[Federal Register Volume 83, Number 199 (Monday, October 15, 2018)]
[Notices]
[Pages 51988-52005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22295]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84386; File No. SR-NASDAQ-2018-078]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend, Reorganize and Enhance Its Membership, Registration and 
Qualification Rules

October 9, 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, The Nasdaq Stock Market LLC (``Nasdaq'' 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://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
Overview
    Nasdaq has adopted registration requirements to ensure that 
associated persons 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's investment banking or 
securities business who are to function as representatives or 
principals register with the Exchange in each 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.
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    \3\ See, e.g., Exchange Rules 1021, Registration Requirements, 
1022, Categories of Principal Registration, 1031, Registration 
Requirements, 1032, Categories of Representative Registration, and 
1041, Registration Requirements for Assistant Representatives.
    \4\ See Rule 1060, Persons Exempt from Registration.
    \5\ See Rule 1120, Continuing Education Requirements.
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    In 2006 Nasdaq separated from the National Association of 
Securities Dealers, Inc. (formerly ``NASD'' and now the Financial 
Industry Regulatory Authority or ``FINRA'') and began to operate as a 
national securities exchange. At that time it adopted a rulebook with 
provisions respecting registration, qualification examinations and 
continuing education that were designed to parallel the NASD rulebook 
in many respects.\6\ Recently, the Commission approved a FINRA proposed 
rule change consolidating and adopting NASD and Incorporated NYSE rules 
relating to qualification and registration requirements into 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 examination waiver process for persons 
working for a financial services affiliate of a member, and amending 
certain continuing education (``CE'') requirements (collectively, the 
``FINRA Rule Changes'').\8\ The FINRA Rule Changes will become 
effective on October 1, 2018.
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    \6\ See Securities Exchange Act Release No. 54136 (July 12, 
2006), 71 FR 40759 (July 18, 2006).
    \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 certain 
of its corresponding membership, registration and qualification 
requirements rules in part in response to the FINRA Rule Changes, and 
also in order to facilitate the adoption of similar membership, 
registration and qualification rules by Nasdaq's 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. At the same time, the 
Exchange is proposing to further amend or delete certain existing 
Exchange rules originally based upon FINRA rules but

[[Page 51989]]

which are no longer appropriate for the business conducted by Nasdaq or 
its affiliated exchanges.\9\ 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.\10\
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    \9\ For example, the Exchange is deleting the Limited 
Principal--Investment Company and Variable Contracts Products 
(current Nasdaq Rule 1022(d)), Limited Representative--Investment 
Company and Variable Contracts Products (current Nasdaq Rule 
1032(b)) and Introducing Broker/Dealer Financial and Operations 
Principal (current Nasdaq Rule 1022(c)) registration categories from 
the array of registration categories recognized by the Exchange. 
Although FINRA is retaining these registration categories for its 
own purposes, the activities permitted by registration in those 
categories have little or no practical relevance to the Exchange.
    \10\ 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 IM-1002-2, Status of 
Persons Serving in the Armed Forces of the United States; IM-1002-3, 
Failure to Register Personnel; 1020, Registration of Principals; 1021, 
Registration Requirements; 1022, Categories of Principal Registration; 
IM-1022-1, Reserved; IM-1022-2, Limited Principal-General Securities 
Sales Supervisor; 1030, Registration of Representatives; 1031, 
Registration Requirements, Sections (a)-(e); 1032, Categories of 
Representative Registration; 1040, Registration of Assistant 
Representatives; 1041, Registration Requirements for Assistant 
Representatives; 1042, Restrictions for Assistant Representatives; 
1043, Reserved; 1060, Persons Exempt from Registration \11\; 1070, 
Qualification Examinations and Waiver of Requirements; 1080, 
Confidentiality of Examinations; 1100, Reserved; 1110, Reserved; 1120, 
Continuing Education Requirements; and Chapter II, Section 2, 
Requirements for Options Participation, Subsections (g) and (h) and 
Commentary .01, are proposed to be deleted. Rule 1140, Electronic 
Filing Requirements for Uniform Forms, is proposed to be amended and 
relocated. A number of other rules are proposed to be amended with 
conforming changes, or relocated in view of the foregoing 
amendments.\12\
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    \11\ Provisions currently found in Rule 1060(b) are being 
amended and relocated to new Rule 2040, as discussed below.
    \12\ Conforming amendments are proposed to Rules 0120, 
Definitions; 1050, Research Analysts; 3010, Supervision; 7003, 
Registration and Processing Fees; IM-9216, Violations Appropriate 
for Disposition Under Plan Pursuant to SEC Rule 19d-1(c)(2); and 
9630, Appeal. In the Exchange's Options Rules, amendments are 
proposed to Chapter XI, Section 2, Registration of Options 
Principals and Section 3, Registration of Representatives.
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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.\13\ 
The proposed new 1200 Series is also being proposed for adoption by 
Nasdaq's affiliated exchanges in order to facilitate compliance with 
membership, registration and qualification regulatory requirements by 
members of two or more of those affiliated exchanges.\14\ In the new 
1200 Series 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.\15\
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    \13\ The proposed 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; and Rule 1250, Electronic Filing 
Requirements for Uniform Forms.
    \14\ The Exchange's five affiliated exchanges, Nasdaq BX, Inc. 
(``BX''), Nasdaq PHLX LLC (``PHLX''), Nasdaq ISE, LLC (``ISE''), 
Nasdaq GEMX, LLC (``GEMX''), and Nasdaq MRX, LLC (``MRX'') (together 
with Nasdaq, the ``Nasdaq Affiliated Exchanges'') are also 
submitting proposed rule changes to adopt the 1200 Series of rules. 
See SR-BX-2018-047, SR-Phlx-2018-61, 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 more closely to those of the 
other Nasdaq Affiliated Exchanges. See Securities Exchange Act 
Release No. 82175 (November 29, 2017), 82 FR 57494 (December 5, 
2017) (SR-NASDAQ-2017-125). Ultimately, the Exchange intends to 
submit another proposed rule change to transfer the 1200 Series of 
rules into the new shell structure. (The Exchange notes that 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.'').
    \15\ 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 on April 
1, 2019.
Proposed Rules
A. Registration Requirements (Proposed Rule 1210)
    Exchange Rules 1021(a) and 1031(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 1022 and 
1032.\16\ The Exchange is proposing to consolidate and streamline 
provisions of Exchange Rules 1021(a) and 1031(a) and to adopt them as 
Exchange Rule 1210, subject to several changes.\17\
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    \16\ In addition, IM-1002-3 provides that the failure to 
register an individual as a registered representative may be deemed 
to be conduct inconsistent with just and equitable principles of 
trade and may be sufficient cause for appropriate disciplinary 
action. As explained below the Exchange proposes to delete IM-1002-3 
as superfluous.
    \17\ Rule 1031, Registration Requirements, contains certain 
sections that are not affected by this proposed rule change. 
However, due to the overall organizational restructuring of the 
registration rules, those sections (current Rules 1031(c), (d) and 
(e)) are being relocated with non-substantive amendments to new 
Supplementary Material .12, Application for Registration and 
Jurisdiction, to proposed Rule 1210, Registration Requirements. 
These relocated provisions govern the process for applying for 
registration and amending the registration application, as well as 
for notifying the Exchange of termination of a member's association 
with a person registered with the Exchange. The Exchange proposes to 
adopt Rule 1210, Supplemental Material .12, into the 1200 Series in 
order to have uniform processes and requirements in this area across 
the Nasdaq Affiliated Exchanges. This relocated language is unique 
to the Exchange--the FINRA Rule Changes do not contain a counterpart 
Rule 1210 Supplementary Material .12. The Exchange anticipates 
amending Rule 1031(f) in a future proposed rule change.
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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 1021(a) and 1031(a), proposed 
Rule 1210 would not

