[Federal Register Volume 87, Number 133 (Wednesday, July 13, 2022)]
[Notices]
[Pages 41814-41832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-14885]



[[Page 41814]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95219; File No. SR-Phlx-2022-28]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Phlx's 
General 3 Membership Rules

July 7, 2022.
    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 June 27, 2022, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III, 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 delete the Exchange's membership rules 
currently under Phlx General 3 (Membership and Access), and incorporate 
by reference The Nasdaq Stock Market LLC's (``Nasdaq'') rules in the 
General 3 Rule 1000 Series, and make other related changes. The 
Exchange also proposes to relocate some rules currently within Phlx 
General 3 to General 2, Organization and Administration, Sections 10, 
11, 23 and 24; Equity 2, Market Participants, Section 3; and Options 2, 
Options Market Participants, Section 2.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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
    General 3 of Phlx's General Equity and Option Rules and Nasdaq's 
General 3, Rules 1000 Series prescribe the qualifications and 
procedures for applying for membership, respectively, on Phlx and 
Nasdaq. Phlx proposes to delete in their entirety the rules under its 
General 3 title, entitled ``Membership and Access,'' and incorporate by 
reference the Nasdaq General 3, Rules 1000 Series (the ``Nasdaq Rule 
1000 Series'' or ``Nasdaq Membership Rules'') as described below.\3\
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    \3\ The Exchange will separately request an exemption from the 
rule filing requirements of Section 19(b) of the Act for changes to 
General 3 to the extent such changes are affected solely by virtue 
of a change to the Nasdaq Rule 1000 Series. The Exchange's proposed 
rule change will not become effective unless and until the 
Commission approves this exemption request.
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    The Exchange also proposes to relocate some rules currently within 
Phlx General 3 to General 2, Organization and Administration, Sections 
10, 11, 23 and 24; Equity 2, Market Participants, Section 3; and 
Options 2, Options Market Participants, Section 2. This proposal is 
part of the Exchange's plan to harmonize its membership rules with the 
membership rules of Nasdaq, Nasdaq BX, Inc. (``BX''), Nasdaq GEMX, LLC 
(``GEMX''), Nasdaq MRX, LLC (``MRX''), and Nasdaq ISE, LLC (``ISE'') 
exchanges (collectively the ``Affiliated Exchanges''). The Exchange 
notes that the Affiliated Exchanges have made amendments to their 
membership rules that made their rules substantially similar to those 
of Nasdaq.\4\ To account for any differences that may exist between 
Phlx's General 3 Rules and Nasdaq's General 3 Rules, the proposed 
introductory paragraph lists instances in which cross references in the 
Nasdaq Series 1000 Rules to other Nasdaq rules shall be read to refer 
instead to the Exchange Rules, and references to Nasdaq terms (whether 
or not defined) shall be read to refer to the Exchange-related meanings 
of those terms. Specifically, references to defined terms ``Exchange'' 
or ``Nasdaq'' shall be read to refer to the Phlx Exchange; ``Rule'' or 
``Exchange Rule'' shall be read to refer to the Exchange Rules; the 
defined term ``Applicant'' in the Nasdaq Rule 1000 Series shall be read 
to refer to an Applicant of the Phlx Exchange; the defined terms 
``Board'' or ``Exchange Board'' in the Nasdaq Rule 1000 Series shall be 
read to refer to the Phlx Board of Directors; the defined term 
``Director'' in the Nasdaq Rule 1000 Series shall be read to refer to a 
Director of the Board of the Phlx Exchange; the defined term ``Exchange 
Review Council'' in the Nasdaq Rule 1000 Series shall be read to refer 
to the Phlx Exchange Review Council; the defined term ``Subcommittee'' 
in the Nasdaq Rule 1000 Series shall be read to refer to a Subcommittee 
of the Phlx Exchange Review Council; the defined term ``Interested 
Staff'' in the Nasdaq Rule 1000 Series shall be read to refer to 
Interested Staff of Phlx; the defined term ``Member'' in the Nasdaq 
Rule 1000 Series shall be read to refer to a Phlx member (as defined 
under Phlx General 1, Section 1(16)) or member organization (as defined 
under Phlx General 1, Section 1(17)); the defined terms ``Lead Market 
Maker'' or ``Market Maker'' shall be read to refer to a Nasdaq Phlx 
Associated Person; the defined term ``Associated Person'' shall be read 
to refer to a Phlx Associated Person or Person Associated with a member 
organization (as defined under Phlx General 1, Section 1(2)); the 
defined terms ``Exchange Membership Department'' or ``Membership 
Department'' shall be read to refer to the Phlx Membership Department; 
and the defined term ``Exchange Regulation Department'' shall be read 
to refer to the Phlx Regulation Department.
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    \4\ The Affiliated Exchanges' membership rules were previously 
amended to incorporate by reference Nasdaq's membership rules. See 
Securities Exchange Act Release Nos. 86425 (July 22, 2019), 84 FR 
36139 (July 26, 2019) (SR-BX-2019-022); 90903 (January 12, 2021), 86 
FR 5284 (January 19, 2021) (SR-ISE-2020-43); 91672 (April 26, 2021), 
86 FR 23001 (April 30, 2021) (SR-GEMX-2021-02); and 91674 (April 26, 
2021), 86 FR 23013 (April 30, 2021) (SR-MRX-2021-03).
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    Additionally, cross references in the Nasdaq Rule 1000 Series to 
``General 1 and Equity 1'' shall be read as references to Phlx General 
1, Section 1; cross references in the Nasdaq Rule 1000 Series to 
``General 9, Section 20'' shall be read as references to Phlx General 
9, Section 20 and Phlx Supplementary Material .01 of Options 10, 
Section 5; cross references in the Nasdaq Rule 1000 Series to ``General 
9, Section 37'' shall be read as references to Phlx General 9, Section 
37; and cross references to the ``General 4, Rule 1200 Series'' shall 
be read as references to Phlx General 4, Section 1.\5\
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    \5\ The Exchange notes that its General 4 title (entitled 
``Registration Requirements'') currently incorporates by reference 
the rules contained in Nasdaq's General 4 title. See Securities 
Exchange Act Release No. 85761 (May 2, 2019), 84 FR 20176 (May 8, 
2019) (SR-Phlx-2019-18) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change To Delete and Relocate the 
Exchange's Current Registration, Qualification and Continuing 
Education Rules).

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[[Page 41815]]

    As compared to the Exchange's existing General 3, by virtue of 
incorporating by reference the Nasdaq Membership Rules into the 
Exchange's rulebook, the Exchange's membership rules will be organized 
in a more logical order. The incorporated rules will eliminate 
unnecessary or vague provisions that exist under the current General 3 
title, eliminate unnecessary complexity in the membership process, and 
otherwise streamline the Exchange's existing membership rules and their 
associated procedures.
Summary of Proposed Changes
    A comparison between the Exchange's existing General 3 and the 
Nasdaq Membership Rules is summarized below. As a general matter, in 
comparison to the Exchange's existing membership rules, the Nasdaq 
Membership Rules provide for more specific membership procedures and 
due process. Moreover, as described below, some of the Nasdaq Rule 1000 
Series rules have no analogue in the existing Exchange rules.
    The Exchange notes that Nasdaq's General 4, Registration 
Requirements were previously streamlined across the Affiliated 
Exchanges. Phlx's General 4 Rules are incorporated by reference to 
Nasdaq General 4.
Proposed General 3, Rule 1001 (Phlx Regulatory Contract With FINRA) \6\
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    \6\ For purposes of this rule change, references to proposed 
Phlx General 3 Rules shall mean the Nasdaq General 3 Rules which 
Phlx proposes to incorporate by reference.
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    Nasdaq General 3, Rule 1001 states that Nasdaq and the Financial 
Industry Regulatory Authority (``FINRA'') are parties to a Regulatory 
Contract, pursuant to which FINRA has agreed to perform certain 
functions described in the Nasdaq General 3, Rule 1000 Series and the 
Nasdaq General 4, Rule 1200 Series on behalf of Nasdaq.\7\ Moreover, 
Nasdaq General 3, Rule 1001 provides that Nasdaq rules that refer to 
Nasdaq's Regulation Department, Nasdaq Regulation Department staff, 
Nasdaq staff, and Nasdaq departments should be understood as also 
referring to FINRA staff and FINRA departments acting on behalf of 
Nasdaq pursuant to the Regulatory Contract.
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    \7\ Nasdaq's General 4, Section 1 (Registration, Qualification 
and Continuing Education) is currently incorporated by reference 
into the Exchange's General 4 title. See supra note 5.
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    Nasdaq General 3, Rule 1001 also provides that, notwithstanding the 
fact that Nasdaq has entered into the Regulatory Contract with FINRA to 
perform some of Nasdaq's functions, Nasdaq shall retain ultimate legal 
responsibility for, and control of, such functions. In addition, the 
rule informs that Nasdaq has incorporated by reference certain FINRA 
rules and that Nasdaq members shall comply with those rules and 
interpretations as if such rules and interpretations were part of 
Nasdaq's Rules.
    Nasdaq General 3, Rule 1001 currently has no analogue rule under 
Phlx's membership rules. Current Phlx General 2, Section 5 does permit 
the Phlx Board to authorize any officer, on behalf of the Exchange, 
subject to the approval of the Board, to enter into one or more 
agreements with another self-regulatory organization to provide 
regulatory services to the Exchange to assist the Exchange in 
discharging its obligations under Section 6 and Section 19(g) of the 
Act.\8\ Similar to Nasdaq, Phlx has entered into a Regulatory Services 
Agreement with FINRA. FINRA performs substantially similar services for 
Nasdaq pursuant to its Regulatory Services Agreement with FINRA as it 
performs for Phlx pursuant to Phlx's Regulatory Services Agreement with 
FINRA.\9\ Therefore, the language of proposed General 3, Rule 1001 is 
applicable to the Exchange, as the Exchange is, similarly, a signatory 
of a Regulatory Contract with FINRA, pursuant to which FINRA has agreed 
to perform certain membership functions on its behalf, and the Exchange 
also retains the ultimate legal responsibility for the performance of 
said functions. The Exchange believes that the incorporation by 
reference of Nasdaq General 3, Rule 1001 is not a substantive amendment 
to the Exchange rules.
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    \8\ Phlx General 2, Section 5, Regulatory Services Agreements, 
provides, ``The Board may authorize any officer, on behalf of the 
Exchange, subject to the approval of the Board, to enter into one or 
more agreements with another self-regulatory organization to provide 
regulatory services to the Exchange to assist the Exchange in 
discharging its obligations under Section 6 and Section 19(g) of the 
Exchange Act. Any action taken by another self-regulatory 
organization, or its employees or authorized agents, acting on 
behalf of the Exchange pursuant to a regulatory services agreement 
shall be deemed to be an action taken by the Exchange; provided, 
however, that nothing in this provision shall affect the oversight 
of such other self-regulatory organization by the Securities and 
Exchange Commission. Notwithstanding the fact that the Exchange may 
enter into one or more regulatory services agreements, the Exchange 
shall retain ultimate legal responsibility for, and control of, its 
self-regulatory responsibilities, and any such regulatory services 
agreement shall so provide.''
    \9\ For example, Phlx may act as a designated examining 
authority, while Nasdaq does not act as a designated examining 
authority. Therefore, FINRA performs certain regulatory functions 
for Phlx as the designated examining authority that would not be 
performed under the Nasdaq RSA.
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Proposed General 3, Rule 1002 (Qualifications of Exchange Members and 
Associated Persons; Registration of Branch Offices and Designation of 
Office of Supervisory Jurisdiction)
    Nasdaq General 3, Rule 1002, which will be incorporated by 
reference under the Exchange's General 3 title, describes the 
qualifications of members, member organizations and Associated Persons, 
the registration of branch offices, and the designation of a member's 
or member organization's office of supervisory jurisdiction. The 
Exchange will adopt by incorporation the provisions of Nasdaq General 
3, Rule 1002 and delete those under current Phlx General 3, Section 1. 
The Exchange believes that incorporating by reference this rule will 
further the Exchange's objective to provide uniformity and clarity to 
its rules by aligning them with the membership rules of Nasdaq and 
other Affiliated Exchanges.
    Proposed General 3, Rule 1002(a) provides that any registered 
broker or dealer shall be eligible for membership in Nasdaq (except for 
those excluded under paragraph (b) of the rule); additionally, 
paragraph (a) provides that any person shall be eligible to become an 
Associated Person of a member organization (except for those excluded 
under General 3, Rule 1002(b)). Proposed General 3, Rule 1002(a) is 
similar to current Phlx General 3, Sections 1(b) \10\ and (f)(1)(i) 
\11\ to the extent that it describes that brokers or dealers may become 
member organizations or an Associated Person of a member 
organization.\12\ The Exchange

