611. The Exchange believes that this is appropriate 
because both of these principals are subject to a comprehensive 
qualification examination that covers their area of supervision. Of 
course, if the member organization is involved in activity other than 
what a Proprietary Trader Principal and a Registered Options Principal 
are permitted under these rules to supervise, an additional principal 
would be required.
    Two other provisions of the current principal registration 
framework are also becoming applicable to all member organizations, in 
addition to the basic principal requirement. Rule 604.02, titled 
Limited Principal--Financial and Operations, currently requires that 
each member organization of the Exchange that is subject to Rule 604(g) 
and that is operating pursuant to the provisions of SEC Rule 15c3-
1(a)(1)(ii), (a)(2)(i) or (a)(8), designate as Limited Principal--
Financial and Operations (``FINOP'') those persons associated with it, 
at least one of whom shall be its chief financial officer, who perform 
the following duties: final approval and responsibility for the 
accuracy of financial reports submitted to any duly established 
securities industry regulatory body; final preparation of such reports; 
supervision of individuals who assist in the preparation of such 
reports; 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; supervision and/or 
performance of the

[[Page 13673]]

member organization's responsibilities under all financial 
responsibility rules promulgated pursuant to the provisions of the Act; 
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 any other matter involving 
the financial and operational management of the member organization. 
Each FINOP must register with the Exchange and pass the Series 27 
examination. The Exchange proposes to move this provision to Rule 
612(b) and extend it beyond PSX users, including trading floor members. 
This provision is intended to ensure that persons handling the 
financial affairs of a firm are properly registered and qualified. This 
requirement also harmonizes the Exchange's rules with those of other 
exchanges \33\ and recognizes the importance and complexity of the 
rules governing financial responsibility for broker-dealers.\34\ 
Although the FINOP is a type of principal registration, because its 
scope is limited to financial matters, the FINOP does not count toward 
the two principal requirement of Rule 611.
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    \33\ See e.g., CBOE Rule 3.6A(b).
    \34\ See e.g., Phlx Rule 703.
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    Rule 604.03, Limited Principal--General Securities Sales 
Supervisor, is also being extended to all member organizations as new 
Rule 612(c). It currently provides that each person associated with a 
member organization who is included in the definition of principal in 
Rule 604(g) (changing to Rule 611) may register with the Exchange as a 
Limited Principal--General Securities Sales Supervisor, or ``SU,'' if 
applicable. This provision is being moved, unchanged, in its entirety 
to new Rule 612(c). Like the FINOP, the General Securities Sales 
Supervisor does not count toward satisfying the two principal 
requirement of Rule 611.
    In total, although various other supervisory rules currently 
operate, such as Phlx Rule 748,\35\ extending these principal 
registration requirements beyond Exchange member organizations doing 
business on PSX should strengthen the framework of supervisory rules. 
The Exchange believes that the broader application of the principal 
registration requirement is an important change. The Exchange also 
believes that offering categories of limited principal registration 
should help ensure that principals are properly qualified for their 
specific functions, such as supervising persons involved in options and 
proprietary trading.
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    \35\ Currently, Rule 748, Supervision, establishes the 
supervisory requirement for member organizations, including that all 
locations and activities of a member organization be supervised by a 
qualified supervisor.
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Other Rules

    The Exchange proposes to renumber Rule 604(i), Persons Exempt from 
Registration, as new Rule 614. No changes are proposed thereto. These 
registration exemptions will now apply to all member organizations and 
are intended to make clear that registration of certain, specific 
persons is not necessary, because of their functions. This provision is 
based on exemptions contained in, for example, NASDAQ Rule 1060 and BX 
Rule 1060.
    Rule 604(i)(2) provides that member organizations, and persons 
associated with a member organization, may pay nonregistered foreign 
persons transaction-related compensation based upon the business of 
customers they direct to member organizations under certain conditions 
detailed in the rule. This provision is intended to cover the payment 
of fees to finders,\36\ and is being moved to Rule 614(b), without 
change.
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    \36\ This provision is identical to NASDAQ Rule 1060(b) and BX 
Rule 1060(b).
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    The Exchange proposes to renumber Rule 604(j) as Rule 615, Waiver 
of Requirements. Currently, Rule 604(j) provides that 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. Advanced 
age or physical infirmity will not individually of themselves 
constitute sufficient grounds to waive a Qualification Examination. 
Experience in fields ancillary to the investment banking or securities 
business may constitute sufficient grounds to waive a Qualification 
Examination. The rule is not changing and is based on corresponding 
rules of FINRA, NASDAQ and BX.
    The Exchange proposes to adopt Rule 616, Electronic Filing 
Requirements for Uniform Forms. Rule 616(a), WebCRD Filing, will 
provide that forms required to be filed under the Rule 600 Series shall 
be filed electronically through WebCRD.\37\ Currently, some of the 
rules in the 600 series state this and others do not, such that 
adopting a separate, new rule should be clearer. Similarly, new Rule 
616(b), Form U4 and U5 Filing Requirements, will require that initial 
filings and amendments of Forms U4 and U5 be submitted electronically. 
Furthermore, as part of the member organization's recordkeeping 
requirements, it shall retain such records 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, and make such records 
available promptly upon regulatory request. In addition, every 
application for registration filed with the Exchange shall be kept 
current at all times by supplementary amendments via electronic filing 
or such other process as the Exchange may prescribe. Such amendments 
shall be filed not later than 30 days after the applicant learns of the 
facts or circumstances giving rise to the need for the amendment. These 
requirements also currently may appear in various rules but not each 
applicable rule, such that adopting a separate, new rule should be 
clearer.\38\
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    \37\ This is similar to International Securities Exchange, LLC 
(``ISE'') Rules 313.01 and .02.
    \38\ This rule is similar to NASDAQ Rule 1031(d)(3).
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    The Exchange also proposes to amend OFPA F-34 and EFPA A-7, both 
titled Failure to Timely Submit Amendments to Form U4, Form U5 and Form 
BD; these are the corollary minor rule plan provisions for Rule 623, 
which are being amended only to add new rule numbers 611-613 and 616 
and to delete reference to Rule 604.
    The Exchange proposes to amend Rule 620, Trading Floor 
Registration, to specifically state the registration categories 
governed by the rule, to require all trading floor associated persons 
of member organizations to register via Form U4, to delete unnecessary 
language and to strengthen a time requirement. Specifically, the 
Exchange proposes to add to Rule 620(a), which requires the 
registration of Floor Brokers, Specialists and Registered Options 
Traders on an Exchange trading floor via Form U4, that the appropriate 
registration category on such form is ``Member Exchange (``ME'')'' 
under ``PHLX.'' This is intended to specify registration categories in 
the Exchange's rules whenever possible, for clarity. The Exchange notes 
that this provision covers members operating on the trading floor and 
that such members are required to successfully complete the Exchange's 
Trading Floor Qualification Examination. The Exchange also proposes to 
delete a reference in Rule 620(a) to updating Form U4 within a certain 
time period, because this requirement will now appear in new Rule 616, 
as explained above.
    Currently, Rule 620(b) covers all trading floor personnel, such as 
clerks, interns, and other associated persons of member organizations, 
not required to register under Rule 620(a) and requires