[[Page 51990]]

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.\18\ Proposed Exchange 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. This latter provision is a consolidation of similar 
provisions in the registration categories under the current Exchange 
rules.
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    \18\ Miami International Securities Exchange LLC (``MIAX'') Rule 
203(a) and 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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    Further, the Exchange is proposing to delete Exchange IM-1002-3 
because it is superfluous. The failure to register a representative as 
required under current Exchange Rule 1031(a) is in fact a violation of 
Exchange rules.
B. Minimum Number of Registered Principals (Proposed Rule 1210.01)
    Rule 1021(e)(1) currently requires that a member, except a sole 
proprietorship, have a minimum of two registered principals with 
respect to each aspect of the member's investment banking and 
securities business pursuant to the applicable provisions of Rule 1022, 
provided however that a proprietary trading firm with 25 or fewer 
registered representatives shall only be required to have one 
registered principal. This requirement applies to applicants for 
membership and existing members. Exchange Rule 1021(e)(2) also provides 
that, pursuant to the Exchange's Rule 9600 Series, the Exchange may 
waive the principal requirements of Rule 1021(e)(1) in situations that 
indicate conclusively that only one person associated with an applicant 
for membership should be required to register as a principal. Rule 
1021(e)(3) provides that an applicant for membership, if the nature of 
its business so requires, must also have at least one person qualified 
for registration under Rule 1022(b) and (c) as a Financial and 
Operations Principal (or an Introducing Broker/Dealer Financial and 
Operations Principal).\19\
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    \19\ Exchange Rules 1022(b) and (c) as well as other Exchange 
rules currently refer to categories of limited principal 
registration as ``Limited Principal--'' followed by the name of the 
registration category. In this proposed rule change and in the 
proposed rules, the Exchange will no longer employ the term 
``Limited Principal--'' in identifying 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 adopt Rule 1021(e) as Rule 1210.01, 
subject to the following changes. The Exchange proposes to provide 
firms that limit the scope of their business with greater flexibility 
to satisfy 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.\20\ 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. Currently, a sole 
proprietor member (without any other associated persons) is not subject 
to the two-principal requirement because such member is operating as a 
one-person firm. Given that one-person firms may be organized in legal 
forms other than a sole proprietorship (such as a single-person limited 
liability company), proposed Exchange Rule 1210.01 provides that any 
member with only one associated person is excluded from the two 
principal requirement. In addition, proposed Rule 1210.01 clarifies 
that existing members as well as new applicants may request a waiver of 
the two-principal requirement. 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.\21\
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    \20\ The principal registration categories are described in 
greater detail below.
    \21\ 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)
    Rules 1021(a) and 1031(a) currently permit a member to register or 
maintain the registration(s) as a representative or principal of an 
individual performing legal, compliance, internal audit, back-office 
operations or similar responsibilities for the member. Rule 1031(a) 
also permits a member to register or maintain the registration as a 
representative of an individual performing administrative support 
functions for registered persons. In addition, Rules 1021(a) and 
1031(a) permit a member to register or maintain the registration(s) as 
a representative or principal of an individual engaged in the 
investment banking or securities business of a foreign securities 
affiliate or subsidiary of the member.
    The Exchange is proposing to consolidate these provisions under 
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

[[Page 51991]]

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.\22\ 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.\23\
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    \22\ 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.
    \23\ 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)
    Rules 1021(a) and 1031(a) currently set forth general requirements 
that an individual pass an appropriate qualification examination before 
his or her registration as a representative or principal can become 
effective. The Exchange is proposing to consolidate these provisions 
and adopt them as Rule 1210.03.
    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 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 under the remaining 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

[[Page 51992]]

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, paragraph (d) of Rule 1070 currently permits the Exchange, 
in exceptional cases and where good cause is shown, to waive the 
applicable qualification examination and accept other standards as 
evidence of an applicant's qualifications for registration. The 
Exchange is proposing to transfer the provisions of Rule 1070(d) into 
proposed Rule 1210.03 with changes which track FINRA Rule 1210.03.\27\ 
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.
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    \27\ Rules 1070(a), (b) and (c) provide general information 
relating to the examination process. The Exchange is proposing to 
delete these provisions given that they relate to the administration 
of the examination program rather than rule requirements.
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E. Requirements for Registered Persons Functioning as Principals for a 
Limited Period (Proposed Rule 1210.04)
    Exchange Rule 1021(d) provides that a person who is currently 
registered with a member as a representative and whose duties are 
changed by the member so as to require registration as a principal may 
function as a principal for up to 90 calendar days before he or she is 
required to pass the appropriate qualification examination for 
principal. In addition, it allows a formerly registered representative 
who is required to register as a principal to function as a principal 
without passing the appropriate principal qualification examination for 
up to 90 calendar days, provided the person first satisfies all 
applicable prerequisite requirements. A person who has never been 
registered does not qualify for this exception. This provision applies 
to a person associated with a member of another registered national 
securities exchange or association who is required to register in a 
principal classification under Nasdaq rules but who is not required to 
be so registered under the rules of the other exchange or association.
    The Exchange is proposing to adopt Rule 1021(d) as Rule 1210.04, 
subject to the following 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. 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.\28\ The 
Exchange is not conserving in Rule 1210.04 the language that this 
provision applies to a person associated with a member of another 
registered national securities exchange or association who is required 
to register in a principal classification under the Nasdaq rules but 
who is not required to be so registered under the rules of the other 
exchange or association. The Exchange believes this language is 
superfluous as the applicability to various individuals of proposed 
Rule 1210.04 speaks for itself and requires no elaboration.\29\ 
Proposed Rule 1210.04 would increase the Rule 1021(d)'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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    \28\ 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 and the Introducing Broker/Dealer Financial 
and Operations Principal.
    \29\ 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 qualifications examination, FINRA's Sanction Guidelines recommend a 
bar. \30\
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    \30\ 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