[[Page 41816]]

believes that incorporating by reference Nasdaq General 3, Rule 1002(a) 
expands upon current Phlx General 3, Sections 1(b) and (f)(1)(i) by 
explicitly referencing an associated person of a member organization 
(``Associated Person'').\13\ Today, persons may be ineligible to be 
associated with a Phlx member organization under certain circumstances 
(e.g. statutory disqualification) notwithstanding the absence of 
specific language.
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    \10\ Phlx General 3, Sections 1(b) states, ``Only an 
organization whose principal purpose is the transaction of business 
as a broker or dealer in securities may be qualified as a member 
organization.''
    \11\ Phlx General 3, Sections 1(f)(1)(i) states, ``To obtain and 
maintain the status of a member organization, an organization shall: 
(i) be a broker or dealer duly registered under the Exchange Act. . 
.''.
    \12\ The term ``member'' means a permit holder which has not 
been terminated in accordance with the By-Laws and these Rules of 
the Exchange. A member is a natural person and must be a person 
associated with a member organization. Any references in the rules 
of the Exchange to the rights or obligations of an associated person 
or person associated with a member organization also includes a 
member. See Phlx General 1, Section 1(16). The term ``member 
organization'' means a corporation, partnership (general or 
limited), limited liability partnership, limited liability company, 
business trust or similar organization, transacting business as a 
broker or a dealer in securities and which has the status of a 
member organization by virtue of (i) admission to membership given 
to it by the Membership Department pursuant to the provisions of 
General 3, Sections 5 and 10 or the By-Laws or (ii) the transitional 
rules adopted by the Exchange pursuant to Section 6-4 of the By-
Laws. References herein to officer or partner, when used in the 
context of a member organization, shall include any person holding a 
similar position in any organization other than a corporation or 
partnership that has the status of a member organization. See Phlx 
General 1, Section 1(17).
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    The Exchange believes the remaining provisions of current Phlx 
General 3, Section 1 are unnecessary or incorporated by reference in 
other sections of the Nasdaq Rule. Current Phlx General 3, Section 1(a) 
provides that the Exchange's Board of Directors may permit a member of 
the Exchange to qualify an entity as a member organization, subject to 
such terms and conditions as may from time to time be prescribed by 
rule or may be imposed by the Board of Directors. Phlx's Membership 
Department reviews and approves all applicants for membership. The 
Exchange proposes to delete current Phlx General 3, Section 1(a). 
Instead, the Exchange would require all applications to be approved 
pursuant to the prescribed process detailed within the proposed General 
3 Rules. Today, Nasdaq's General 3 Rules apply to all Affiliated 
Exchanges, except Phlx.\14\
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    \14\ Today, all Affiliated Exchange General 3 Rules, except 
Phlx, incorporate by reference Nasdaq General 3.
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    Current Phlx General 3, Section 1(c) provides that a member 
organization shall be organized under the laws of a jurisdiction 
approved by the Membership Department. The Exchange has not restricted 
any broker dealer from becoming a member organization of the Exchange, 
provided the broker dealer meets all the membership requirements 
specified in Phlx's General 3 rules, notwithstanding the jurisdiction 
under which the member organization determines to be organized. The 
Exchange proposes to remove this rule as unnecessary. Additionally, no 
other Affiliated Exchange has a similar rule.
    Additionally, current Phlx General 3, Section 1(d) states that if 
it appears to the Membership Department that the business form of a 
member organization is being used to evade financial responsibility, 
such organization shall not be registered as a member organization. The 
Exchange believes that the membership qualifications described in 
current Phlx General 3, Section 1(d) are consistent with the 
eligibility criteria described in proposed General 3, Rule 1014(b) \15\ 
discussed below, with the exception of General 3, Rule 1014(b)(3) as 
discussed later in this section. The Exchange proposes to delete 
current Phlx General 3, Section 1(d) as that provision will be 
accounted for within proposed General 3, Rule 1014.
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    \15\ Nasdaq General 3, Rule 1014(b), titled ``Bases for Approval 
Conditional Approval, or Denial'' states, ``After considering the 
completed application, other information and documents provided by 
the Applicant, other information and documents obtained by the 
Department, and the public interest and the protection of investors, 
the Department shall approve an application under Rules 1013 or 1017 
by an Applicant that is not, and is not required to become, a FINRA 
member unless the Department determines that such information or 
documents provide a basis for denial of membership: (1) The 
Department may deny (or condition) approval of an Applicant for the 
same reasons that the Commission may deny or revoke a broker or 
dealer registration and for those reasons required or allowed under 
the Act; (2) Without limiting the generality of the foregoing, the 
Department may deny (or condition) approval of an Applicant when the 
Applicant directly or indirectly: (A) is unable to satisfactorily 
demonstrate its present capacity to adhere to all applicable 
Exchange and Commission policies, rules, and regulations, including, 
without limitation, those concerning recordkeeping, reporting, 
finance, and trading procedures; (B) has previously violated, and 
there is a reasonable likelihood such Applicant will again engage in 
acts or practices violative of, any applicable Exchange or 
Commission policies, rules and regulations, including, without 
limitation, those concerning record-keeping, reporting, finance and 
trading procedures or those rules of other self-regulatory 
organizations of which such Applicant is or was a member; (C) has 
engaged, and there is a reasonable likelihood such Applicant will 
again engage, in acts or practices inconsistent with just and 
equitable principles of trade; (D) is not in compliance with the 
Commission's net capital rule (17 CFR 240.15c3-1), or has financial 
difficulties involving an amount that is more than 5% of the 
Applicant's net worth; (E) has been itself, or is the successor to 
an entity which has been subject to any bankruptcy proceeding, 
receivership or arrangement for the benefit of creditors within the 
past three years; (F) has engaged in an established pattern of 
failure to pay just debts; (G) does not have such licenses and 
registrations as are required by governmental authorities and self-
regulatory organizations; or (H) is unable satisfactorily to 
demonstrate reasonably adequate systems capacity and capability. (3) 
The Department will not approve an Applicant unless the Applicant is 
a member of another registered securities exchange or association 
that is not registered solely under Section 6(g) or Section 15A(k) 
of the Securities Exchange Act of 1934. An Applicant that will 
transact business with the public must be a member of FINRA.
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    Moreover, current Phlx General 3, Section 1(e) states that no bank 
and no investment trust may be qualified or registered as a member 
organization. Today, a bank or an investment trust would need to be 
registered as a broker dealer in order to apply to be a member 
organization of the Exchange. This is similar to the membership 
requirements of proposed General 3, Rule 1002(a) \16\ which also 
provides that registered broker or dealers are eligible for membership. 
The Exchange proposes to delete current Phlx General 3, Section 1(e) 
since the requirement to be a broker or dealer is clearly stated and a 
bank or an investment trust would be subject to the same requirements 
as all other applicants.
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    \16\ Nasdaq General 3, Rule 1002(a), titled ``Persons Eligible 
to Become Members and Associated Persons,'' states, ``(1) Any 
registered broker or dealer shall be eligible for membership in the 
Exchange, except such registered brokers or dealers as are excluded 
under paragraph (b). (2) Any person shall be eligible to become an 
Associated Person of a Member, except such persons as are excluded 
under paragraph (b).''
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    Current Phlx General 3, Section 1(f)(1) states,

    To obtain and maintain the status of a member organization, an 
organization shall: (i) be a broker or dealer duly registered under 
the Exchange Act; (ii) be duly qualified by a permit holder who is 
primarily affiliated with such organization for purposes of 
nominating as provided in the By-Laws; (iii) have submitted to the 
Membership Department an application for such status in the form 
approved by the Membership Department and any other information and 
materials requested by the Membership Department; (iv) have had such 
application approved by the Membership Department; and (v) meet such 
other requirements as are set forth in these By-Laws or the Rules of 
the Exchange.

As stated above, the Exchange believes that the membership 
qualifications described in current Phlx General 3, Section 1(f)(1)(i) 
are consistent with the eligibility criteria described in proposed 
General 3, Rule 1002(a).\17\ The membership qualifications described in 
current Phlx General 3, Section 1(f)(1)(ii) are specific to Phlx in 
that in order to obtain and maintain the status of a Phlx member 
organization, an organization shall be duly qualified by a permit 
holder who is primarily affiliated with such organization for purposes 
of nominating as provided in the By-Laws. The Exchange proposes to 
retain this requirement by adding rule text within Phlx General 3 which 
states, ``In order to obtain and maintain the status of a Phlx member 
organization, an organization shall be duly qualified by a permit 
holder who is primarily affiliated with such organization for purposes 
of nominating as provided in the By-Laws.'' This proposed rule text 
will allow Phlx to retain this unique requirement while also 
incorporating by

[[Page 41817]]

reference Nasdaq's General 3 rules. The Exchange believes that the 
membership qualifications described in current Phlx General 3, Section 
1(f)(1)(iii) are consistent with the eligibility criteria described 
further below in proposed General 3, Rule 1014. Further, approval by 
the Membership Department as described within current Phlx General 3, 
Section 1(f)(1)(iv) is inherent within the proposed General 3 
membership rules and compliance with the By-Laws and Rules of the 
Exchange within current Phlx General 3, Section 1(f)(1)(v) is a catch-
all provision which requires an applicant to meet other requirements 
set forth in the by-laws and rules of the Exchange. Today, every Phlx 
member and member organization is required to comply with the 
requirements set forth in the by-laws and rules of the Exchange and, 
therefore, this provision is unnecessary. Additionally, no other 
Affiliated Exchange has a similar rule, although all members of 
Affiliated Exchanges are required to meet other requirements set forth 
in the by-laws and rules of the exchange. Accordingly, the Exchange 
proposes to delete current Phlx General 3, Section 1(f)(1) as those 
provisions not covered by proposed General 3, Rule 1002(a) are covered 
within proposed General 3, Rule 1014, with the exception of General 3, 
Section 1(f)(1)(ii) which will be preserved in Phlx General 3's rule 
text as described above.
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    \17\ The Exchange notes that while Phlx General 3, Section 
1(f)(1) mentions a ``permit holder,'' that term is encompassed 
within the definition of ``member'' as defined within Phlx General 
1, Section 1(16). The proposed General 3 rule notes the difference 
in the term ``member'' between Nasdaq's and Phlx's definitions.
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    With respect to current Phlx General 3, Section 1(f)(2),\18\ the 
Exchange proposes to remove this rule text because it is otherwise 
superseded by proposed General 3, Rule 1017(a)(5)(B) which provides 
that a member or member organization is required to file an application 
for approval if a material change in business operations occurs, which 
includes, ``acting as a dealer or market maker for the first time.'' 
Current Section 1(f)(2) provides that to obtain and maintain Market 
Maker status on PSX, a member organization whose market making has not 
previously been approved by FINRA, Nasdaq under General 3, or Nasdaq BX 
under General 3 shall submit an application and any other requested 
information and material to, and have it approved by, the Membership 
Department and meet such other requirements as are set forth in the By-
Laws or Rules of the Exchange.\19\ The information to be provided shall 
include a business plan, an organizational chart, written supervisory 
procedures reflecting the change, and such other information as the 
Membership Department may request. Proposed General 3, Rule 1017 
expands on current Phlx General 3, Section 1(f)(2) by explaining the 
process in more detail and requiring additional material such as pro 
forma financials.
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    \18\ Current Phlx General 3, Section 1(f)(2) provides, ``To 
obtain and maintain the status of a Market Maker on PSX, a member 
organization whose market making has not previously been approved by 
FINRA under the NASD Rule 1000 Series (or such successor FINRA Rules 
as may be adopted by FINRA), Nasdaq under General 3, or Nasdaq BX 
under General 3 shall: (i) have submitted to the Membership 
Department an application for such status in the form approved by 
the Membership Department and any other information and material 
requested by the Membership Department; (ii) have had such 
application approved by the Membership Department; and (iii) meet 
such other requirements as are set forth in the By-Laws or Rules of 
the Exchange. The information to be provided shall include a 
business plan, an organizational chart, written supervisory 
procedures reflecting the change, and such other information as the 
Membership Department may request.''
    \19\ Proposed General 3, Rule 1017(a)(5)(B) requires members and 
member organizations applying to become a Market Maker to seek 
Exchange approval and therefore would supersede Phlx Section 1(f)(2) 
as first time Market Makers would continue to be required to seek 
Exchange approval. Similar to current General 3, Section 1(f)(2), 
approval would not be required under proposed General 3, Rule 
1017(a) if an exchange affiliated with the Exchange or a Member's 
Designated Examining Authority has already approved the change in 
accordance with its respective rules.
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    Generally speaking, current Phlx General 3, Section 1(f)(3) 
describes the expedited process for membership applications. Today, 
Phlx accepts Nasdaq's and BX's membership process as a basis for 
membership on Phlx. Incorporating Nasdaq's rule would further support 
this reciprocity as an applicant would be subject to the same process 
for both Nasdaq and Phlx membership. Also, as discussed further below, 
proposed General 3, Rule 1013(b)(2) \20\ is substantially similar to 
the provisions in current Phlx General 3, Section 1(f)(3).
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    \20\ Proposed General 3, Rule 1013(b)(2) concerns the Special 
Application Procedures Applicable to Applicants that are Already 
Members of an Affiliated Exchange.
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    Current Phlx General 3, Section 1(g) allows the Board to terminate 
the registration of a member organization by the affirmative vote of a 
majority of the Board if the member organization is found to have 
violated the terms and conditions, or fails to meet the requirements, 
of its registration. The Exchange believes that this rule is 
substantially similar to General 5, Rule 8310 \21\ of the Exchange's 
disciplinary rules and is therefore not necessary to be retained within 
the Membership Rules.
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    \21\ Nasdaq General 5, Rule 8310 concerns the Sanctions for 
Violation of the Rules.
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    Current Phlx General 3, Section 1(h) allows for a member 
organization or an Exchange member who has qualified a member 
organization to apply for termination of the registration of the member 
organization.\22\ The Exchange believes that proposed General 3, Rule 
1018,\23\ discussed further below, is similar to, and consistent with 
the requirements of current Phlx General 3, Section 1(h) with respect 
the ability to voluntarily terminate membership. Additionally, both 
rules (proposed General 3, Rule 1018 and Phlx General 3, Section 1(h)) 
provide that the effectiveness of the termination is contingent on all 
indebtedness to the Exchange has been paid. Phlx General 3, Section 
1(h) also requires that commitments and liabilities have been 
discharged to its members and member organizations. This rule is a 
holdover from a time when members leased seats on Phlx prior to 
demutualization. The Exchange has not had occasion to enforce this rule 
in the recent past and believes this portion of the rule is 
unnecessary. The last provision in the Phlx rule, pertaining to death 
or incapacity of the member who has qualified the member organization 
is not necessary to be described within the membership rules. The 
proposed rules would not prohibit a legal representative from being 
used under such circumstances. Also, a member organization could make 
other legal arrangements to obtain proper consent, within the bounds of 
the law and their governing documents, to effect the termination 
without violating the proposed rules. This would be the case in the 
event any officer of any member died or became incapacitated.
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    \22\ Current Phlx General 3, Section 1(h) provides, ``A member 
of the Exchange who has qualified a member organization or a member 
organization may apply to the Membership Department for termination 
of the registration of the member organization. Such termination 
shall become effective upon such date as the Membership Department 
may determine and in no event shall it be effective until and unless 
the member organization and the member have discharged all 
commitments and liabilities to the Exchange and to its members and 
member organizations, or have made provision therefor satisfactory 
to the Membership Department. If the member who has qualified the 
member organization is prevented by death or incapacity from 
applying for the termination of such registration, the application 
may be made under the same terms and conditions as herein provided 
by his legal representative.''
    \23\ Proposed General 3, Rule 1018 concerns the Resignation, 
Reinstatement, Termination, and Transfer of Membership.
---------------------------------------------------------------------------

    Lastly, current Phlx General 3, Section 1(i) provides, ``During the 
unavoidable absence or disability of an officer (or person in a similar 
position) of a member organization who is a member of the Exchange, any 
officer or director (or person in a similar position) of such member 
organization shall have the privilege of effecting transactions on the 
Exchange in the name of the

[[Page 41818]]

member organization.'' This provision has never been invoked by any 
Phlx member or member organization. The Exchange believes that the 
provision is unnecessary and should be removed from Phlx's Rules.\24\
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    \24\ A member's or member organization's governing documents 
and/or business continuity plans would allow a member or member 
organization to appoint alternative officers in such an event.
---------------------------------------------------------------------------