[[Page 13674]]

them to register with the Exchange on a form supplied by the Exchange. 
The Exchange proposes to significantly strengthen this requirement by 
requiring these individuals to be registered on Form U4 on WebCRD, not 
just with the Exchange. Accordingly, these associated persons will be 
subject to the comprehensive disclosure obligations of Form U4, which 
the Exchange believes is an important enhancement. For example, once a 
Form U4 submission is required, the background information of these 
individuals will be available electronically within WebCRD for access 
by the appropriate regulators. The specific registration category will 
be ``Floor Employee (``FE'')'' under ``PHLX,'' which will be stated 
expressly in the rule. The Exchange does not intend to require a 
qualification examination for non-member trading floor personnel at 
this time. The Exchange does not believe that the Series 7, Series 56 
or the Exchange's own Trading Floor Qualification Examination are 
appropriate for the limited functions of a trading floor clerk, because 
these persons are not members trading on the floor and they are 
supervised by members. These persons do not execute transactions on the 
Exchange, but rather enter orders and report trades, for example, and 
related clerical functions.\39\ Specifically, the types of questions 
covered by the Exchange's Trading Floor Qualification Examination 
include announcing trades, trade allocation and floor broker 
responsibilities, all of which are rules that apply to trading floor 
members, but not clerks or off-floor persons.
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    \39\ See Rule 1090.
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    The Exchange also proposes to amend Rule 620(b) to provide that 
following the termination of, or the initiation of a change in the 
status of any such personnel of a member organization who has been 
issued an Exchange access card and a trading floor badge, the 
appropriate Exchange form must be completed, approved and dated by a 
member organization principal, officer, or member of the member 
organization with authority to do so, and submitted to the appropriate 
Exchange department no later than 9:30 a.m. the next business day by 
the member organization employer. The Exchange proposes to strengthen 
this requirement by adding that such submission should occur, rather 
than no later than 9:30 a.m. the next business day, as soon as possible 
but no later than 9:30 a.m. the next business day.
    Lastly, the Exchange proposes to amend Rule 623, Fingerprinting, to 
adopt a new paragraph (b), which is similar to NASDAQ Rule 1140(d). 
Upon filing an electronic Form U4 pursuant to Rule 616 on behalf of a 
person applying for registration, a member shall promptly submit 
fingerprint information for that person. The Exchange may make a 
registration effective pending receipt of the fingerprint information. 
The fingerprinting requirement is not new, but rather is being codified 
into the appropriate rule.\40\
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    \40\ OFPA F-25 and EFPA A-4 are the corollary minor rule plan 
provisions for Rule 623; these are not changing.
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Conclusion

    The Exchange believes that these proposed new rules should form a 
solid framework for the registration and qualification of all member 
organizations and their personnel. As a result of the new registration 
requirements, additional persons will become subject to the Exchange's 
continuing education requirement in Rule 640. The Exchange will 
announce to the membership when these new requirements will be 
implemented and available for member organizations to access.
    The Exchange proposes to require that member organizations comply 
with the new registration and qualification requirements within 90 days 
of the Exchange's issuance of an alert to its membership, announcing 
Commission approval; respecting any registration category and related 
examination that has a prerequisite, the Exchange proposes to require 
its member organizations to comply therewith 90 days after successful 
completion of the prerequisite exam.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \41\ in general, and furthers the objectives of: (1) 
Section 6(c)(3)(B) of the Act,\42\ pursuant to which a national 
securities exchange prescribes standards of training, experience and 
competence for members and their associated persons; and (2) Section 
6(b)(5) of the Act,\43\ in that it is designed, among other things, 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, by 
extending its registration and qualification requirements beyond PSX 
users. Overall, as discussed in more detail above, the Exchange 
believes that these new requirements bolster the integrity of the 
Exchange by helping to ensure that all associated persons 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.
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    \41\ 15 U.S.C. 78f(b).
    \42\ 15 U.S.C. 78(c)(3)(B).
    \43\ 15 U.S.C. 78f(b)(5).
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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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2012-23 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2012-23. This file 
number should be included on the

[[Page 13675]]

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 Web site 
(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 Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10 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; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Phlx-2012-23 and should be submitted on or before March 
28, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5555 Filed 3-6-12; 8:45 am]
BILLING CODE 8011-01-P