[[Page 51993]]

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 2010A.\31\ 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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    \31\ Pursuant to Exchange Rule 2010A, a member, in the conduct 
of its business, shall observe high standards of commercial honor 
and just and equitable principles of trade. FINRA Rule 1210.05 cites 
FINRA Rule 2010, which is a comparable rule.
---------------------------------------------------------------------------

    Proposed Rule 1210.05 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.\32\
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    \32\ In view of proposed Rule 1210.05, the Exchange is proposing 
to delete Rule 1080, Confidentiality of Examinations, which is 
largely duplicative. 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)
    Rule 1070(e) currently sets forth waiting periods for retaking 
failed examinations. The rule provides that a person who fails a 
qualification examination would be permitted to retake the examination 
after either a period of 30 calendar days has elapsed from the date of 
the prior examination or the next administration of an examination 
administered on a monthly basis. However, if the person fails an 
examination three or more times in succession, he or she would be 
prohibited from retaking the examination either until a period of 180 
calendar days has elapsed from the date of his or her last attempt to 
pass the examination or until the sixth subsequent administration of an 
examination administered on a monthly basis. The Exchange is proposing 
to adopt Rule 1070(e) as Rule 1210.06, with the following changes.
    Proposed Rule 1210.06 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. The 
proposed rule deletes the reference to examinations administered on a 
monthly basis because examinations are no longer administered in such a 
manner.
    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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    \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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H. CE Requirements (Proposed Rule 1210.07)
    Pursuant to current Rule 1120, 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 the 
current rule as any person registered with the Exchange as a 
representative, principal, or assistant representative.\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's securities sales, trading and 
investment banking activities, and the immediate supervisors of such 
persons.\38\
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    \34\ See Rule 1120(a).
    \35\ See Rule 1120(b).
    \36\ Pursuant to Rule 1120(a), each registered person is 
required to complete the Regulatory Element initially within 120 
days after the person's second registration anniversary date and, 
thereafter, within 120 days after every third registration 
anniversary date. Unless otherwise determined by the Exchange, a 
registered person who has not completed the Regulatory Element 
program within the prescribed time frames will have their 
registrations deemed inactive until such time as the requirements of 
the program have been satisfied. Any person whose registration has 
been deemed inactive under Rule 1120(a) must cease all activities as 
a registered person and is prohibited from performing any duties and 
functioning in any capacity requiring registration. A registration 
that is inactive for a period of two years will be administratively 
terminated. A person whose registration is so terminated may 
reactivate the registration only by reapplying for registration and 
meeting the qualification requirements of the applicable provisions 
of the Exchange's rules. The Exchange may, upon application and a 
showing of good cause, allow for additional time for a registered 
person to satisfy the program requirements.
    \37\ See Rule 1120(a)(5).
    \38\ See Rule 1120(b)(1).
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    The Exchange proposes to delete Rule 1120 and to replace it with 
Rule 1240, Continuing Education Requirements. The Exchange believes 
that all registered persons, regardless of their activities, should be 
subject to the Regulatory Element of the CE requirements so that they 
can keep their knowledge of the securities industry current. Therefore, 
the Exchange is proposing Rule 1210.07, to clarify that all registered 
persons, including those who solely maintain a permissive registration, 
are required to satisfy the Regulatory Element, as specified in 
proposed Rule 1240. 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 also 
provides 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.
I. Lapse of Registration and Expiration of SIE (Proposed Rule 1210.08)
    Rule 1021(c) currently states that any person whose registration 
has been revoked pursuant to Rule 8310 \39\ or

[[Page 51994]]

whose most recent registration as a principal has been terminated for a 
period of 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 1022. Pursuant to Rule 1031(b), any 
person whose registration has been revoked pursuant to Rule 8310 or 
whose most recent registration as a representative or principal has 
been terminated for a period of 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 representatives appropriate to the 
category of registration as specified in Rule 1032.\40\ The two years 
are calculated from the termination date stated on the individual's 
Form U5 (Uniform Termination Notice for Securities Industry 
Registration) and the date the Exchange receives a new application for 
registration.
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    \39\ Under Rule 8310(a)(3), the Exchange may impose one or more 
sanctions on a member or person associated with a member for each 
violation of the federal securities laws, rules or regulations 
thereunder, or Exchange rules, including suspending the membership 
of a member or suspending the registration of a person associated 
with a member for a definite period or a period contingent on the 
performance of a particular act.
    \40\ In addition, Exchange Rule 1041(c) provides that if any 
person whose most recent registration as an Assistant 
Representative--Order Processing has been terminated for a period of 
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 Assistant Representative--Order Processing. As 
discussed below, the Exchange is proposing to eliminate Rule 1041(c) 
as part of the elimination of the Assistant Representative--Order 
Processing registration category on the Exchange.
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    The Exchange is proposing to consolidate the requirements of Rules 
1021(c) and 1031(b) and adopt them as Rule 1210.08. Proposed Rule 
1210.08 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 
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 process whereby 
individuals who would be working for a financial services industry 
affiliate of a member \41\ 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. \42\ 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.
---------------------------------------------------------------------------

    \41\ 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.
    \42\ 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.\43\ 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 \44\ 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.\45\
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    \43\ 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.
    \44\ 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.
    \45\ The following examples illustrate this point:
    Example 1. Firm A designates an individual as an FSA-eligible 
person by notifying the Exchange and files a Form U5. The individual 
joins Firm A's financial services affiliate. Firm A does not submit 
a waiver request for the individual. After working for Firm A's 
financial services affiliate for three years, the individual 
directly joins Firm B's financial services affiliate for three 
years. Firm B then submits a waiver request to register the 
individual.
    Example 2. Same as Example 1, but the individual directly joins 
Firm B after working for Firm A's financial services affiliate, and 
Firm B submits a waiver request to register the individual at that 
point in time.
    Example 3. Firm A designates an individual as an FSA-eligible 
person by notifying the Exchange and files a Form U5. The individual 
joins Firm A's financial services affiliate for three years. Firm A 
then submits a waiver request to reregister the individual. After 
working for Firm A in a registered capacity for six months, Firm A 
re-designates the individual as an FSA-eligible person by notifying 
FINRA and files a Form U5. The individual rejoins Firm A's financial 
services affiliate for two years, after which the individual 
directly joins Firm B's financial services affiliate for one year. 
Firm B then submits a waiver request to register the individual.
    Example 4. Same as Example 3, but the individual directly joins 
Firm B after the second period of working for Firm A's financial 
services affiliate, and Firm B submits a waiver request to register 
the individual at that point in time.
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    An individual designated as an FSA-eligible person would be subject 
to the Regulatory Element of CE while working for a financial services 
industry affiliate of a member. The individual would be