    The Exchange proposes to incorporate Nasdaq General 3, Rule 1002 in 
its entirety.
    Current Phlx General 3, Section 2(a) allows Phlx to deny a permit 
to, or condition the permit of, any person or bar and deny from 
becoming associated, or condition any association of, any person with a 
registered broker or dealer, or deny or condition the qualification or 
registration of any member organization, if any such person, registered 
broker or dealer or member organization is subject to a statutory 
disqualification, as that term is defined in the Act, as amended. This 
provision is similar to proposed General 3, Rule 1002(b)(1) and (2), 
which describe an Applicant's ineligibility of certain persons for 
membership or association due to statutory disqualification.
    Proposed General 3, Rule 1002(b)(1) and (2) describe the 
ineligibility of certain persons for Membership or Association on Phlx. 
Proposed General 3, Rule 1002(b)(1) provides that, subject to certain 
exceptions, no registered broker or dealer shall be admitted to 
membership, and no Member shall be continued in membership, if such 
broker, dealer, or Member fails or ceases to satisfy the qualification 
requirements established by the Rules, or if such broker, dealer, or 
Member is or becomes subject to a statutory disqualification, or if 
such broker, dealer, or Member fails to file such forms as may be 
required in accordance with such process as the Exchange may prescribe. 
Further, proposed General 3, Rule 1002(b)(2) provides, subject to 
certain exceptions, no person shall become associated with a Member, 
continue to be associated with a Member, or transfer association to 
another Member, if such person fails or ceases to satisfy the 
qualification requirements established by the rules (Phlx General 4 
rules govern registration),\25\ or if such person is or becomes subject 
to a statutory disqualification. Also, no broker or dealer shall be 
admitted to membership, and no Member shall be continued in membership, 
if any person associated with it is ineligible to be an Associated 
Person pursuant to Phlx General 3, Section 2(b).
---------------------------------------------------------------------------

    \25\ Phlx's General 4 rules are incorporated by reference to 
Nasdaq's General 4 rules.
---------------------------------------------------------------------------

    Proposed General 3, Rule 1002(b)(2) describes a statutory 
disqualification,\26\ which was recently adopted by Nasdaq.\27\ Similar 
to Nasdaq, Phlx proposes to harmonize its description of statutory 
disqualification to align its application of statutory disqualification 
to FINRA and other Affiliated Exchanges. This proposal would avoid 
potentially different outcomes for members of both FINRA and Phlx with 
respect to ineligibility for membership and association. Additionally, 
other Affiliated Exchanges have adopted the FINRA defined term. 
Harmonizing the description of statutory disqualification would ensure 
that market participants that are members of both FINRA and Phlx, and 
members of another Affiliated Exchange and Phlx, are held to the same 
standard with respect to statutory disqualification.
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    \26\ Proposed General 3, Rule 1002(b)(2) provides, ``For 
purposes of ``statutory disqualification'' as such term is defined 
in Section 3(a)(39) of the Exchange Act the terms ``person 
associated with a member'' and ``associated person'' shall mean (1) 
a natural person who is registered or has applied for registration 
under the Rules of the Exchange; (2) a sole proprietor, partner, 
officer, director, or branch manager of a member, or other natural 
person occupying a similar status or performing similar functions, 
or a natural person engaged in the investment banking or securities 
business who is directly or indirectly controlling or controlled by 
a member, whether or not any such person is registered or exempt 
from registration with the Exchange under its Rules; and (3) for 
purposes of Nasdaq General 5, Rule 8210, any other person listed in 
Schedule A of Form BD of a member.''
    \27\ See Securities Exchange Act Release No.94473 (March 18, 
2022), 87 FR 16804 (March 24, 2022) (SR-NASDAQ-2022-022) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
General 3, Rule 1002, Qualifications of Exchange Members and 
Associated Persons; Registration of Branch Offices and Designation 
of Office of Supervisory Jurisdiction).
---------------------------------------------------------------------------

    Proposed General 3, Rule 1002(c) \28\ establishes, as a condition 
to maintaining membership, that member organizations shall at all times 
maintain membership in a registered securities association that is not 
registered solely under Section 15A(k) of the Act, or another 
registered exchange that is not registered solely under Section 6(g) of 
the Act. Furthermore, the rule prescribes that members and member 
organizations that transact business with customers shall at all times 
be members of FINRA. The Exchange proposes to incorporate this rule by 
reference and provide within the General 3 rule text that members or 
member organizations may comply with proposed General 3, Rule 1002(c) 
if Phlx is the member organization's designated examining authority 
(``DEA'').\29\ Because Phlx acts in the capacity of a DEA, applicants 
for membership who register Phlx as their DEA comply with proposed 
General 3, Rule 1002(c).
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    \28\ Proposed General 3, Rule 1002(c) provides, ``Membership in 
a Registered Securities Association or Another Registered Exchange. 
As a condition to maintaining membership in the Exchange, Members 
shall at all times maintain membership in a registered securities 
association that is not registered solely under Section 15A(k) of 
the Securities Exchange Act of 1934, or another registered exchange 
that is not registered solely under Section 6(g) of the Securities 
Exchange Act of 1934. Members that transact business with customers 
shall at all times be members of FINRA.''
    \29\ The Exchange proposes to add the following to the General 3 
rule text: ``Phlx members and member organizations may comply with 
General 3, Rule 1002(c) and General 3, Rule 1014(b)(3) if Phlx is 
the member's or member organization's designated examining 
authority.''
---------------------------------------------------------------------------

    Current Phlx General 3, Section 2(b) allows the Exchange to deny or 
condition association or membership if the broker, dealer or member 
organization (1) is unable satisfactorily to demonstrate its present 
capacity to adhere to applicable provisions of (i) Sections 15 and 17 
of the Act, as amended, and all rules and regulations promulgated 
thereunder or (ii) Exchange Rules relating to the maintenance of books 
and records; or (2) has previously been found to have violated and 
there is a reasonable likelihood the broker or dealer or member 
organization will again engage in acts or practices violative of (A) 
Sections 15 and 17 of the Act, as amended, and all rules and 
regulations promulgated thereunder, or (B) Rules relating to the 
maintenance of books and records of the Exchange or other self-
regulatory organizations of which the broker or dealer or member 
organization is or was a member. The Exchange believes that the 
conditions for membership described in Phlx Section 2(b) are consistent 
with and are incorporated by reference into the eligibility criteria 
described further below in proposed General 3, Rule 1014(b)(2)(A) and 
(B), which the Exchange is adopting with this proposal. Further, 
current Phlx General 3, Section 2(c) allows the Exchange to deny or 
condition association or membership if the broker, dealer or member 
organization (1) does not successfully complete such written 
proficiency examinations as required by the Exchange to enable it to 
examine and verify the applicant's qualifications to function in one or 
more of the capacities applied for; (2) does not meet such other 
standards of training, experience, and competence as may be established 
by the Exchange; (3) cannot demonstrate a capacity to adhere to all 
applicable policies, rules and regulations of the Exchange or any other 
self-regulatory organization, the SEC, the Board of Governors of the 
Federal

[[Page 41819]]

Reserve System, the Commodity Futures Trading Commission contract 
market designated pursuant to Section 5 of the Commodity Exchange Act 
or futures association registered under Section 17 of such Act; (4) has 
been the subject of findings of fact rendered by any of the above 
mentioned entities such that the broker or dealer, person or member 
organization has engaged in acts or practices inconsistent with just 
and equitable principles of trade, and there is a reasonable likelihood 
the person will do so again; or (5) (i) is subject to any unsatisfied 
liens, judgments or unsubordinated creditor claims of a material 
nature, which remain outstanding (ii) has been or is the successor to 
an entity which has been subject to any bankruptcy proceeding, 
receivership or arrangement for the benefit of creditors within the 
past three years (iii) has been and/or remains associated as a general 
partner, principal, officer, director, stockholder, or registered 
trader for a member organization which has been subject to any 
unsatisfied liens, judgments or unsubordinated creditor claims of a 
material nature (iv) has engaged in a pattern of failure to pay just 
debts (v) would bring the Exchange into disrepute or (vi) for such 
other cause as the Membership Department reasonably may decide. 
Proposed General 3, Section 1014(b)(1) provides that ``[t]he Department 
may deny (or condition) approval of an Applicant for the same reasons 
that the Commission may deny or revoke a broker or dealer registration 
and for those reasons required or allowed under the Act.'' Phlx's 
General 4 rules requires members and member organizations to obtain 
certain registrations and further proposed General 3, Section 
1014(b)(2)(G) permits denial if proper licenses and registrations are 
not obtained. This would be the equivalent of the proficiency 
examination requirements within current Phlx General 3, Section 2(c)(1) 
as well as the standards of training, experience, and competence as may 
be established by the Exchange in other rules pursuant to current Phlx 
General 3, Section 2(c)(1).\30\ Current Phlx General 3, Section 2(c)(3) 
requires a demonstration of a capacity to adhere to all applicable 
policies, rules and regulations of the Exchange or any self-regulatory 
organization, the Commission, the Board of Governors of the Federal 
Reserve System, the Commodity Futures Trading Commission contract 
market designated pursuant to Section 5 of the Commodity Exchange Act 
or futures association registered under Section 17 of such Act. General 
3, Section 1014(b)(2)(A) is, in part, substantially similar to current 
Phlx General 3, Section 2(c)(3). While the provisions of Phlx General 
3, Section 2(c)(3) are broader with respect to other agencies, the 
Exchange notes that to the extent a member or member organization is 
subject to the jurisdiction of other federal agencies, those same rules 
would apply.
---------------------------------------------------------------------------

    \30\ E.g., Phlx By-Law Sec. 7-3, Membership Qualifications; 
General 9, Section 20, Supervision; and Options 8, Section 39, E-15 
Options Trading Floor Training.
---------------------------------------------------------------------------

    Current Phlx General 3, Section 2(c)(4) concerns whether an 
applicant has engaged in acts or practices inconsistent with just and 
equitable principles of trade is substantially similar to proposed 
General 3, Section 1014(b)(2)(C). Current Phlx General 3, Section 
2(c)(5)(i) related to unsatisfied liens, judgments or unsubordinated 
creditor claims of a material nature, which remain outstanding is 
substantially similar to proposed General 3, Section 1014(b)(2)(F). 
Current Phlx General 3, Section 2(c)(5)(ii) related to bankruptcy 
proceeding, receivership or arrangement for the benefit of creditors 
within the past three years is substantially similar to proposed 
General 3, Section 1014(b)(2)(E). Current Phlx General 3, Section 
2(c)(5)(iii) and (iv) relating to unsatisfied liens, judgments or 
unsubordinated creditor claims of a material nature and failure to pay 
just debts is substantially similar to proposed General 3, Section 
1014(b)(2)(F). Current Phlx General 3, Section 2(c)(5)(v) would allow 
the Exchange to deny a permit to, or condition the permit of, any 
person that would bring the Exchange into disrepute. Current Phlx 
General 3, Section 2(c)(5)(vi) would allow the Exchange to deny a 
permit to, or condition the permit of, any person for such other cause 
as the Membership Department reasonably may decide. The proposed rules 
would eliminate the discretion under these two provisions.
    Current Phlx General 3, Section 2(d) permits the Membership 
Department to waive proficiency examinations in exceptional cases where 
good cause is shown upon written request of the applicant. The waiver 
described within current Phlx General 3, Section 2(d) is similar to 
current Supplementary Material .03 of General 4, Section 1210 \31\ with 
one exception. Today, Phlx General 3, Section 2(d) provides, ``Advanced 
age, physical infirmity or experience in fields ancillary to the 
securities business will not individually of themselves constitute 
sufficient grounds to waive a proficiency examination.'' This is 
different from the standard within Supplementary Material .03 of 
General 4, Section 1210 which states, ``Experience in fields ancillary 
to the securities business may constitute sufficient grounds to waive a 
qualification examination.'' Phlx has not waived proficiency 
examinations within the recent past on the grounds of experience in 
fields ancillary to the securities business. Phlx proposes to remove 
Phlx General 3, Section 2(d) and instead waive proficiency examinations 
according to Supplementary Material .03 of General 4, Section 1210. By 
eliminating Phlx General 3, Section 2(d), Phlx will also eliminate the 
conflict that exists today between Phlx and its Affiliated Exchanges, 
thereby harmonizing the qualification examination waiver process across 
Affiliated Exchanges.
---------------------------------------------------------------------------

    \31\ Phlx General 4 incorporates Nasdaq General 4 by reference. 
Supplementary Material .03 of General 4, Section 1210 states, in 
relevant part, ``Pursuant to the Rule 9600 Series, the Exchange may, 
in exceptional cases and where good cause is shown, waive the 
applicable qualification examination(s) and accept other standards 
as evidence of an applicant's qualifications for registration. Age 
or disability will not individually of themselves constitute 
sufficient grounds to waive a qualification examination. Experience 
in fields ancillary to the securities business may constitute 
sufficient grounds to waive a qualification examination. The 
Exchange shall only consider waiver requests submitted by a member 
for individuals associated with the member who are seeking 
registration in a representative or principal registration category. 
Moreover, the Exchange shall consider waivers of the SIE alone or 
the SIE and the applicable representative and principal 
examination(s) for such individuals. The Exchange shall not consider 
a waiver of the SIE for individuals who are not associated persons 
or for associated persons who are not registering with the Exchange 
as representatives or principals.''
---------------------------------------------------------------------------

    Proposed General 3, Rule 1002(d) describes the requirement to 
register a branch office and designate an office of supervisory 
jurisdiction. Phlx Options 10, Section 5, Branch Office, similarly 
provides an obligation to register branch offices with the Exchange and 
requires supervision of such branch offices. Additionally, General 9, 
Section 20(f) requires Phlx DEA members to file a list identifying each 
of its branch offices. Adopting this rule would require all Phlx 
members to likewise register branch offices and designate supervision 
of those branches. The adoption of this rule would make clear the 
uniform requirement that all Phlx members and member organizations have 
to report branch offices and designate supervision of those branches to 
the Exchange. This would include advising the Exchange, via electronic 
means or such other means as the Exchange may prescribe, of the 
opening,

[[Page 41820]]

closing, relocation, change in designated supervisor, or change in 
designated activities of any branch office of such member organization 
not later than 30 days after the effective date of such change. The 
proposed rule provides that members and member organizations that are 
also FINRA members shall be deemed to have complied with this provision 
if they are in compliance with FINRA rules by keeping current Form BR. 
Finally, members and member organizations that are not FINRA members 
shall promptly advise the Exchange by submitting to the Exchange a 
Branch Office Disclosure Form.
Membership Proceedings and Proposed General 3, Rule 1011 (Definitions)
    Proposed General 3, Rule 1011 contains definitions applicable to 
the Membership Rules. Proposed General 3, Rule 1011 has no analogue 
rule in the existing Exchange's General 3 title. By incorporating by 
reference Nasdaq Rule 1011 definitions under General 3, the Exchange 
believes it will further harmonize its rules with respect to the 
membership rules of Nasdaq and other Affiliated Exchanges. Nasdaq Rule 
1011 states that terms used in the Nasdaq Rule 1000 Series and the 
General 4, Rule 1200 Series shall have the meaning as defined in 
General 1 and Equity 1. Similarly, proposed Phlx General 3 shall have 
the meaning as defined in General 1 and Equity 1. The terms 
``Applicant,'' \32\ ``Department,'' \33\ ``Interested Staff,'' \34\ 
``Securities business,'' \35\ ``Exchange Board,'' \36\ ``principal 
place of business,'' \37\ ``registered broker or dealer,'' \38\ 
``Representative,'' \39\ ``sales practice event,'' \40\ and 
``Subcommittee,'' \41\ have not been defined in the Exchange's 
rulebook. The term ``associated person'' as defined in Phlx General 1, 
Section 1(2) is substantially similar to the definition of associated 
person within Nasdaq General 3, Rule 1011(b). The term ``Director'' is 
substantially similar to the term ``Director'' within General 1, 
Section 1(9). The term ``statutory disqualification'' as defined within 
proposed General 3, Rule 1011(n) aligns with the Act definition. 
Relatedly, the term ``Proprietary Trading Firm'' as defined in proposed 
Nasdaq General 3, Rule 1011(o) is substantially similar to the 
definition of ``proprietary trading firm'' within Phlx General 1, 
Section 1(33). The Exchange proposes to adopt by incorporation the text 
of Nasdaq General 3, Rule 1011 in its entirety. The Exchange believes 
that incorporating by reference this rule will further the Exchange's 
objective to provide uniformity and clarity to its rules by aligning 
them with the membership rules of Nasdaq and other Affiliated 
Exchanges.
---------------------------------------------------------------------------

    \32\ The term ``Applicant'' means a person that applies for 
membership in the Exchange under Rule 1013 or a Member that files an 
application for approval of a change in ownership, control, or 
business operations under Rule 1017. See proposed General 3, Rule 
1011(a).
    \33\ The term ``Department'' means the Exchange's Membership 
Department located within the Exchange's Regulation Department. See 
proposed General 3, Rule 1011(c).
    \34\ The term ``Interested Staff'' means an employee who 
directly participates in a decision under Rule 1014 or 1017, an 
employee who directly supervises an employee with respect to such 
decision, an employee who conducted an investigation or examination 
of a member that files an application under Rule 1017, and the head 
of the Department. See proposed General 3, Rule 1011(e).
    \35\ The term ``securities business'' means the business of 
purchasing securities and offering the same for sale as a dealer, or 
of purchasing and selling securities upon the order and for the 
account of others. See proposed General 3, Rule 1011(f).
    \36\ The term ``Exchange Board'' means the Board of Directors of 
the Exchange. See proposed General 3, Rule 1011(h).
    \37\ The term ``principal place of business'' means the 
executive office from which the sole proprietor or the officers, 
partners, or managers of the Applicant direct, control, and 
coordinate the activities of the Applicant, unless the Department 
determines that the principal place of business is where: (1) the 
largest number of Associated Persons of the Applicant are located; 
or (2) the books and records necessary to provide information and 
data to operate the business and comply with applicable rules are 
located. See proposed General 3, Rule 1011(i).
    \38\ The term ``registered broker or dealer'' means any broker 
or dealer, as defined in Section 3(a)(48) of the Act, that is 
registered with the Commission under the Act. See proposed General 
3, Rule 1011(j).
    \39\ The term ``Representative'' shall have the meaning assigned 
to it in General 4, Rule 1220(b)(1). All Representatives of the 
Exchange Members are required to be registered with the Exchange, 
and Representatives that are so registered are referred to herein as 
``Registered Representatives.'' See proposed General 3, Rule 
1011(k).
    \40\ The term ``sales practice event'' means any customer 
complaint, arbitration, or civil litigation that has been reported 
to the Central Registration Depository, currently is required to be 
reported to the Central Registration Depository, or otherwise has 
been reported to the Exchange. See proposed General 3, Rule 1011(l).
    \41\ The term ``Subcommittee'' means a subcommittee of the 
Exchange Review Council that is constituted pursuant to Rule 1015 to 
conduct a review of a Department decision issued under the Rule 1010 
Series. See proposed General 3, Rule 1011(m).
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Proposed General 3, Rule 1012 (General Application Provisions)
    Proposed General 3, Rule 1012 (``General Application Provisions'') 
provides a detailed outline of the requirements that an Applicant must 
follow in order to file an application for membership. In contrast, the 
Exchange's General 3 membership rules do not describe in detail the 
manner in which an application shall be submitted or how service shall 
be performed. The Exchange believes that adopting proposed General 3, 
Rule 1012 will provide a more detailed set of instructions for 
Applicants, members, member organizations, and Associated Persons to 
submit materials and the requirements for service of documents. The 
Exchange believes that incorporating proposed General 3, Rule 1012 by 
reference will further the Exchange's objective to provide uniformity 
and clarity to its rules by aligning them with the membership rules of 
Nasdaq and other Affiliated Exchanges.
    Proposed General 3, Rule 1012(a) provides that Applicants, members 
and member organizations may submit an application or other documents 
and information to the Exchange by first-class mail, overnight courier, 
hand delivery, or by electronic means (or facsimile if the Department 
and the Applicant, member, or member organization agree); this section 
also provides that the Exchange shall serve a notice or decision issued 
under the Membership Rules by first-class mail or electronic means on 
the Applicant, member or member organization, or its counsel, unless an 
Exchange rule specifies a different method of service; finally, this 
section also details when service by the Exchange or filing by an 
Applicant or member or member organization shall be deemed complete. 
The current Exchange membership rules contain no such provision. The 
Exchange believes that incorporating proposed General 3, Rule 1012(a) 
by reference improves its membership application process by adopting 
specific provisions regarding the manner of submission and service of 
documents.
    Proposed General 3, Rule 1012(b) provides a definition of the term 
``calendar day'' and describes the manner in which times under the 
Membership Rule shall be computed. The current Exchange membership 
rules contain no such provision. The Exchange believes that adopting 
this rule by incorporation will provide further clarity to the 
calculation of days under its membership rules.
    Proposed General 3, Rule 1012(c) describes a(n) Applicant's, 
member's, member organization's and Associated Person's duty to ensure 
that the information they provide to the Exchange at the time of the 
filing is accurate, complete, and current. Moreover, this provision 
requires that an Applicant, member, member organization, and Associated 
Person ensure that membership applications and supporting materials 
filed with the Exchange remain accurate, complete,

[[Page 41821]]

and current at all times by filing supplementary amendments, which must 
be filed within 15 business days of their learning of the facts or 
circumstances giving rise to the need for an amendment. Furthermore, 
this section requires that Applicants, members, member organizations, 
and Associated Persons promptly notify the Exchange, in writing, of any 
material adverse change in their financial condition. The current 
Exchange membership rules contain no such provision. The Exchange 
believes that incorporating proposed General 3, Rule 1012(c) by 
reference improves its membership rules by adopting provisions 
concerning a member's and member organization's duty to ensure the 
accuracy, completeness, and current nature of membership information.
    As previously stated, the Exchange proposes to adopt by 
incorporation the text of proposed General 3, Rule 1012 in its 
entirety, as the rule's provisions provide clear instructions 
concerning the submission of membership applications and other 
materials; the requirements for service of documents; and the 
Applicants', members', member organizations', and Associated Persons' 
duty to ensure that the information filed with the Exchange is kept 
current.
Proposed General 3, Rule 1013 (New Member Application)
    Proposed General 3, Rule 1013 sets forth the procedure for filing 
applications for new membership on the Exchange. The Exchange proposes 
to incorporate Nasdaq General 3, Rule 1013 by reference under its 
General 3 title. The Exchange is incorporating Nasdaq General 3, Rule 
1013 as it expands upon and provides clarity to the procedure currently 
in place in the Exchange's rules within current General 3, Section 5, 
Member Applications.\42\ The Exchange believes that incorporating 
proposed General 3, Rule 1013 by reference will further the Exchange's 
objective to provide uniformity and clarity to its rules by aligning 
them with the membership rules of Nasdaq and other Affiliated 
Exchanges.
---------------------------------------------------------------------------

    \42\ Phlx General 3, Section 5, Member Application, provides, 
``(a) Every applicant for a membership or a permit and every non-
member seeking admission as a member upon acquisition of an existing 
membership shall file an application in writing with the Membership 
Department of the Exchange in such form as the Membership Department 
may prescribe from time to time, shall appear before such department 
if required thereby, and shall submit such information as such 
department may direct. (b) All applications will be reviewed 
preliminarily by the staff of the Exchange. If the staff recommends 
that the applicant not be issued a membership or a permit the 
applicant shall be notified in writing of the reasons therefor and 
may, within fifteen (15) days of the receipt thereof, file a request 
with the Membership Department for its consideration of the 
application, together with a written statement setting forth the 
applicant's opinion as to why the staff recommendation is in error 
or insufficient to preclude the issuance of a membership or a 
permit. (c) The Membership Department shall review and act upon the 
membership application or permit application. (d) Absent a showing 
of good cause, an application filed pursuant to this Rule shall 
lapse after a 90 calendar day period if an applicant fails to 
provide the requisite documentation provided for in this Rule or any 
subsequent written request for information or documents pursuant to 
this Rule within such time period agreed to by the Membership 
Department. If such time period elapses, an applicant seeking 
membership to the Exchange shall be required to file a new 
application pursuant to this Rule. The applicant will be required to 
pay an additional application fee at that time. The Exchange will 
not refund any fees for lapsed applications.''
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    Proposed General 3, Rule 1013(a) describes in detail the membership 
application process. Subsection (a)(1) (``Where to File; Contents''), 
provides that an application shall include (A) a copy of the 
Applicant's current Form BD, if not otherwise available to the Exchange 
electronically through the Central Registration Depository (``CRD''); 
(B) an original Exchange-approved fingerprint card for each Associated 
Person who will be subject to SEC Rule 17f-2 and for whom a fingerprint 
card has not been filed with another self-regulatory organization 
(SRO), if such fingerprints are not otherwise available electronically 
to the Exchange through CRD; (C) payment for such fee as may be 
required under the Rules; (D) a description of the Applicant's proposed 
trading activities on the Exchange, such as the types of securities it 
will trade, whether it will be a market maker, or an order entry firm, 
and/or engage in block trading activities, and the extent to which the 
Applicant is conducting such activities as a member of other SROs; (E) 
a copy of the Applicant's most recent audited financial statements and 
a description of any material changes in the Applicant's financial 
condition since the date of the financial statements; (F) an 
organizational chart; (G) the intended location of the Applicant's 
principal place of business and all other branch offices, if any, and 
the names of the persons who will be in charge of each office; (H) a 
description of the communications and operational systems the Applicant 
will employ to conduct business and the plans and procedures the 
Applicant will employ to ensure business continuity, including: system 
capacity to handle the anticipated level of usage; contingency plans in 
the event of systems or other technological or communications problems 
or failures; system redundancies; disaster recovery plans; and system 
security; (I) a copy of any decision or order by a federal or state 
authority or SRO taking permanent or temporary adverse action with 
respect to a registration or licensing determination regarding the 
Applicant or an Associated Person; (J) a statement indicating whether 
the Applicant or any person listed on Schedule A of the Applicant's 
Form BD is currently, or has been in the last ten years, the subject of 
any investigation or disciplinary proceeding conducted by any SRO, the 
foreign equivalent of a SRO, a foreign or international securities 
exchange, a contract market designated pursuant to the Commodity 
Exchange Act (``CEA'') or any substantially equivalent foreign statute 
or regulation, a futures association registered under the CEA or any 
substantially similar foreign statute or regulation, the Commission or 
any other ``appropriate regulatory agency'' (as defined in the Act), 
the Commodity Futures Trading Commission, or any state financial 
regulatory agency regarding the Applicant's activities that has not 
been reported to the CRD, together with all relevant details, including 
any sanctions imposed; (K) a statement indicating whether any person 
listed on Schedule A of the Applicant's Form BD is currently, or has 
been in the last ten years, the subject of any investigation or 
disciplinary proceeding conducted by any SRO, the foreign equivalent of 
an SRO, a foreign or international securities exchange, a contract 
market designated pursuant to the CEA or any substantially equivalent 
foreign statute or regulation, a futures association registered under 
the CEA or any substantially similar foreign statute or regulation, the 
Commission or any other ``appropriate regulatory agency'', the CFTC, or 
any state financial regulatory agency regarding the Applicant's 
activities that has not been reported to the CRD, together with all 
relevant details, including any sanctions imposed; (L) a copy of any 
contract or agreement with another broker-dealer, a bank, a clearing 
entity, a service bureau or a similar entity to provide the Applicant 
with services regarding the execution or clearance and settlement of 
transactions effected on the Exchange; (M) if the Applicant proposes to 
make markets on the Exchange, a description of the source and amount of 
Applicant's capital to support its market making activities on the 
Exchange, and the source of any additional capital that may become 
necessary; (N) a description of the financial controls to be employed 
by the Applicant with