[[Page 51995]]

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 proposed Rule 1240 (currently Rule 
1120, Continuing Education Requirements).
    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,\46\ similar to the process used today for waiver requests, 
and it would represent that the individual is eligible for an FSA 
waiver based on the conditions set forth below. The Exchange would 
review the waiver request and make a determination of whether to grant 
the request within 30 calendar days of receiving the request. The 
Exchange would summarily grant the request if the following conditions 
are met:
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    \46\ 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.\47\ An 
individual who has been designated as an FSA-eligible person by a 
member would not be able to take additional examinations to gain 
additional registrations while working for a financial services 
affiliate of a member.
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    \47\ 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)
    IM-1002-2(a) and (b) currently provide specific relief to 
registered persons serving in the Armed Forces of the United States. 
Among other things, these rules permit a registered person of a member 
who volunteers for or is called into active duty in the Armed Forces of 
the United States to be registered in an inactive status and remain 
eligible to receive ongoing transaction-related compensation. IM-1002-
2(c) also includes specific provisions regarding the deferment of the 
lapse of registration requirements in Exchange Rules 1021(c), 1031(b) 
and 1041(c) for formerly registered persons serving in the Armed Forces 
of the United States.
    The Exchange is proposing to adopt IM-1002-2 as Rule 1210.10 with 
the following 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.\48\
---------------------------------------------------------------------------

    \48\ 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 conserves language from existing 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)
    Rules 1021(a) and 1031(a) currently prohibit a member from 
maintaining a representative or principal registration with the 
Exchange for any person who is no longer active in the member's 
investment banking or securities business, who is no longer functioning 
as a representative or principal as defined under the rules or where 
the sole purpose is to avoid the requalification requirement applicable 
to persons who have not been registered for two or more years. These 
rules also prohibit a member from applying for the registration of a 
person as representative or principal where the member does not intend 
to employ the person in its investment banking or securities business. 
These prohibitions do not apply to the current permissive registration 
categories.
    In light of proposed Rule 1210.02, the Exchange is proposing to 
delete these provisions 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.\49\
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    \49\ 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 Exchange Rule 1031.
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M. Registration Categories (Proposed Rule 1220)
    The Exchange is proposing to integrate the various registration 
categories and related definitions under the Exchange's rules into a 
single rule, Rule 1220, subject to the changes described below.\50\
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    \50\ 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))
    Rule 1021(b) currently defines the term ``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's investment banking or securities

[[Page 51996]]

business, such as supervision, solicitation, conduct of business or the 
training of persons associated with a member for any of these 
functions. The Exchange is proposing to streamline and adopt Rule 
1021(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. The proposed rule 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))
    Rule 1022(a)(1) currently requires that an associated person who 
meets the definition of ``principal'' under Rule 1021 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 Rule 1022. Further, the 
rule does not preclude individuals registered in a limited principal 
category from registering as General Securities Principals. Rule 
1022(a)(1) also includes transitioning and grandfathering provisions 
for CCO's.
    Rule 1022(a) provides that a person seeking to register as a 
General Securities Principal must satisfy the General Securities 
Representative or Corporate Securities Representative prerequisite 
registration. Rule 1022(a)(2) qualifies this provision by providing 
that the Corporate Securities Representative prerequisite registration 
gives a General Securities Principal only limited supervisory 
authority.
    Rule 1022(a)(3) includes a grandfathering provision for persons who 
were registered as principals before the adoption of the General 
Securities Principal registration category.
    Rule 1022(a)(4) provides that an associated person registered 
solely as a General Securities Principal is not qualified to function 
as a Financial and Operations Principal (or an Introducing Broker-
Dealer Financial and Operations Principal, as applicable), or Limited 
Principal--General Securities Sales Supervisor, unless the General 
Securities Principal is also registered in these other categories.
    Exchange Rule 1022(a)(5) currently requires that each associated 
person who is included within the definition of ``principal'' in Rule 
1021 with supervisory responsibility over the securities trading 
activities described in Rule 1032(f)(1) \51\ register as a Securities 
Trader Principal. To qualify for registration as a Securities Trader 
Principal, an individual must be registered as a Securities Trader and 
pass the General Securities Principal qualification examination. The 
rule provides that a person qualified and registered as a Securities 
Trader Principal may only have supervisory responsibility over the 
activities specified in Rule 1032(f)(1), unless such person is 
separately registered in another appropriate principal registration 
category, such as the General Securities Principal registration 
category. The rule further provides that a person registered as a 
General Securities Principal is not qualified to supervise the trading 
activities described in Rule 1032(f)(1), unless he or she qualifies and 
registers as a Securities Trader (by passing the Series 57 Securities 
Trader examination) and affirmatively registers as a Securities Trader 
Principal.
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    \51\ Current Rule 1032(f)(1) provides for the registration as a 
Securities Trader of an associated person if, with respect to 
transactions in equity, preferred or convertible debt securities or 
foreign currency options on Nasdaq, 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.
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    The Exchange is proposing to streamline the provisions of Rule 
1022(a) and adopt them as Rule 1220(a)(2) with the following changes.
    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, subject to the following exceptions. The proposed 
rule provides 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.\52\ 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 shall be required to register as a 
General Securities Sales Supervisor or as a Registered Options 
Principal.\53\
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    \52\ 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.
    \53\ 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).
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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, the Exchange is proposing in Rule 1220(a)(2) to delete the 
provision in Rule 1022(a)(1)(A) permitting the Corporate Securities 
Representative prerequisite registration. However, proposed Rule 
1220(a)(2)(B) provides 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

[[Page 51997]]

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. Proposed Rule 
1220(a)(2)(B) requires all other individuals registering as General 
Securities Principal after October 1, 2018, to first become registered 
as a General Securities Representative pursuant to Rule 1220(b)(2).\54\
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    \54\ 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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    Moreover, as described in greater detail below, the Exchange is 
proposing to adopt with some changes the requirements of Rule 
1022(a)(1) relating to the registration of CCOs, and Rule 1022(a)(5) 
relating to the supervision of securities trading activities as Rule 
1220(a)(3).
    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.\55\
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    \55\ 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.
---------------------------------------------------------------------------

3. Compliance Official (Proposed Rule 1220(a)(3))
    The Exchange is proposing to adopt Rule 1022(a)(1)'s CCO 
registration requirement as Rule 1220(a)(3), subject to the following 
changes.
    Specifically, proposed Rule 1220(a)(3) provides 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 shall, 
prior to or concurrent with such registration, 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, proposed Rule 1220(a)(3) provides that an individual 
designated as a Chief Compliance Officer on Schedule A of Form BD may 
register and qualify as a Securities Trader Compliance Officer if, with 
respect to transactions in equity, preferred or convertible debt 
securities, or options such person is engaged in proprietary trading, 
the execution of transactions on an agency basis, or the direct 
supervision of such activities other than a person associated with a 
member whose trading activities are conducted principally on behalf of 
an investment company that is registered with the SEC pursuant to the 
Investment Company Act and that controls, is controlled by, or is under 
common control with a member. All individuals registering as Securities 
Trader Compliance Officers would be required to first become registered 
pursuant to paragraph (b)(4) as a Securities Trader, and to pass the 
Compliance Official qualification exam.\56\
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    \56\ 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))
    Rule 1022(b)(1) currently provides that every member 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 performs the duties described in Rule 
1022(b)(2).\57\ Each person associated with a member who performs such 
duties is required to register as a Limited Principal--Financial and 
Operations with the Exchange and pass an appropriate qualification 
examination before such registration may become effective. A person 
registered solely as a Limited Principal--Financial and Operations is 
not qualified to function in a principal capacity with responsibility 
over any area of business activity not described in 1022(b)(2).
---------------------------------------------------------------------------

    \57\ These 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's books and records from which such 
reports are derived; (E) supervision and/or performance of the 
member'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's back 
office operations; or (G) any other matter involving the financial 
and operational management of the member.
---------------------------------------------------------------------------

    Rule 1022(c) currently provides that every member subject to the 
requirements of SEC Rule 15c3-1, other than a member operating pursuant 
to SEC Rule 15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8) in which case Rule 
1022(b) shall apply, shall designate as Limited Principal--Introducing 
Broker/Dealer 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 1022(c)(2).\58\ Each person associated 
with a member who performs such duties is required to register as a 
Limited Principal--Introducing Broker/Dealer Financial and Operations 
with the Exchange and pass an appropriate Qualification Examination 
before such registration may become effective.
---------------------------------------------------------------------------

    \58\ These duties include (A) final approval and 
responsibilities 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's books and records from which such 
reports are derived; (E) supervision and/or performance of the 
member'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's back 
office operations; or (G) any other matter involving the financial 
and operational management of the member.
---------------------------------------------------------------------------

    Financial and Operations Principals and Introducing Broker-Dealer 
Financial and Operations Principals are not

[[Page 51998]]

subject to a prerequisite representative registration, but they must 
pass the Financial and Operations Principal or Introducing Broker-
Dealer Financial and Operations Principal examination, as applicable.
    The Exchange is proposing to move the provisions in Rules 1022(b) 
regarding Financial and Operations Principals to Rule 1220(a)(4)(A), 
substituting the word ``and'' for the current word ``or'' found in Rule 
1022(b)(2)(F) in order to conform to FINRA Rule 1220(a)(4)(A) in 
describing the duties of a Financial and Operations Principal. In 
addition, the Exchange proposes to delete the Introducing Broker-Dealer 
Financial and Operations Principals Rule 1022(c), as the Exchange has 
determined it no longer requires this registration category as it is 
relatively little used.\59\
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    \59\ 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 which are carried over 
from existing Nasdaq Rule 1022.
---------------------------------------------------------------------------

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))
    The Exchange is proposing to adopt Rule 1022(a)(5) relating to 
Securities Trader Principal registration as Rule 1220(a)(7). Similar to 
the current rule, proposed Rule 1220(a)(7) requires that a principal 
responsible for supervising the securities trading activities specified 
in proposed Rule 1220(b)(4) \60\ 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.
---------------------------------------------------------------------------

    \60\ Proposed Rule 1220(b)(4), discussed below, provides for 
representative-level registration in the ``Securities Trader'' 
category.
---------------------------------------------------------------------------

8. Registered Options Principal (Proposed Rules 1220(a)(8)
    Chapter II, Section 2(g) of the rulebook currently requires that 
members engaged in security futures or options transactions with public 
customers have at least one Registered Options and Security Futures 
Principal. It also provides that every person engaged in the 
supervision of options and security futures sales practices shall be 
registered as a Registered Options and Security Futures Principal and 
pass the appropriate qualification examination for Registered Options 
and Security Futures Principal, or an equivalent examination acceptable 
to the Exchange. Further, each person required to register and qualify 
as a Registered Options and Security Futures Principal must, prior to 
or concurrent with such registration, be or become qualified pursuant 
to the Rule 1030 Series, as either a General Securities Representative 
or a Limited Representative--Corporate Securities and a Registered 
Options and Security Futures Representative.
    The rule provides that a person registered solely as a Registered 
Options and Security Futures Principal is not qualified to function in 
a principal capacity with responsibility over any area of business 
activity not prescribed in Chapter II, Section 2(g). Chapter II, 
Section 2(g)(5) provides that any person who is registered as a 
Registered Options and Security Futures Principal, or who becomes 
registered as a Registered Options and Security Futures Principal 
before a revised examination that includes security futures products is 
offered, must complete a firm-element continuing education program that 
addresses security futures and a principal's responsibilities for 
security futures before such person can supervise security futures 
activities. Finally, Chapter II, Section 2 of the Exchange's options 
rules further requires in Commentary .01 that members that have one 
Registered Options Principal promptly notify the Exchange and agree to 
specified conditions if such person is terminated, resigns, becomes 
incapacitated or is otherwise unable to perform his or her duties.
    The Exchange is proposing to adopt Chapter II, Section (2)(g) as 
Rule 1220(a)(8), Registered Options Principal, with certain changes. 
The registration category would now be titled Registered Options 
Principal, rather than Registered Options and Security Futures 
Principal.\61\ All references to a revised examination that includes 
security futures products would be deleted. Instead, Rule 1220(b), 
Supplementary Material .02 will simply provide 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, as applicable, 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.\62\
---------------------------------------------------------------------------

    \61\ FINRA has also shortened references to ``Registered Options 
and Security Futures Principal'' in its rulebook to ``Registered 
Options Principal''. See Securities Exchange Act Release No. 58932 
(November 12, 2008), 73 FR 69696 (November 19, 2008) (SR-FINRA-2008-
032).
    \62\ 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 case, the Exchange does not 
currently offer security futures products for trading.
---------------------------------------------------------------------------