[[Page 41822]]

respect to anti-money laundering compliance rules as set forth in 
General 9, Section 37; (O) a copy of the Applicant's written 
supervisory procedures with respect to the activities identified in 
paragraph (a)(1)(D); (P) a list of the persons conducting the 
Applicant's market making and other trading activities, and a list of 
the persons responsible for such persons' supervision, together with 
the CRD numbers; (R) a copy of the Applicant's most recent ``FOCUS 
Report'' (Form X-17A-5) filed with the SEC pursuant to SEC Rule 17a-5; 
(S) all examination reports and corresponding responses regarding the 
Applicant for the previous two years from the SROs of which it is a 
member; (T) a copy of the Exchange's Membership Agreement, duly 
executed by the Applicant, which includes, among other things: (1) an 
agreement to comply with the federal securities laws, the rules and 
regulations thereunder, Exchange rules, and all rulings, orders, 
directions, and decisions issued and sanctions imposed under Exchange 
rules; (2) an agreement to pay such dues, assessments, and other 
charges in the manner and amount as from time to time shall be fixed 
pursuant to Exchange rules; and (U) such other reasonable information 
with respect to the Applicant as the Exchange may require.
    In contrast, current Phlx General 3, Section 5(a) states simply 
that every applicant for a membership or a permit and every non-member 
seeking admission as a member upon acquisition of an existing 
membership shall file an application in writing with the Membership 
Department of the Exchange in such form as the Membership Department 
may prescribe from time to time, shall appear before such department if 
required thereby, and shall submit such information as such department 
may direct.
    The Exchange believes that deleting current Phlx General 3, Section 
5 is appropriate because the Exchange's current rule contains broad 
language that permits the Membership Department to apply the same 
standard that is set forth in proposed General 3, Rule 1013(a)(1) to 
processing applications today. Proposed General 3, Rule 1013(a)(1) will 
now be incorporated by reference. This rule lists in detail all of the 
supplementary application materials required for submission by an 
Applicant. Incorporating this provision by reference will further 
standardize the Exchange's membership application process.
    Proposed General 3, Rule 1013(a)(2) provides that the Membership 
Department will deem an application to be filed on the date when it is 
substantially complete, which is interpreted to be the date on which 
the Membership Department receives from the Applicant all material 
documentation and information required under proposed General 3, Rule 
1013. This rule also provides that the Exchange will notify the 
Applicant in writing when it deems the Applicant's application to be 
substantially complete. Phlx does not have a comparable rule.
    Proposed General 3, Rule 1013(a)(3) provides the procedure 
concerning incomplete applications (including the conditions necessary 
for the refund of application fees); and the request for additional 
documents or supporting information. Specifically, proposed General 3, 
Rule 1013(a)(3)(A) (``Lapse of Applications that are not Substantially 
Complete'') provides that if an application that was initiated under 
proposed Rule 1013 is not deemed to be substantially complete by the 
Membership Department within 90 calendar days after an Applicant 
initiates it, then absent a showing of good cause by the Applicant, the 
Membership Department may, at its discretion, deem the application to 
have lapsed without filing, and the Membership Department will take no 
action in furtherance of the application. If the Membership Department 
deems an application to have lapsed, then the Membership Department 
shall serve a written notice of that determination on the Applicant. If 
an Applicant still wishes to apply for membership on the Exchange after 
receiving notice of a lapse in its application, then the Applicant will 
be required to submit a new application pursuant to Membership Rules 
and pay a new application fee for doing so, if applicable. The 
Membership Department will refund fees that an Applicant has paid to 
the Exchange in connection with a lapsed application, in accordance 
with Exchange rules regarding fees, provided that the Exchange has not 
proceeded to process the application at the time it lapses. The rule 
also provides that, for purposes of proposed Rule 1013(a)(3)(A), the 
Membership Department will deem an application to be not 
``substantially complete'' if the Applicant fails to submit to the 
Membership Department materially important information or documentation 
that is required or requested under these Rules.
    Current Phlx General 3, Rule 5(d) provides that absent a showing of 
good cause, an application filed pursuant to this Rule shall lapse 
after a 90 calendar day period if an applicant fails to provide the 
requisite documentation provided for in this Rule or any subsequent 
written request for information or documents. The applicant would be 
required to file a new application and pay an additional application 
fee at that time. The Exchange will not refund any fees for lapsed 
applications. Current Phlx General 3, Rule 5(d) would be replaced by 
proposed General 3, Rule 1013. While the rules are substantially 
similar, proposed General 3, Rule 1013(a)(3)(A) provides that the 
Department will refund fees that an Applicant has paid to the Exchange 
in connection with a lapsed application, in accordance with its Rules 
regarding fees, provided that the Exchange has not proceeded to process 
the application at the time it lapses. This carve-out for permitting 
refunds would be a new provision as Phlx has no such carve-out today. 
The Exchange believes adopting the carve-out as specified within 
proposed General 3, Rule 1013(a)(3)(A) and otherwise removing current 
Phlx General 3, Rule 5(d) would serve to align Phlx's rules with that 
of Nasdaq and other Affiliated Exchanges.
    Proposed General 3, Rule 1013(a)(3)(B) (``Rejection of Filed 
Applications that Remain or Become Incomplete After Filing'') provides 
that if an application that was initiated under proposed General 3, 
Rule 1013 is substantially complete and thus is deemed to be filed with 
the Exchange under proposed General 3, Rule 1013(a)(2), but the 
application nevertheless remains or becomes incomplete with respect to 
any required or requested information or documentation, then the 
Membership Department shall serve written notice to the Applicant of 
such incompleteness and describe the missing information or 
documentation. If the Applicant fails to submit to the Exchange the 
missing information or documentation within a reasonable period after 
it receives a notice of incompleteness, then absent a showing of good 
cause by the Applicant, the Membership Department may, at its 
discretion, reject the application. If the Membership Department 
rejects an application on the basis of incompleteness, then the 
Membership Department shall serve a written notice on the Applicant of 
the Membership Department's determination and the reasons therefor. The 
Exchange shall not refund the application fees that an Applicant has 
paid to the Exchange in connection with an application that the 
Exchange rejects. If the Applicant determines to continue to seek

[[Page 41823]]

membership on the Exchange, then the Applicant shall submit a new 
application and pay a new application fee in accordance with the 
Exchange rules.
    Current Phlx General 3, Section 5(c), similar to proposed General 
3, Rule 1013, provides that the Membership Department shall review and 
act upon the membership application or permit application. Proposed 
General 3, Section 1013 would obviate the need for current Phlx General 
3, Section 5(c). Similarly, current Phlx General 3, Section 5(b) 
provides that all applications will be reviewed preliminarily by the 
staff of the Exchange. Proposed General 3, Rule 1014(a) implies that an 
application will be reviewed by the Membership Department. Further, 
current Phlx General 3, Section 5(b) provides that the Exchange shall 
notify the applicant in writing if a membership or permit will not be 
issued.\43\ The applicant would have 15 days from the day of receipt of 
the notice to request a consideration of the application by providing a 
written statement setting forth the applicant's opinion as to why the 
staff recommendation is in error or insufficient to preclude the 
issuance of a membership or a permit. Further, pursuant to Phlx's 
current rules under General 3, Section 16(a)(i) within 25 days after 
service of a decision of an adverse action described above, an 
applicant may file a written request for review with the Exchange 
Review Council. A request for review shall state with specificity why 
the applicant believes that the Department's decision is inconsistent 
with the bases for denial set forth in General 3, Section 2, or 
otherwise should be set aside, and state whether a hearing is 
requested. The applicant simultaneously shall file by first-class mail 
a copy of the request with the Department. The Exchange notes that the 
rule text within current Phlx General 3, Section 16(a)(i) is the same 
as the rule text within Nasdaq General 3, Rule 1015(a). This proposal 
would therefore eliminate the first level of appeal by the Membership 
Department. Similar to Affiliated Exchanges, with the proposed rules, 
an applicant would have the right to review before the Exchange Review 
Council. Despite the elimination of the first level of review by the 
Membership Department, the Exchange believes the review by the Exchange 
Review Council provides an applicant with appropriate due process as 
the review is conducted by an independent panel.
---------------------------------------------------------------------------

    \43\ The term ``permit'' is not necessary in the proposed new 
rules because the Exchange's membership rules govern membership in 
the same manner as the Nasdaq rules. An applicant that is approved 
for membership on Phlx would be entitled to the issuance of a permit 
pursuant to Phlx General 3, Section 11, Rights and Privileges of A-1 
Permits. The Exchange proposes to retain Phlx General 3, Section 11 
and relocate that rule to new Phlx General 2, Section 23, as 
described within this proposal. The concept of a ``permit'' will 
continue to separately exist within the Phlx rules and would 
continue to be tied to the membership process through the definition 
of a member. See General 1, Section 1(16).
---------------------------------------------------------------------------

    The Exchange plans to replace current Phlx General 3, Section 5(d) 
by incorporating by reference Nasdaq General 3, Rule 1013(a)(3) which 
provides well-defined processes for the treatment of applications that 
become stale or result in the Applicant's failure to pursue membership 
by not responding to requests for additional information.
    Proposed General 3, Rule 1013(a)(4) (``Requests by the Department 
for Additional Documents or Information from the Applicant or from 
Third Parties'') establishes that (A) at any time before the Membership 
Department serves its decision as to an application for new membership 
in the Exchange, the Membership Department may serve a written request 
for additional information or documentation, from the Applicant or from 
a third party, if the Membership Department deems such information or 
documentation to be necessary to clarify, verify, or supplement the 
application materials. The Membership Department may, at its 
discretion, request that the Applicant or the third party provide the 
requested information or documentation in writing or through an in-
person or telephonic interview. In the written request, the Membership 
Department shall afford the Applicant or the third party a reasonable 
period of time within which to respond to the request; moreover, (B) in 
the event that the Membership Department obtains information or 
documentation about an Applicant from a third party that the Membership 
Department reasonably believes could adversely impact its decision on 
an application, then the Membership Department shall promptly inform 
the Applicant in writing and provide the Applicant with a description 
of the information or a copy of the documentation that the Membership 
Department obtained, where appropriate under the circumstances. Prior 
to rendering an application decision on the basis of information or 
documentation obtained from a third party source, the Membership 
Department shall afford the Applicant with a reasonable opportunity to 
discuss or to otherwise address the information or documentation that 
the Membership Department obtained from the third party.
    The provisions under proposed General 3, Rule 1013(a)(4) are 
similar to the Exchange's current practice to the extent that the 
Membership Department has made written requests for documentation in 
furtherance of their review of the membership applications. Proposed 
General 3, Rule 1013(a)(4) specifically provides for the Exchange's 
authority to request additional documents or information from the 
Applicant, or a third party. The Exchange believes that incorporating 
by reference proposed Nasdaq Rule 1013(a)(4) into its membership rules 
will provide a greater degree of detail concerning the Exchange's 
discretion and authority to request additional information.
    Proposed General 3, Rule 1013(b)(1)(A) sets forth the procedure 
that allows an Applicant who is a FINRA member to ``waive-in'' to 
become an Exchange member or member organization and to register with 
the Exchange all persons associated with it whose registrations FINRA 
has approved (in categories recognized by the Exchange's rules). This 
section defines the term ``waive-in'' to mean that the Membership 
Department will rely substantially upon FINRA's prior determination to 
approve the Applicant for FINRA membership when the Membership 
Department evaluates the Applicant for Exchange membership. That is, 
the Membership Department will normally permit a FINRA member to waive-
into Exchange membership without conducting an independent examination 
of the Applicant's qualifications for membership on the Exchange, 
provided that the Membership Department is not otherwise aware of any 
basis set forth in proposed General 3, Rule 1014 to deny or condition 
approval of the application. Today, General 3, Section 1(f)(3) permits 
an applicant that is an approved member in good standing of Nasdaq or 
BX to apply to become a member of the Exchange and to register with the 
Exchange all associated persons of the firm whose registrations with 
the firm are approved with Nasdaq or BX in categories recognized by the 
Rules of the Exchange through an expedited process. The expedited 
process requires applicants to complete an Organization Membership 
Application and attest that the application material previously 
provided and reviewed as part of the Nasdaq or BX application is 
complete and accurate but does not require the applicant to submit 
duplicative documentation which was previously produced. By 
incorporating the Nasdaq

[[Page 41824]]

General 3 rules, Phlx would be able to similarly waive-in a member of 
any of the other Affiliated Exchanges (ISE, GEMX or MRX). This would 
expand Phlx's current ability to offer a waive-in application process 
(similar to Phlx's ``expediated process'') to all Affiliated Exchanges, 
not just members of Nasdaq and BX.
    Proposed General 3, Rule 1013(b)(1)(B) provides that waive-in 
membership that is granted to a FINRA member pursuant to this provision 
shall terminate in the event that the Applicant ceases to be a FINRA 
member and otherwise fails to comply with Rule 1002(c). Proposed 
General 3, Rule 1013(b)(1)(C) provides that in lieu of submitting an 
application as set forth in paragraph (a), an Applicant may waive-in to 
Exchange membership as provided in subparagraph (b)(1) by filing with 
the Exchange a waive-in application form and an executed Exchange 
Membership Agreement. Proposed General 3, Rule 1013(b)(1)(D) provides 
that the Membership Department will act upon a duly submitted 
application to waive-into Exchange membership under paragraph (b)(1) by 
serving upon the Applicant a written notification of its decision 
within a reasonable time frame not to exceed 20 days of submission of 
the application, unless the Department and the Applicant agree that the 
Department may issue its decision at a later date. A failure of the 
Department to issue a decision within this time frame shall be subject 
to proposed General 3, Rule 1014(c)(3). The Department will normally 
grant a duly submitted application to waive-into Exchange membership, 
provided that the Applicant submits the required materials, the 
Department verifies that the Applicant is a FINRA member, and that the 
Department is not otherwise aware of any basis to deny or condition 
approval of the application, as set forth in proposed General 3, Rule 
1014. A decision issued under this provision shall have the same 
effectiveness as set forth in proposed General 3, Rule 1014 and shall 
be subject to review as set forth in proposed General 3, Rules 1015 and 
1016. By incorporating Nasdaq's General 3 Rules by reference, the 
Exchange's rules would become similar to FINRA's 1000 Series membership 
rules. Therefore, with this proposal, a FINRA member would be permitted 
to waive-in with the adoption of General 3, Rule 1013 as is the case 
today for Nasdaq and BX and would be the case for all other Affiliated 
Exchanges (ISE, GEMX, and MRX) upon adoption of this proposal. Today, 
Phlx's membership rules differ from FINRA's membership rules.
    The second special application process, which is set forth in 
proposed General 3, Rule 1013(b)(2)(A), permits Applicants for 
membership that are already approved members or member organizations of 
one or more of the Affiliated Exchanges to waive-into the Exchange. In 
this context, ``waive-in'' means that the Membership Department will 
rely substantially upon an Affiliated Exchange's prior determination to 
approve the Applicant for membership. The procedures in proposed 
General 3, Rule 1013(b)(2) for an Applicant to submit a waive-in 
application under this provision and for the Membership Department to 
issue a decision based upon such an application are identical to the 
procedures described above for FINRA members that seek to waive-into 
the Exchange membership. Applicants who meet the criteria for this 
waive-in review process have already demonstrated their ability to meet 
membership standards on one or more of the Affiliated Exchanges which 
eliminates the need for a full review. Proposed General 3, Rule 
1013(b)(2)(B) provides that in lieu of submitting an application as set 
forth in paragraph (a), an Applicant may waive-into Exchange membership 
as provided in subparagraph (b)(2) by filing with the Department a 
waive-in application form. As part of this form, the Applicant must 
attest to the fact that it has made no unapproved material changes to 
its broker-dealer business subsequent to its approval as a member of an 
affiliated exchange. Finally, proposed General 3, Rule 1013(b)(2)(C) 
provides that the Department will act upon a duly submitted application 
to waive-into Exchange membership under paragraph (b)(2) by serving 
upon the Applicant a written notification of its decision within a 
reasonable time frame not to exceed 20 days of submission of the 
application, unless the Department and the Applicant agree that the 
Department may issue its decision at a later date. A failure of the 
Department to issue a decision within this time frame shall be subject 
to General 3, Rule 1014(c)(3). The Department will normally grant a 
duly submitted application to waive-into Exchange membership, provided 
that the Applicant submits the required materials, the Department 
verifies that the Applicant is a member of an exchange affiliated with 
the Exchange, and that the Department is not otherwise aware of any 
basis to deny or condition approval of the application, as set forth in 
General 3, Rule 1014. A decision issued under this provision shall have 
the same effectiveness as set forth in General 3, Rule 1014 and shall 
be subject to review as set forth in General 3, Rules 1015 and 1016. As 
noted above, an applicant that is an approved member in good standing 
of Nasdaq or BX to apply may become a member of the Exchange and 
register with the Exchange all associated persons of the firm whose 
registrations with the firm are approved with Nasdaq or BX in 
categories recognized by the Rules of the Exchange through an expedited 
process. The process to approve members in good standing of Nasdaq and 
BX that is described in current Phlx General 3, Section 1(f)(3) is not 
detailed. Proposed General 3, Rule 1013(b)(2) will provide Phlx a more 
detailed process to continue to allow it to accept members of Nasdaq 
and BX and also permit it to accept members of other Affiliated 
Exchanges similar to the process that occurs today on Nasdaq and other 
Affiliated Exchanges with respect to Phlx members and member 
organizations.
    Nasdaq General 3, Rule 1013(b) (``Special Application Procedures'') 
was adopted by Nasdaq to expedite the membership application process of 
Applicants who were already members of FINRA or members of one of the 
Affiliated Exchanges. The Exchange proposes to adopt by incorporation 
these same provisions to facilitate Applicants who meet the rule 
requirements. The adoption of this rule will offer members of FINRA, 
Nasdaq, and other Affiliated Exchanges the option to apply for 
membership on the Exchange through an expedited membership application 
process.
    As noted above, current Phlx General 3, Section 1(f)(3) permits an 
applicant that is an approved member in good standing of Nasdaq or 
Nasdaq BX, Inc. to have the option to apply to become a member of Phlx 
through an expedited process. The adoption of proposed General 3, Rule 
1013(b) would expand the scope of markets by which an applicant could 
utilize an expedited process. The Exchange believes that incorporating 
by reference the waive-in provisions within proposed General 3, Rule 
1013(b) will further the Exchange's objective to provide uniformity and 
clarity to its rules by aligning its membership application process 
with Nasdaq and other Affiliated Exchanges.
Proposed General 3, Rule 1014 (Department Decision)
    Proposed General 3, Rule 1014 (``Department Decision'') describes 
the Membership Department's process for the issuance of a decision. The

[[Page 41825]]

Exchange proposes to incorporate by reference proposed General 3, Rule 
1014 in its entirety as it provides a more organized, detailed, and 
logical description of the procedure currently described in current 
Phlx General 3, Sections 2 and 5. Incorporating proposed General 3, 
Rule 1014 by reference in the Exchange's rules will improve the 
membership application and decision making process by better defining 
the Membership Department's authority and obligations, describing the 
basis for approval, conditional approval or denial of an application. 
Further, the Exchange believes that this proposed change provides 
consistency in the treatment of Exchange Applicants.
    Proposed General 3, Rule 1014(a) describes the Membership 
Department's authority to act on an application by approving it, 
denying it, or approving it subject to restrictions: (1) that are 
reasonably designed to address a specific (financial, operational, 
supervisory, disciplinary, investor protection, or other regulatory) 
concern; or (2) that mirror a restriction placed upon the Applicant by 
FINRA or an Affiliated Exchange.
    Proposed General 3, Rule 1014(b), entitled ``Bases for Approval, 
Conditional Approval, or Denial,'' provides that the Membership 
Department will approve, grant conditional approval, or deny a 
membership application filed under proposed General 3, Rules 1013 and 
1017 by an Applicant that is not, and is not required to become, a 
FINRA member. Proposed General 3, Rule 1014(b)(1) indicates that the 
Membership Department may deny or condition membership approval for the 
same reasons that the Commission may deny or revoke a broker or 
dealer's registration; this Rule parallels current Phlx General 3, 
Section 2(a) and (b), which describes the Exchange's authority to deny 
an application for the same reasons that the SEC may deny or revoke a 
broker-dealer registration and for those reasons required or allowed 
under the Act.
    Proposed General 3, Rule 1014(b)(2) enumerates the reasons for 
denial or conditional approval of a membership application in the cases 
when the Applicant (A) is unable to satisfactorily demonstrate its 
capacity to adhere to the Exchange and Commission rules; (B) has 
previously violated, and there is a reasonable likelihood that such 
Applicant will again engage in violative acts or practices, of any 
Exchange or Commission policies, rules, and regulations; (C) has 
engaged in acts or practices inconsistent with just and equitable 
principles of trade, and there is a reasonable likelihood that such 
Applicant will again engage in violative acts or practices, of any 
Exchange or Commission policies, rules, and regulations; (D) is not in 
compliance with the Commission's net capital rule or has financial 
difficulties greater than 5% of their net worth; (E) has been itself, 
or is the successor to an entity subject to a bankruptcy, proceeding, 
receivership, or arrangement for the benefit of creditors within the 
past 3 years; (F) has engaged in an established pattern of failure to 
pay just debts; (G) does not hold required licenses or registrations; 
or (H) is unable to satisfactorily demonstrate reasonably adequate 
systems capacity and capability.
    The Exchange notes that the basis for denial listed under current 
Phlx General 3, Section 2, includes statutory disqualification at 
Section 2(a), violations of Section 15 and 17 of the Act and books and 
records violations at Section 2(b), and the following list of reasons 
under Section 2(c): (i) failure to complete proficiency examinations or 
meet other standards of competence; and (ii) failure to adhere to 
applicable policies, rules and regulations of the Exchange or any other 
self-regulatory organization, the SEC, the Board of Governors of the 
Federal Reserve System and the contract market designated pursuant to 
Section 5 of the Commodity Exchange Act or futures association 
registered under Section 17 of such Act; (iii) unsatisfied liens, 
judgments or unsubordinated creditor claims of a material nature, which 
remain outstanding; subject to any bankruptcy proceeding, receivership 
or arrangement within three years; associated as a general partner, 
principal, officer, director, stockholder, or registered trader for a 
member organization which has been subject to any unsatisfied liens, 
judgments or unsubordinated creditor claims of a material nature; (iv) 
engaged in a pattern of failure to pay just debts; and (v) generally, 
for such other cause as the Membership Department reasonably may 
decide.
    The Exchange believes that the provisions under proposed General 3, 
Rule 1014(b)(2) are very similar to the Exchange's current provisions 
for denial. While Phlx does not currently have specific provisions for 
net capital or adequate systems capacity and capability, it currently 
does have a catch-all provision within current Phlx General 3, Section 
2(c) that would allow the Exchange to deny membership for those 
reasons.
    The Exchange notes that current Phlx General 3, Section 2(a), which 
refers to the basis for membership denial as it relates to statutory 
disqualification, is substantially similar to proposed General 3, Rule 
1002(b)(1) and (2), which describe an Applicant's ineligibility for 
membership or association due to statutory disqualification. As stated 
above, the Exchange proposes to incorporate proposed General 3, Rule 
1002 in its entirety.
    Proposed General 3, Rule 1014(b)(3) provides that the Membership 
Department will not approve an Applicant unless the Applicant is a 
member of another registered securities exchange or association that is 
not registered solely under Section 6(g) or Section 15A(k) of the Act. 
As noted herein, the Exchange acts in the capacity of a DEA and, 
therefore, applicants for membership may register to have Phlx as their 
DEA. As such, a member or member organization that registers with Phlx 
as its DEA may meet the requirement of proposed General 3, Rule 
1014(b)(3) without the need to be a member of another registered 
securities exchange or association. Further, because Phlx is distinct 
from Nasdaq with respect to its DEA capacity, the Exchange proposes to 
add rule text which provides for this distinction within General 3. 
Proposed General 3, Rule 1014(b)(3) also provides that an Applicant 
that will transact business with the public must be a member of FINRA. 
While Phlx's rules currently do not indicate that an Applicant that 
transacts business with the public must be a member of FINRA, this is 
the case today. Proposed General 3, Rule 1014(b)(3) will make clear 
that an Applicant must also be a member of FINRA if an Applicant 
transacts business with the public.
    The Exchange proposes to incorporate by reference proposed General 
3, Rule 1014(c) to establish the time and content of a decision and the 
recourse available to an Applicant if the Membership Department fails 
to timely issue a decision on a membership application. Current Phlx 
General 3, Section 5(c), broadly states that the Membership Department 
shall review and act upon the membership application or permit. 
Proposed General 3, Rule 1014(c) outlines this process in greater 
detail. Proposed General 3, Rule 1014(c)(1) requires the Membership 
Department to serve a decision on the membership application within a 
reasonable time period, not to exceed 45 (calendar) days after the 
Applicant files and provides to the Exchange all required and requested 
information or documents in connection with the application. 
Additionally, the rule allows the Membership Department

[[Page 41826]]

and the Applicant the ability to agree to further extensions of the 
decision deadlines. Phlx has no comparable rule. Proposed General 3, 
Rule 1014(c)(2) also provides that the decision will detail the 
reason(s) for the denial of membership or the approval of the 
application subject to restrictions. This provision is similar to 
current Phlx General 3, Section 5(b), which provides that if Exchange 
staff recommends that the applicant not be issued a membership or a 
permit the applicant shall be notified in writing of the reasons 
therefor. Moreover, proposed General 3, Rule 1014(c)(3) provides that 
if the Membership Department fails to timely serve a decision, the rule 
prescribes that the Applicant may request the Exchange Board to direct 
the Membership Department to serve a decision. The rule further 
provides that the Exchange Board, within seven days, will direct the 
Membership Department to serve its decision or to show good cause for a 
time extension. If the Membership Department shows good cause, the 
Exchange Board may grant the Membership Department up to 45 days to 
issue the decision. Phlx has no comparable rule.
    Proposed General 3, Rule 1014(e) prescribes that service of the 
Membership Department's decision shall be made pursuant to proposed 
General 3, Rule 1012. Further, the rule provides that the decision 
shall become effective upon service and shall remain in effect during 
the pendency of any review until a decision constituting final action 
of the Exchange is issued under proposed General 3, Rules 1015 or 1016, 
unless otherwise directed by the Exchange Review Council, the Exchange 
Board, or the Commission. Current Phlx General 3, Section 5(b) 
prescribes that a notice of the Exchange's decision shall be provided 
to the Applicant if the staff recommends not to issue a membership or a 
permit but is silent on providing a decision to approve membership. The 
Exchange believes that incorporating this rule by reference clarifies 
the process for serving the Membership Department's decision on 
applications.
    Proposed General 3 Rules 1014(f) and (g), respectively, provide for 
the effectiveness of restrictions on an approved application and what 
constitutes final action in the Membership Department's decision. 
Proposed General 3, Rule 1014(f) establishes that a restriction imposed 
under proposed General 3, Rule 1014 shall remain in effect and bind the 
Applicant and all successors to the ownership or control of the 
Applicant unless (1) it is removed or modified by a decision 
constituting final action of the Exchange issued under proposed General 
3, Rules 1015, 1016, or 1017; or (2) stayed by the Exchange Review 
Council, the Exchange Board, or the Commission. Proposed General 3, 
Rule 1014(g) provides that unless the Applicant files a written request 
for a review under proposed General 3, Rule 1015, the Membership 
Department's decision shall constitute final action by the Exchange. 
Phlx has no comparable rule.
Proposed General 3, Rule 1015 (Review by Exchange Review Counsel)
    The Exchange proposes to incorporate by reference Nasdaq General 3 
Rule 1015 in its entirety under its General 3 title. Proposed General 
3, Rule 1015, subsections (a) through (j) are substantially similar to 
the current provisions concerning a review by the Exchange Review 
Council detailed in current Phlx General 3, Section 16(a).
    Phlx will no longer retain the introductory sentence within current 
Phlx General 3, Section 16 which provides, ``If the Membership 
Department takes an adverse action with respect to a membership 
application, permit application, or other matter for which the 
Membership Department has responsibility, the department will notify 
the applicant in writing of the specific grounds for denial and the 
applicant shall have a right to a hearing.'' This rule text is covered 
within proposed General 3, Rule 1014(g) and 1015.
    The Exchange proposes to incorporate by reference Nasdaq General 3, 
Rules 1015(k) and (l) (respectively, ``Ex Parte Communications'' and 
``Recusal or Disqualification''). Proposed General 3, Rule 1015(k) 
prohibits ex parte communications involving membership decisions 
subject to review between an Applicant, a counsel or representative of 
an Applicant, or an Interested Staff and certain Exchange staff, 
members of the Exchange Review Council, members of a Subcommittee of 
the Council, and Directors, unless notice was provided along with an 
opportunity for an Applicant and Interested Staff to participate. 
Further, pursuant to General 3, Rule 1015(k)(3), in the instance that a 
Director, a member of the Exchange Review Council or a Subcommittee, or 
an Exchange employee participating or advising in the decision of such 
a person, who receives, makes, or knowingly causes to be made a 
communication prohibited by this paragraph shall place in the record of 
the membership proceeding all written communications, memoranda stating 
the substance of all such oral communications, and all written 
responses and memoranda stating the substance of all oral responses to 
all such communications. Proposed General 3, Rule 1015(l) governs the 
recusal and disqualification of a member of the Exchange Review 
Council, a Subcommittee thereof, or a Director from participating in a 
review of a membership decision, where that person has a conflict of 
interest or bias, or if circumstances otherwise exist where his or her 
fairness might reasonably be questioned. The Exchange has no parallel 
provisions in its rulebook to proposed General 3, Rules 1015(k) and 
(l). The Exchange believes that incorporating proposed General 3, Rules 
1015(k) and (l) by reference enhances the Exchange Review Council's 
procedures and is in line with the Exchange's goal of harmonizing its 
rules with those of the Nasdaq and other Affiliated Exchanges.
Proposed General 3, Rule 1016 (Discretionary Review by the Exchange 
Board)
    Aside from their respective internal cross-references, the text in 
proposed General 3, Rule 1016 and current Phlx General 3, Section 16(b) 
(both entitled ``Discretionary Review by the Exchange Board'') are 
identical. The Exchange proposes to incorporate by reference Nasdaq 
General 3, Rule 1016 under its General 3 title. The Exchange believes 
that incorporating by reference this rule will further the Exchange's 
objective to provide uniformity and clarity to its rules by aligning 
them with the membership rules of the Nasdaq and other Affiliated 
Exchanges.
Proposed General 3, Rule 1017 (Application for Approval of Change in 
Ownership, Control, or Material Business Operations)
    Proposed General 3, Rule 1017, ``Application for Approval of Change 
in Ownership, Control, or Material Business Operations,'' has no 
analogue rule in the current Phlx General 3 title, other than current 
Phlx General 3, Section 1(f)(2) which discussed PSX Participants who 
commence market making. Incorporating Nasdaq General 3, Rule 1017 by 
reference in its entirety in the Exchange's rules will enhance the 
Exchange's ongoing regulatory oversight capabilities by clearly 
identifying events that would trigger the requirement for an approved 
member or member organization to file an application with the Exchange. 
As stated below, proposed General 3, Rule 1017 outlines in detail the 
circumstances that trigger the filing of an application pursuant to 
this rule. While the Exchange has no