    Proposed Rule 1220(a)(8) provides that a General Securities Sales 
Supervisor may also supervise options activities. Rule 1220(b), 
Supplementary Material .02 regarding security futures activities will 
apply to General Securities Sales Supervisors as well as to Registered 
Options Principals.\63\
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    \63\ Rule 1220(b), Supplementary Material .02 regarding security 
futures activities will also apply to General Securities 
Representatives and to Options Representatives.
---------------------------------------------------------------------------

    Further, as discussed below, the Exchange is proposing to eliminate 
the Options Representative and Corporate Securities Representative 
registration categories. In conjunction with these changes, the 
Exchange is proposing to eliminate registration as an Options 
Representative and a Corporate Securities Representative from the 
prerequisite choices in the current rule. Consequently, a person 
registering as a Registered Options Principal under proposed Rule 
1220(a)(8) would be required to satisfy the General Securities 
Representative prerequisite registration.\64\
---------------------------------------------------------------------------

    \64\ Proposed Rule 1220(a)(8) differs from FINRA Rule 1220(a)(8) 
in that it omits certain references to other specific FINRA rules.
---------------------------------------------------------------------------

    Finally, the Exchange is proposing to adopt Chapter II, Section 2 
Commentary .01 with non-substantive changes as Supplementary Material 
.03 of Rule 1220.\65\
---------------------------------------------------------------------------

    \65\ Chapter XI, Doing Business with the Public, at Section 2(a) 
provides that no order entry firm (``OEF'') shall be approved to 
transact options business with the public until those associated 
persons who are designated as Options Principals have been approved 
by and registered with the Exchange. Persons engaged in the 
management and supervision of the OEF's business pertaining to 
options contracts must be designated as Options Principals and shall 
have responsibility for the overall oversight of the OEF's options 
related activities on the Exchange. Similarly, Chapter XI, Sections 
3(a) and (b) provide that no OEF shall be approved to transact 
business with the public until those persons associated with it who 
are designated representatives have been approved by and registered 
with the Exchange, and also that persons who perform duties for the 
OEF which are customarily performed by sales representatives or 
branch office managers shall be designated as representatives of the 
OEF. The foregoing provisions of Chapter XI are specific to 
conducting an options business with the public and are not proposed 
to be amended in this proposed rule change, other than to add a 
customer protection requirement, similar to existing Phlx Rule 
1024.08 and existing ISE Rule 602(d), that a person accepting orders 
from non-member customers (unless such customer is a broker-dealer 
registered with the Commission) is required to register with the 
Exchange and to be qualified by passing the General Securities 
Registered Representative Examination (Series 7). However, Chapter 
XI, Sections 2(b) and (c) and Section 3(c) also contain 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 51999]]

9. Government Securities Principal (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)
    Pursuant to Exchange Rule 1022(g), each associated person of a 
member who is included within the definition of ``principal'' in Rule 
1021 may register as a Limited Principal--General Securities Sales 
Supervisor, instead of separately registering in multiple principal 
registration categories,\66\ if the individual's supervisory 
responsibilities are limited solely to securities sales activities. A 
person registering as a Limited Principal--General Securities Sales 
Supervisor must satisfy the General Securities Representative 
prerequisite registration and pass the General Securities Sales 
Supervisor examinations.\67\ Moreover, a General Securities Sales 
Supervisor is precluded from performing any 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 Exchange Rule 2210; 
(4) supervision of the custody of firm or customer funds or securities 
for purposes of SEC Rule 15c3-3; or (5) supervision of overall 
compliance with financial responsibility rules. Current IM-1022-2 
explains the purpose of the General Securities Sales Supervisor 
registration category.
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    \66\ For instance, a principal supervising the sale of corporate 
securities and options must be registered as a General Securities 
Principal and a Registered Options Principal, unless the principal 
is registered as a General Securities Sales Supervisor.
    \67\ An individual may also register as a General Securities 
Sales Supervisor by passing a combination of other principal-level 
examinations.
---------------------------------------------------------------------------

    The Exchange is proposing to adopt Rule 1022(g) and IM-1022-2 as 
Rules 1220(a)(10) and 1220.04, respectively.\68\ 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.
---------------------------------------------------------------------------

    \68\ The Exchange is not proposing to carry over into proposed 
Rule 1220(a)(10) the current Rule 1022(g)(2)(C)(iii) 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.
---------------------------------------------------------------------------

11. Investment Company and Variable Contracts Products Principal and 
Direct Participation Programs Principal (Rules 1220(a)(11) and (a)(12))
    The Exchange is proposing to eliminate the Investment Company and 
Variable Contracts Products Principal registration category and does 
not recognize the Direct Participation Programs Principal registration 
category. The Exchange is therefore reserving Rules 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 therefore reserving Rule 
1220(a)(13), retaining the caption solely to facilitate comparison with 
FINRA's rules.
13. Supervisory Analyst (Rule 1220(a)(14))
    The Exchange does not recognize the Supervisory Analyst 
registration category and is therefore 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))
    Rule 1011(k) currently defines the term ``representative'' as 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 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. Rule 1011(k) further states that, as 
provided in Rule 1031, all representatives of members are required to 
be registered with the Exchange, and that representatives that are so 
registered are referred to as registered representatives.
    The Exchange now proposes to adopt a definition of 
``representative'' in proposed Rule 1220(b)(1). Current Rule 1011, 
Definitions, Section (k) would be amended by deleting the existing 
definition of representative, and replacing it with a cross reference 
to the new definition of representative in 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. Unlike the current Rule 1011(k) ``representative'' 
definition, the new Rule 1220(b)(1) definition would be confined to 
associated persons of Exchange members (rather than to associated 
persons of broker dealers generally) who are engaged in the member's 
securities business (and not also in the member's investment banking 
business).
15. General Securities Representative (Proposed Rule 1220(b)(2))
    Rule 1032(a) currently requires that an associated person who meets 
the definition of ``representative'' under Rule 1011 register as a 
General Securities Representative. A person registering as a General 
Securities Representative must pass the General Securities 
Representative examination. The rule, however, provides that a