[[Page 41827]]

corresponding rule, it does have a similar process in place that it 
administers procedurally. For example, if an existing member 
organization of the Exchange is seeking Market Maker status for the 
first time, the current Exchange process is to require that the member 
organization submit an amended Exchange application along with relevant 
supplementary material.\44\ The Exchange believes that incorporating 
proposed General 3, Rule 1017 by reference further harmonizes its 
process with that of Nasdaq and other Affiliated Exchanges and improves 
its current practice. As stated previously, the objective is to 
eventually harmonize membership rules across all Affiliated Exchanges 
in order to advance uniformity within the membership rules and 
procedures.
---------------------------------------------------------------------------

    \44\ See Phlx General 3, Section 1(f)(2).
---------------------------------------------------------------------------

    Proposed General 3, Rule 1017(a) prescribes the events that require 
member organizations to file applications with the Exchange. Paragraph 
(a) provides that a member organization shall file an application for 
approval prior to effecting the following changes: (1) a merger of the 
member organization with another member organization; (2) a direct or 
indirect acquisition by the member organization of another member 
organization; (3) direct or indirect acquisitions or transfers of 25% 
or more in the aggregate of the member organization's assets or any 
asset, business line or line of operations that generates revenues 
comprising 25% or more in the aggregate of the member organization's 
earnings measured on a rolling 36 month basis; (4) a change in the 
equity ownership or partnership capital of the member organization that 
results in one person or entity directly or indirectly owning or 
controlling 25% or more of the equity or partnership capital; or (5) a 
material change in business operations, which includes, but is not 
limited to, (A) removing or modifying a membership restriction; (B) 
acting as a dealer or a market maker for the first time; (C) adding 
business activities that require a higher minimum net capital under SEC 
Rule 15c3-1; or (D) adding business activities that would cause a 
proprietary trading firm no longer to meet the definition of that term 
contained in the proposed Rule 1000 Series.
    Proposed General 3, Rule 1017(b), governs the filing and content of 
applications filed under proposed General 3, Rule 1017. This Rule 
provides that the application shall be filed with the Membership 
Department; if the Applicant seeks approval of change of ownership or 
control or a material change in the member organization's business 
operations, the application shall (A) provide a detailed description of 
the proposed change, (B) provide a business plan, pro forma financials, 
an organizational chart, and written supervisory procedures reflecting 
the proposed change; and (C) if the application requests approval of a 
change in ownership or control, the application also shall include the 
names of the new owners, their percentage of ownership, and the sources 
of their funding for the purchase and recapitalization of the member 
organization.
    Furthermore, proposed General 3, Rule 1017(b) provides that if the 
application requests the removal or modification of a membership 
restriction, the application also shall, (A) present facts showing that 
the circumstances that gave rise to the restriction have changed; and 
(B) state with specificity why the restriction should be modified or 
removed in light of the applicable bases for denial or standards for 
approval set forth in proposed General 3, Rules 1014 or 1017 and the 
articulated rationale for the imposition of the restriction. Moreover, 
the Rule indicates that if the application requests approval of an 
increase in Associated Persons involved in sales, offices, or markets 
made, the application shall set forth the increases in such areas 
during the preceding 12 months.
    Proposed General 3, Rule 1017(c) indicates when an application 
shall or may be filed. Specifically, the Rule provides that (1) an 
application for approval of a change in ownership or control shall be 
filed at least 30 days prior to such change; (2) that an application to 
remove or modify a membership restriction may be filed at any time 
(clarifying that an existing restriction shall remain in effect during 
the pendency of the proceeding); and that (3) an application for 
approval of a material change in business operations, other than the 
modification or removal of a restriction, may be filed at any time, but 
the member organization may not effect such change until the conclusion 
of the proceeding, unless the Membership Department and the member 
organization otherwise agree.
    Proposed General 3, Rule 1017(d) prescribes that an application 
will be deemed to be filed on the date when it is substantially 
complete, meaning the date on which the Membership Department receives 
from the Applicant all material documentation and information required 
under this Rule, and that the Membership Department will notify the 
Applicant in writing when the Membership Department deems the 
Applicant's application to be substantially complete.
    Proposed General 3, Rule 1017(e) indicates that, pursuant to 
proposed General 3, Rule 1013(a)(3), the Membership Department may 
treat an application filed under this Rule as having lapsed or it may 
reject such an application, except that the Membership Department may 
treat an application as having lapsed if it is not substantially 
complete for 30 days or more after the Applicant initiates it.
    Proposed General 3, Rule 1017(f) provides that the Membership 
Department, at any time before it serves its decision, may request 
additional information or documentation from the Applicant or from a 
third party in accordance with proposed General 3, Rule 1013(a)(4).
    Proposed General 3, Rule 1017(g) establishes that a Membership 
Department's decision shall be issued in accordance with proposed 
General 3, Rule 1014, except that (1) In rendering a decision on an 
application submitted under the Rule that requests the modification or 
removal of a membership restriction, the Membership Department shall 
consider whether maintenance of the restriction is appropriate in light 
of: (A) the applicable bases for denial or standards for approval set 
forth in proposed General 3, Rule 1014; (B) the circumstances that gave 
rise to the imposition of the restriction; (C) the Applicant's 
operations since the restriction was imposed; (D) any change in 
ownership or control or supervisors and principals; and (E) any new 
evidence submitted in connection with the application. Furthermore, 
this Rule provides that the Membership Department shall serve a written 
decision on an application filed under this Rule in accordance with 
proposed General 3, Rule 1013(c). Moreover, the Rule provides that in 
the event that a proposed change in ownership, control, or business 
operations by a member organization requires such member organization 
to become a member of FINRA, the Membership Department shall not be 
required to serve a written decision under this Rule until 10 business 
days after the member organization becomes a FINRA member.
    Proposed General 3, Rule 1017(h) provides that service of the 
decision on the Applicant shall be made in accordance with proposed 
General 3, Rule 1012. Moreover, the Rule indicates that the decision 
shall become effective upon service and shall remain in effect during 
the pendency of any review until a decision constituting final action 
of

[[Page 41828]]

the Exchange is issued under proposed General 3, Rules 1015 or 1016, 
unless otherwise directed by the Exchange Review Council, the Exchange 
Board, or the Commission.
    Proposed General 3, Rule 1017(i) indicates that an Applicant may 
file a written request for review of the Membership Department's 
decision with the Exchange Review Council pursuant to proposed General 
3, Rule 1015. The rule further clarifies that the procedures set forth 
in proposed General 3, Rule 1015 shall apply to such review, and the 
Exchange Review Council's decision shall be subject to discretionary 
review by the Exchange Board pursuant to proposed General 3, Rule 1016. 
If the Applicant does not file a request for a review, the Membership 
Department's decision shall constitute final action by the Exchange.
    Proposed General 3, Rule 1017(j) prescribes that the Membership 
Department shall modify or remove a restriction on its own initiative 
if the Membership Department determines such action is appropriate in 
light of the considerations set forth in paragraph (g)(1) of the Rule. 
The Membership Department shall notify the member in writing of the 
Membership Department's determination and inform the member that it may 
apply for further modification or removal of a restriction by filing an 
application under proposed General 3, Rule 1017(a).
Proposed General 3, Rule 1018 (Resignation, Reinstatement, Termination, 
and Transfer of Membership)
    Proposed General 3, Rule 1018, ``Resignation, Reinstatement, 
Termination, and Transfer of Membership,'' has no analogue rule in the 
Exchange's current General 3 title. The Exchange proposes to 
incorporate the rule by reference under its General 3 title. Proposed 
General 3, Rule 1018 outlines the process for resignation, 
reinstatement, termination, and transfers of memberships. Incorporating 
Nasdaq General 3, Rule 1018 by reference will eventually allow the 
Exchange to standardize the processing of these requests across all the 
Affiliated Exchanges.
    Proposed General 3, Rule 1018(a) provides that membership may be 
voluntarily terminated only by formal resignation. Resignations of 
members and member organizations must be filed via electronic process 
or such other process as the Exchange may prescribe. Any member or 
member organization may resign from the Exchange at any time. Such 
resignation shall not take effect until all indebtedness due to the 
Exchange from such member or member organization shall have been paid 
in full and so long as any complaint or action is pending against the 
member or member organization under the Rules. The Exchange, however, 
may in its discretion declare a resignation effective at any time.
    Proposed General 3, Rule 1018(b) indicates that no member 
organization may transfer its membership or any right arising 
therefrom; the membership of a corporation, partnership, or any other 
business organization that is a member organization shall terminate 
upon its liquidation, dissolution, or winding up; and the membership of 
a sole proprietorship that is a member organization shall terminate at 
death, provided that all obligations of membership under the Rules have 
been fulfilled. Moreover, the Rule provides that the consolidation, 
reorganization, merger, change of name, or similar change in any 
corporate member organization shall not terminate the membership of 
such corporate member organization, provided that the Exchange member 
organization or surviving corporation, if any, shall be deemed a 
successor to the business of the corporate member organization, and the 
member organization or the surviving organization shall continue in the 
securities business, and shall possess the qualifications for 
membership in the Exchange. Furthermore, the death, change of name, 
withdrawal of any partner, the addition of any new partner, 
reorganization, consolidation, or any change in the legal structure of 
a partnership member organization shall not terminate the membership of 
such partnership member organization, provided that the member 
organization or surviving organization, if any, shall be deemed a 
successor to the business of the partnership member organization, and 
the member organization or surviving organization shall possess the 
qualifications for membership in the Exchange. If the business of any 
predecessor member organization is to be carried on by an organization 
deemed to be a successor organization by the Exchange, the membership 
of such predecessor member organization shall be extended to the 
successor organization subject to the notice and application 
requirements of the Rules and the right of the Exchange to place 
restrictions on the successor organization pursuant to the Rules; 
otherwise, any surviving organization shall be required to satisfy all 
of the membership application requirements of the Exchange's Rules.
    Proposed General 3, Rule 1018(c) establishes that any membership or 
registration suspended or canceled under the Rules may be reinstated by 
the Exchange upon such terms and conditions as are permitted under the 
Act and the Exchange rules; provided, however, that any applicant for 
reinstatement of membership or registration shall possess the 
qualifications required for membership or registration in the Exchange.
Proposed General 3, Rule 1019 (Application to Commission for Review)
    Proposed General 3, Rule 1019 (``Application to Commission for 
Review'') has no analogue rule in the Exchange's current General 3 
title. Proposed General 3, Rule 1019 allows an aggrieved person to 
request the Commission to review an Exchange final action under the 
proposed General 3, Rule 1010 Series. Incorporating proposed General 3, 
Rule 1019 by reference standardizes the process by which an Applicant 
may dispute any final action of the Exchange.
    Proposed General 3, Rule 1019 provides that a person aggrieved by 
the Exchange's final action under Membership Rules may apply for review 
by the Commission pursuant to Section 19(d)(2) of the Act. The filing 
of an application for review shall not stay the effectiveness of a 
decision constituting final action of the Exchange, unless the 
Commission otherwise orders.
Proposed General 3, Rule 1030 (Member Access to the Exchange)
    Current Phlx General 3, Rule 1030 is identical to proposed General 
3, Rule 1030. The Exchange intends to incorporate Nasdaq General 3, 
Rule 1030 in order to continue to harmonize Phlx's membership rules 
with Nasdaq and other Affiliated Exchanges.
Current Phlx General 3, Section 7, Registration
    Current Phlx General 3, Section 7, Registration, is proposed to be 
deleted in part and relocated in part.
    Current Phlx General 3, Section 7(a) provides that each member and 
member organization shall register with the Membership Department an 
address where notices may be served. Subsequent changes in address must 
be provided to the Membership Department of the Exchange before the 
effective date thereof. This provision is no longer necessary as the 
Membership Department has access to Web CRD and monitors for member 
organization address changes which are available to the Exchange 
through Web CRD. All Phlx members and member

[[Page 41829]]

organizations are required to register within Web CRD to fulfill their 
General 4 registration requirements.\45\
---------------------------------------------------------------------------

    \45\ See Nasdaq General 4, Rule 1210. Phlx's General 4 rules 
incorporate by reference Nasdaq's General 4 rules.
---------------------------------------------------------------------------

    Current Phlx General 3, Section 7(b) provides that each member and 
member organization shall register with the Exchange, on such form or 
forms as may from time to time be required by the Membership 
Department. Registration forms shall include, but not be limited to, 
(i) the name and address of the individual member having qualified such 
member organization in accordance with General 3, Section 1 and (ii) 
the name and address of the Executive Representative designated by such 
member organization in accordance with General 3, Section 13(b). 
Finally, members and member organizations must use Web CRD to submit 
Form U4, Uniform Application for Securities Industry Registration or 
Transfer registration filings. Members and member organizations shall 
amend Form U4 filings not later than thirty (30) days after the filer 
knew or should have known of the facts which gave rise to the 
amendment. The Exchange proposes to delete current Phlx General 3, 
Section 7(b) as proposed General 3, Rule 1013 describes the content of 
an application that would be required to seek membership with the 
Exchange. Also, Phlx General 4 describes the manner in which members 
and member organizations must be registered and utilize Form U-4 and 
Web CRD.\46\
---------------------------------------------------------------------------

    \46\ Id.
---------------------------------------------------------------------------

    Current Phlx General 3, Section 7(c) provides that each member 
organization applicant that is a registered broker or dealer pursuant 
to Section 15 of the Act must use Web CRD to submit a Uniform 
Application for Broker-Dealer Registration, Form BD. Member 
organizations shall amend Form BD filings not later than thirty (30) 
days after the filer knew or should have known of the facts which gave 
rise to the amendment.\47\ The Exchange proposes to delete this rule 
text as Nasdaq General 3, Rule 1013(a)(1)(A) requires an applicant to 
provide a copy of the Form BD and all broker-dealers are required to 
amend their Form BD or Uniform Application for Broker-Dealer 
Registration. Pursuant to Article IV, Section 1(c) of the FINRA By-
Laws, a broker-dealer is required to promptly update Form BD 
information by submitting amendments whenever the information on file 
becomes inaccurate or incomplete for any reason. Finally, Section 15 of 
the Act requires broker-dealers to use Web CRD to submit a Form BD and 
to amend Form BD filings not later than thirty days after the filer 
knew or should have known of the facts which gave rise to the 
amendment.
---------------------------------------------------------------------------

    \47\ See Phlx General 3, Section 7(c)(2).
---------------------------------------------------------------------------

    Current Phlx General 3, Section 7(d) is being relocated to General 
2, Section 11 which is proposed to be titled ``Contact Information 
Requirements.'' The Exchange proposes to remove the sentence which 
provides, ``In addition to the requirements of paragraph (a) above, 
each member organization must comply with the contact information 
requirements of this paragraph (d)'' and re-letter the rule. This 
sentence is no longer necessary given the relocation of this rule. 
Nasdaq has the same rule within General 2, Section 11 of its rules.
Current Phlx General 3, Section 8, Status Verification
    The Exchange proposes to delete current Phlx General 3, Section 8, 
Status Verification. This rule provides that upon the request of any 
member or member organization, the Membership Department of the 
Exchange shall provide such member or member organization (as 
applicable) with reasonable written verification of its status as a 
member or member organization. No member or member organization has 
requested verification in recent history. This rule is obsolete and 
unnecessary. No other Affiliated Exchanges have a similar provision. If 
requested, the Exchange would provide such verification as a courtesy.
Current Phlx General 3, Section 9, Administration of Rules by 
Membership Department
    The Exchange proposes to delete current Phlx General 3, Section 9, 
Administration of Rules by Membership Department. This rule, which 
simply states that the Membership Department shall administer General 
3, is unnecessary. No other Affiliated Exchanges have a similar 
provision.
Current Phlx General 3, Section 10, General Powers and Duties of 
Membership Department
    The Exchange proposes to delete current Phlx General 3, Section 10, 
General Powers and Duties of Membership Department.
    Current Phlx General 3, Section 10(a) indicates that the Membership 
Department shall have jurisdiction over the issuance of memberships (in 
respect of members and member organizations) and permits and over 
applications by nonmembers for admission as members. The Membership 
Department shall also have jurisdiction over the revocation of 
memberships and permits. All applications for a membership or a permit, 
all applications by non-members for admission as members, all 
applications for reinstatement of any membership or permit suspended 
for insolvency of its holder, and any application for readmission of a 
person who has been expelled from the Exchange shall be referred to the 
Membership Department for review and action. Proposed General 3, Rule 
1013 makes clear that the Membership Department handles memberships. 
Proposed General 3, Rule 1018 describes the resignation, reinstatement, 
termination, and transfer of memberships. The Exchange proposes to 
delete current Phlx General 3, Section 10(a) in light of the proposed 
rules. No other Affiliated Exchanges have a similar provision.
    Current Phlx General 3, Section 10(b) provides that all 
applications to qualify and register a corporation or other entity as a 
member organization and all applications for reinstatement of any 
qualification or registration of a member organization shall be 
referred to the Membership Department which shall investigate and act 
thereon. The Membership Department shall have supervision over member 
corporation (and similar) arrangements, and copies of the articles of 
incorporation, by-laws and all amendments thereto shall be filed with 
the Membership Department for approval. Proposed General 3, Rule 1013 
makes clear that all applications for membership are handled by the 
Membership Department, which would include a corporation's request for 
membership. The Exchange proposes to delete this rule as proposed 
General 3, Rule 1013 would govern. Additionally, today, the Membership 
Department does not collect articles of incorporation, by-laws and all 
amendments to those documents on an on-going basis beyond a request 
from the Membership Department associated with the application to 
become a member. Any arrangements that a corporation may have in terms 
of ``events'' would be handled by the Membership Department pursuant to 
proposed General 3, Rule 1017(a). No other Affiliated Exchanges have a 
similar provision.
    Current Phlx General 3, Section 10(c) provides for a situation 
where a member organization's only officer who was a member of the 
Exchange dies or resigns and the remaining officers may request the 
Membership Department to permit the corporation to have the status of a 
member organization for such period, not exceeding sixty (60) days from 
the date of such death or resignation. The Membership Department in its 
discretion may, at any time during such

[[Page 41830]]

period, withdraw such permission and upon such withdrawal such status 
shall terminate. The Exchange notes that such a request has never been 
made to the Membership Department in recent history and the Exchange 
believes that such discretion is not necessary. No other Affiliated 
Exchanges have a similar provision.
Current Phlx General 3, Section 11, Rights and Privileges of A-1 
Permits
    Current Phlx General 3, Section 11, Rights and Privileges of A-1 
Permits, is proposed to be relocated to new General 2, Section 23, with 
one change within subparagraph (c)(ii) to update a rule citation from 
General 3, Section 13(a) to General 3, Rule 1002(a). The rule would 
retain the current title.
Current Phlx General 3, Section 12, Member and Member Organization 
Participation
    Current Phlx General 3, Section 12, Member and Member Organization 
Participation, is being relocated into Equity 2, Section 3, which is 
currently reserved, and Options 2, Section 2, which is currently 
reserved. The rules would retain the same title. The Exchange proposes 
to amend proposed Equity 2, Section 3(a)(3) to remove references to 
FBMS, which is related to options, and the collective definition of 
``System''. The rule is otherwise being relocated to Equity 2, Section 
3, without change. Nasdaq has a similar rule within Equity 2, Section 
3. Also, the Exchange proposes to amend proposed Options 2, Section 
2(a)(3) to remove references to PSX, which is related to equities, and 
the collective definition of ``System''. The rule is otherwise being 
relocated to Options 2, Section 3 without change.
Current Phlx General 3, Section 13, Qualification; Designation of 
Executive Representative
    Current Phlx General 3, Section 13, Qualification; Designation of 
Executive Representative, is being relocated to General 2, Section 10, 
which is currently reserved. This rule is being relocated without 
change. The current title would be retained.
Current Phlx General 3, Section 14, Transfer of Accounts
    The Exchange proposes to relocate General 3, Section 14, Transfer 
of Accounts, to new General 2, Section 24, without change. The current 
title would be retained.
Current Phlx General 3, Section 15, Certificate of Incorporation
    The Exchange proposes to delete current Phlx General 3, Section 15, 
Certificate of Incorporation. This rule requires a certificate of 
incorporation and by-laws of a proposed member organization to be filed 
with the Membership Department and approved as well as other 
authorization documents. Also, amendments to the certificate of 
incorporation and by-laws of a member organization are required to be 
reviewed by the Membership Department for approval. Phlx has not 
approved amendments to the certificate of incorporation and by-laws of 
a member organization. Proposed General 3, Rule 1013 includes a list of 
required documentation which may include a certificate of incorporation 
and by-laws, if requested by the Membership Department. The Exchange 
proposes to delete current Phlx General 3, Section 15 because it is 
redundant and unnecessary.
Conclusion
    The amendments proposed herein will allow the Exchange to harmonize 
its membership rules and processes with those of Nasdaq and other 
Affiliated Exchanges. These amendments will provide uniform criteria 
across the Affiliated Exchanges for membership qualifications and a 
consistent process across the Affiliated Exchanges for processing 
membership applications. The proposal will also provide for full 
membership reciprocity between the Affiliated Exchanges so that a 
member of one Affiliated Exchange would receive expedited treatment in 
applying for membership on any other Affiliated Exchange. Similarly, 
harmonized membership rules and processes will benefit Exchange 
Applicants, members and member organizations by establishing consistent 
membership requirements and processes that must be followed to apply 
for membership on the Exchange.
    Moreover, as to the Exchange itself, the proposed changes described 
herein will render the Exchange's membership rules and processes 
clearer, better organized, simpler, and easier to comply with. Again, 
such changes will provide benefits both to the Exchange's Membership 
Department and to Exchange Applicants.
    The proposed membership rules and processes are similar to the 
existing rules and process, and where there are differences between the 
new and old processes, the Exchange believes that the new process does 
not disadvantage its members, member organizations or Associated 
Persons. To the contrary, the Exchange believes that the new rules and 
processes will benefit all parties as it again provides greater 
clarity, simplicity, and efficiency than the retired rules and 
processes.
Implementation
    As noted in footnote 3 above, the Exchange's proposed rule change 
will not become effective unless and until the Commission approves the 
exemption request. To facilitate an orderly transition from the 
existing rules under the General 3 title and the Nasdaq Membership 
Rules to be incorporated by reference, the Exchange is proposing to 
apply the existing Rules to all applications which have been submitted 
to the Exchange (including applications that are not yet complete) and 
are pending approval prior to the operative date. The Exchange also 
will apply the existing Rules to any appeal of an Exchange membership 
decision or any request for the Board to direct action on an 
application pending before the Exchange Review Council, the Board, or 
the Commission, as applicable. As a consequence of this transition 
process, the Exchange will retain the existing processes during the 
transition period until such time that there are no longer any 
applications or matters proceeding under the existing rules. To 
facilitate this transition process, the Exchange will retain a 
transitional rulebook that will contain the Exchange's membership rules 
as they are at the time that this proposal is filed with the 
Commission. This transitional rulebook will apply only to matters 
initiated prior to the operational date of the changes proposed herein 
and it will be posted to the Exchange's public rules website. When the 
transition is complete, the Exchange will remove the transitional 
rulebook from its public website.
    The Exchange will announce and explain this transition process in a 
regulatory alert.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\48\ in general, and furthers the objectives of Section 
6(b)(5) and of the Act,\49\ 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. It is also consistent with Section 6(b)(7) of the Act in that 
it provides for a fair

[[Page 41831]]

procedure for denying Exchange membership to any person who seeks it, 
barring any person from becoming associated with an Exchange member or 
member organization, and prohibiting or limiting any person with 
respect to access to services offered by the Exchange or a member or 
member organization thereof.\50\
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b).
    \49\ 15 U.S.C. 78f(b)(5).
    \50\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    As a general matter, the Exchange believes that its proposal to 
delete its existing membership rules, incorporate by reference the 
Nasdaq Membership Rules, and other related changes will promote a free 
and open market, and will benefit investors, the public, and the 
markets, because the new rules will be clearer, better organized, and 
simpler, and will enhance consistency for membership procedures across 
all of Nasdaq's Affiliated Exchanges.
    The proposal is just and equitable because it will render the 
Exchange's membership rules easier for Applicants, members and member 
organizations to read and understand, including by doing the following:
     Establishing a ``roadmap'' paragraph as shown in proposed 
General 3, Rule 1014(a) that sets forth the basic authority of the 
Membership Department to approve, approve with conditions, or deny 
applications for membership before the Rule goes on to enumerate 
criteria for the Membership Department to apply when taking each of 
those actions;
     Making the titles of the rules more accurate and 
descriptive (e.g., proposed General 3, Rule 1014(b));
     Grouping logically-related provisions together in the 
rules (e.g., provisions governing resignation, termination, transfer, 
and reinstatement of membership; recusals and disqualifications);
     Clarifying when the Membership Department will deem an 
application to be filed (when the application is ``substantially 
complete,'' as set forth in proposed General 3, Rule 1013(a)(2)) and by 
requiring the Membership Department to notify an Applicant in writing 
of the filing date;
     Clarifying what the Exchange means when it states that an 
Applicant may ``waive-in'' to Exchange membership (as set forth in 
proposed General 3, Rule 1013(b)); and
    The proposal will also make compliance with the membership rules 
simpler and less burdensome for Applicants, members and member 
organizations by, codifying the below practices which are not currently 
specified within the rules:
     Eliminating obsolete requirements to submit paper articles 
of incorporation and by-laws, pursuant to Phlx General 3, Section 
10(b), unless requested;
     Permitting electronic filing of applications (proposed 
General 3, Rule 1012(a)(1));
     Allowing payment of application fees by means other than 
paper check (proposed General 3, Rule 1013(a)(1)(C)); and
     Harmonizing Phlx's disparate procedures under proposed 
General 3, Rules 1013 and 1017 for filing, evaluating, and responding 
to initial membership applications and applications for approval of 
business changes as compared to the Affiliated Exchanges.
    Finally, the proposal will also make compliance with the membership 
rules simpler and less burdensome for Applicants, members and member 
organizations by, for example, detailing the circumstances in which an 
Applicant may waive-into Exchange membership to include the Applicant's 
membership in any of the Affiliated Exchanges and defining procedures 
for processing and responding to waive-in applications (proposed 
General 3, Rule 1013(b)).
    In sum, the foregoing changes will update, rationalize, and 
streamline the Exchange's membership rules and processes, and enhance 
consistency with membership rules and processes of the Affiliated 
Exchanges, all to the benefit of Applicants, members and member 
organizations. Moreover, these changes will not adversely impact the 
rights of Applicants, members or member organizations to appeal adverse 
Membership Department decisions under these Rules or to request Board 
action to compel the Membership Department to render decisions on 
applications.
    Last, the Exchange believes that its proposal to phase-in the 
implementation of the new membership rules and processes is consistent 
with Section 6(b)(7) of the Act \51\ because both the current and 
proposed processes provide fair procedures for granting and denying 
applications for becoming an Exchange member or member organization, 
becoming an Associated Person, and making material changes to the 
business operations of a member or member organization. The Exchange is 
proposing to provide advanced notice of the implementation date of the 
new processes, and will apply the new processes to new applications, 
appeals, and requests for Board action that are initiated on or after 
that implementation date.\52\ Any application, appeal, or request for 
Board action initiated prior to the implementation date will be 
completed using the current processes. As a consequence, the Exchange 
will maintain a transitional rulebook on the Exchange's public rules 
website which will contain the Exchange Rules as they are at the time 
of filing this rule change. These transitional rules will apply 
exclusively to applications, appeals, and requests for Board action 
initiated prior to the implementation date. Upon conclusion of the last 
decision on a matter to which the transitional rules apply, the 
Exchange will remove the defunct transitional rules from its public 
rules website. Thus, the transition will be conducted in a fair, 
orderly, and transparent manner. Lastly, the proposed transition 
process is the same process that Nasdaq and other Affiliated Exchanges 
implemented during its transition to new membership rules.
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    \51\ 15 U.S.C. 78f(b)(7).
    \52\ See footnote 3 above. Additionally, the Exchange will issue 
a regulatory alert to provide members and member organizations 
notice of this rule change and the implementation date.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not expect 
that its proposed changes to the membership rules will have any 
competitive impact on its existing or prospective membership. The 
proposed changes will apply equally to all similarly situated 
Applicants, members and member organizations and they will confer no 
relative advantage or disadvantage upon any category of Exchange 
Applicant, member, or member organization. Moreover, the Exchange does 
not expect that its proposal will have an adverse impact on competition 
among exchanges for members; to the contrary, the Exchange hopes that 
by clarifying, reorganizing, and streamlining its membership rules and 
enhancing consistency across all Nasdaq Affiliated Exchanges, the 
Exchange's membership process will be less burdensome for Applicants, 
members, and member organizations. Also, the proposal will improve 
Phlx's competitive standing relative to other exchanges by expanding 
its waive-in process to all Affiliated Exchanges, not just Nasdaq and 
BX, as well as FINRA members, thereby simplifying the process for 
additional market participants to become a Phlx member or member 
organization.

[[Page 41832]]

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \53\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\54\
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    \53\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \54\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2022-28 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2022-28. 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-Phlx-2022-28 and should be submitted on 
or before August 3, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
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    \55\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-14885 Filed 7-12-22; 8:45 am]
BILLING CODE 8011-01-P