[[Page 52000]]

representative is not required to register as a General Securities 
Representative if the person's activities are so limited as to qualify 
such person for one or more of the limited representative categories 
specified in Rule 1032, such as an Investment Company and Variable 
Contracts Products Representative, a Corporate Securities 
Representative, or a Securities Trader. Further, the rule does not 
preclude individuals registered in a limited representative category 
from registering as General Securities Representatives.
    Rule 1032(a)(2) provides that if a representative does not engage 
in municipal securities activities, registration as a United Kingdom 
Securities Representative or Canada Securities Representative is 
equivalent to registration as a General Securities Representative. 
These foreign registration categories were created in the 1990s as an 
alternative to General Securities Representative registration for 
individuals who do not engage in municipal securities activities and 
who are in good standing as a representative with the Financial Conduct 
Authority in the United Kingdom or with a Canadian stock exchange or 
securities regulator. To qualify for registration as a United Kingdom 
Securities Representative or Canada Securities Representative, an 
individual must pass the United Kingdom Securities Representative 
examination or Canada Securities Representative examinations, 
respectively. Rule 1032(a)(2) also permits a person registered and in 
good standing as a representative with the Japanese securities 
regulators to become qualified to function as a General Securities 
Representative by passing the Japan Module of the General Securities 
Representative examination. The Japan Module, however, was never 
implemented.
    The Exchange is proposing to streamline the provisions of Rule 
1032(a) and adopt them as Rule 1220(b)(2) with the following changes.
    Similar to the proposed changes to the General Securities Principal 
registration category, the Exchange is proposing to more clearly set 
forth the obligation to register as a General Securities 
Representative. Specifically, 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, 
except that if a representative's activities include the functions of a 
Securities Trader, as specified in this Rule, then such person shall 
appropriately register as a Securities Trader.
    Further, consistent with the proposed restructuring of the 
representative-level examinations, proposed Rule 1220(b)(2)(B) would 
require that individuals registering as General Securities 
Representatives pass the SIE and the General Securities Representative 
examination.\69\
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    \69\ 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. Finally, the Exchange is proposing to delete the 
provision that persons eligible for registration in other 
representative categories are not precluded from registering as General 
Securities Representatives because it is superfluous.
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, Direct Participation Programs Representative and 
Private Securities Offerings Representative. The Exchange has not 
adopted these registration categories for its associated persons. The 
Exchange is reserving Rules 1220(b)(3)--Operations Professional, and 
related Rule 1220.05; 1220(b)(5)--Investment Banking Representative, 
1220(b)(6)--Research Analyst; 1220(b)(8)--Direct Participation Programs 
Representative; and 1220(b)(9)--Private Securities Offerings 
Representative, retaining the captions, solely to facilitate comparison 
with FINRA's rules.
    Securities Trader--Proposed Rule 1220(b)(4). Pursuant to current 
Exchange Rule 1032(f), each associated person of a member who is 
included within the definition of ``representative'' in Rule 1101 is 
required to register 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. The rule provides an 
exception from the registration requirement for any associated person 
of 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 the member. Individuals registering 
as Securities Traders must pass the Securities Trader examination. 
Finally, the rule provides that registered Securities Traders are not 
qualified to function in any other registration category, unless he or 
she is also qualified and registered in such other registration 
category.
    The Exchange now proposes to amend the rule, and adopt it as 
proposed Rule 1220(b)(4).\70\ As amended, the Rule would require 
individuals registering as Securities Traders to pass the SIE as well 
as the Securities Trader qualification exam, and it would be expanded 
to refer not just to foreign currency options, but to the trading of 
options generally.
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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.
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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.\71\
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    \71\ 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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[[Page 52001]]

    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.\72\
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    \72\ 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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    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, wash sales, 
failure to mark orders as ``short'' or perform proper short sale 
``locates,'' 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, pass the SIE 
and the Securities Trader qualification examination.
    Investment Company and Variable Contracts Products Representative--
Proposed Rule 1220(b)(7). Pursuant to current Rule 1032(b), each 
associated person of a member who is included within the definition of 
``representative'' in Rule 1031 may register as an Investment Company 
and Variable Contracts Products Representative, instead of registering 
as a General Securities Representative, if the individual's activities 
are limited solely to redeemable securities of companies registered 
under the Investment Company Act, securities of closed-end companies 
registered under the Investment Company Act during the period of 
original distribution and specified insurance contracts, such as 
variable contracts. Individuals registering as Investment Company and 
Variable Contracts Products Representatives must pass the Investment 
Company and Variable Contracts Products Representative examination. The 
Exchange has experienced little demand for registration in this 
category. Therefore, it now proposes to eliminate the Investment 
Company and Variable Contracts Products Representative category as an 
acceptable category for Exchange representative registration. The 
Exchange is reserving proposed Rule 1220(b)(7), retaining the caption 
solely to facilitate comparison with FINRA's rule.
17. Additional Eliminated Registration Categories (Proposed Rule 
1220.06)
    As noted above, the Exchange is proposing to eliminate the 
Investment Company and Variable Products Representative category, 
reserving proposed Rule 1220(b)(7), and retaining the caption solely to 
facilitate comparison with FINRA's rule. Similarly, it is eliminating 
the Investment Company and Variable Contracts Products Principal 
category, reserving proposed Rule 1220(a)(11), and retaining the 
caption solely to facilitate comparison with FINRA's rule.
    Consistent with the FINRA Rule Changes, the Exchange is also 
proposing to eliminate from its rules the Order Processing Assistant 
Representative, Options Representative, and Corporate Securities 
Representative categories that FINRA is eliminating effective October 
1, 2018, as discussed below.
    Order Processing Assistant Representative. Pursuant to current Rule 
1041, an associated person is not required to register as a General 
Securities Representative or in one or

[[Page 52002]]

more of the limited categories of representative registration if the 
person's activities are so limited as to qualify such person for 
registration as an Order Processing Assistant Representative. An Order 
Processing Assistant Representative is an associated person whose only 
function is to accept unsolicited customer orders from existing 
customers for submission for execution by the member. Pursuant to Rule 
1042, Order Processing Assistant Representatives are subject to 
specified restrictions regarding their activities and compensation and 
are subject to particular supervisory requirements. In addition, they 
may not be registered concurrently in any other capacity.
    Options Representative. Chapter II, Section 2(h) of the Exchange's 
rulebook provides that each person associated with a member who is 
included within the definition of a representative as defined in Rule 
1031 may register with the Exchange as a Limited Representative--
Options and Security Futures if: (A) Such person's activities in the 
investment banking or securities business of the member involve the 
solicitation or sale of option or security futures contracts, including 
option contracts on government securities as that term is defined in 
Section 3(a)(42)(D) of the Act, for the account of a broker, dealer or 
public customer; and (B) such person passes an appropriate 
qualification examination for Limited Representative--Options and 
Security Futures. It also provides that each person seeking to register 
and qualify as a Limited Representative--Options and Security Futures 
must, concurrent with or before such registration may become effective, 
become registered with the Exchange or another SRO as either as a 
Limited Representative--Corporate Securities or Limited 
Representative--Government Securities. The Limited Representative--
Options and Security Futures registration category is the same as the 
Options Representative category.
    Corporate Securities Representative. Rule 1032(e) currently 
provides that each associated person of a member who is included within 
the definition of ``representative'' in Rule 1031 may register as a 
Corporate Securities Representative, instead of a General Securities 
Representative, if the individual's activities are limited solely to 
securities as defined under Section 3(a)(10) of the Act, other than 
municipal securities, options, mutual funds (except for money market 
funds), variable contracts and direct participation program securities. 
Individuals registering as Corporate Securities Representatives must 
pass the Corporate Securities Representative examination.
    The Exchange is proposing to eliminate the current registration 
categories of Order Processing Assistant Representative, Options 
Representative, and Corporate Securities, as FINRA has done in the 
FINRA Rule Changes. The Exchange believes that the utility of the Order 
Processing Assistant Representative registration category has 
diminished as technological advances and changes in industry practice 
have reduced the need for such representatives. As a result, the volume 
of candidates taking the Order Processing Assistant Representative 
examination has diminished. The Options Representative and Corporate 
Securities Representative registration categories were created over the 
years as subcategories of the General Securities Representative 
category. These subcategories currently allow an individual to sell a 
subset of the products (e.g., options, common stocks and corporate 
bonds) permitted to be sold by a General Securities Representative. In 
recent years, however, the utility of these subcategories has also 
diminished as a result of technological, regulatory and business 
practice changes. This is evidenced by the low annual volume for each 
of these examinations and the relatively low number of individuals who 
currently hold these registrations.
    Investment Company and Variable Products Representatives, 
Investment Company and Variable Contracts Products Principals, Order 
Processing Assistant Representatives, Options Representatives, and 
Corporate Securities Representatives would be eligible to maintain 
their registrations with the Exchange. Specifically, 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 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 these 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 Rule 1042.\73\
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    \73\ 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)
    Rule 1060(a) currently provides that the following persons 
associated with a member are not required to register:
    (1) Persons associated with a member whose functions are solely and 
exclusively clerical or ministerial;
    (2) persons associated with a member who are not actively engaged 
in the investment banking or securities business;
    (3) persons associated with a member whose functions are related 
solely and exclusively to the member's need for nominal corporate 
officers or for capital participation; and
    (4) persons associated with a member whose functions are related 
solely and exclusively to: (A) Effecting transactions on the floor of 
another national securities exchange and who are registered as floor 
members with such exchange; (B) transactions in municipal securities; 
(C) transactions in commodities; (D) transactions in security futures, 
provided that any such person is registered with FINRA or a registered 
futures association; or (E) transactions in variable contracts and 
insurance premium funding programs and other contracts issued by an 
insurance company; (F) transactions in

[[Page 52003]]

direct participation programs; (G) Reserved; (H) transactions in 
government securities; or (I) 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.
    (5) Persons associated with a member that are not citizens, 
nationals, or residents of the United States or any of its territories 
or possessions and that will conduct all of their securities activities 
in areas outside the jurisdiction of the United States and will not 
engage in any securities activities with or for any citizen, national 
or resident of the United States.
    Rule 1060(a) is not meant to provide an exclusive or exhaustive 
list of exemptions from registration. Associated persons may otherwise 
be exempt from registration based on their activities and functions.
    The Exchange is proposing to adopt Rule 1060(a) as Rule 1230 
subject to the following changes. As noted above, Rule 1060(a) exempts 
from registration those associated persons who are not actively engaged 
in the investment banking or securities business. Rule 1060(a) 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.\74\ 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 investment 
banking or 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 
1060(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.\75\ 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.\76\
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    \74\ 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.
    \75\ Proposed Rule 1230 differs from FINRA Rule 1230 in that it 
contains a number of additional exemptions, based upon current 
Nasdaq Rule 1060(a), which are not included in FINRA Rule 1230.
    \76\ 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.
---------------------------------------------------------------------------

    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 CE Requirements (Proposed Rule 1240)
    As described above, current Rule 1120 includes a Regulatory Element 
and a Firm Element. The Regulatory Element applies to registered 
persons and consists of periodic computer-based training on regulatory, 
compliance, ethical, supervisory subjects and sales practice standards. 
The Firm Element consists of at least annual, member-developed and 
administered training programs designed to keep covered registered 
persons current regarding securities products, services and strategies 
offered by the member. The Exchange is proposing to delete Rule 1120 
and replace it with Rule 1240. Proposed Rule 1240 would differ from 
current Rule 1120 in a number of respects, discussed below.\77\
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    \77\ 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'' 
under current Rule 1120(a) 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.
    The Exchange is also proposing to remove the requirements currently 
found in Rule 1120(a)(1) prescribing the

[[Page 52004]]

specific Regulatory Elements administered by FINRA that are required 
for General Securities Representatives, Securities Traders or persons 
registered in a supervisory capacity, so that Rule 1240(a)(1) will 
conform more closely to the FINRA counterpart rule which does not 
identify specific Regulatory Element requirements for particular 
categories of registrant.
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 1140, Electronic Filing Requirements for Uniform 
Forms, is proposed to be relocated as Rule 1250, Electronic 
Requirements for Uniform Forms, with non-substantive conforming 
changes. As revised the 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. Rule 1250, as part of the uniform 1200 Series, will 
consolidate Form U4 and U5 electronic filing requirements in a single 
location, across the Nasdaq Affiliated Exchanges.
Q. Other Rules
    The Exchange is deleting Rule 1060, Persons Exempt from 
Registration, as explained above. Rule 1060(b) however, contains 
provisions dealing with Nonregistered Foreign ``Finders'' and is simply 
being relocated with non-substantive changes to new Rule 2040.\78\ The 
remaining rules identified above under ``Overview'' which are to be 
amended in this proposed rule change but are not further discussed 
herein simply update citations and/or make technical or non-substantive 
changes to the proposed new rules.
---------------------------------------------------------------------------

    \78\ The FINRA counterpart to current Rule 1060(b) occupies a 
similar location in the FINRA rulebook. See FINRA Rule 2040(c), 
Nonregistered Foreign Finders.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\79\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\80\ 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.
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    \79\ 15 U.S.C. 78f(b).
    \80\ 15 U.S.C. 78f(b)(5).
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    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 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 
Exchange rules to maintain appropriate parallelism with corresponding 
Exchange rules, in order to prevent unnecessary regulatory burdens and 
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

[[Page 52005]]

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 to registration of developers of algorithmic trading 
strategies in particular, 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 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.
    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) \81\ 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.\82\ 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.\83\
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    \81\ 17 CFR 240.19b-4(f)(6)(iii).
    \82\ See supra note 5.
    \83\ 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).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \84\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \84\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-NASDAQ-2018-078 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-NASDAQ-2018-078. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2018-078, and should be submitted 
on or before November 5, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\85\
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    \85\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22295 Filed 10-12-18; 8:45 am]
 BILLING CODE 8011-01-P


