[Federal Register Volume 83, Number 199 (Monday, October 15, 2018)]
[Notices]
[Pages 51988-52005]
[FR Doc No: 2018-22295]

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SECURITIES AND EXCHANGE COMMISSION

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

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

October 9, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 27, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II, below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend, reorganize and enhance its
membership, registration and qualification rules, and to make
conforming changes to certain other rules.
    The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
Overview
    Nasdaq has adopted registration requirements to ensure that
associated persons attain and maintain specified levels of competence
and knowledge pertinent to their function. In general, the current
rules require that persons engaged in a member's investment banking or
securities business who are to function as representatives or
principals register with the Exchange in each category of registration
appropriate to their functions by passing one or more qualification
examinations,\3\ and exempt specified associated persons from the
registration requirements.\4\ They also prescribe ongoing continuing
education requirements for registered persons.\5\ The Exchange now
proposes to amend, reorganize and enhance its rules regarding
registration, qualification examinations and continuing education, as
described below.
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    \3\ See, e.g., Exchange Rules 1021, Registration Requirements,
1022, Categories of Principal Registration, 1031, Registration
Requirements, 1032, Categories of Representative Registration, and
1041, Registration Requirements for Assistant Representatives.
    \4\ See Rule 1060, Persons Exempt from Registration.
    \5\ See Rule 1120, Continuing Education Requirements.
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    In 2006 Nasdaq separated from the National Association of
Securities Dealers, Inc. (formerly ``NASD'' and now the Financial
Industry Regulatory Authority or ``FINRA'') and began to operate as a
national securities exchange. At that time it adopted a rulebook with
provisions respecting registration, qualification examinations and
continuing education that were designed to parallel the NASD rulebook
in many respects.\6\ Recently, the Commission approved a FINRA proposed
rule change consolidating and adopting NASD and Incorporated NYSE rules
relating to qualification and registration requirements into the
Consolidated FINRA Rulebook,\7\ restructuring the FINRA representative-
level qualification examinations, creating a general knowledge
examination and specialized knowledge examinations, allowing permissive
registration, establishing an examination waiver process for persons
working for a financial services affiliate of a member, and amending
certain continuing education (``CE'') requirements (collectively, the
``FINRA Rule Changes'').\8\ The FINRA Rule Changes will become
effective on October 1, 2018.
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    \6\ See Securities Exchange Act Release No. 54136 (July 12,
2006), 71 FR 40759 (July 18, 2006).
    \7\ The current FINRA rulebook consists of: (1) FINRA rules; (2)
NASD rules; and (3) rules incorporated from the New York Stock
Exchange (``NYSE'') (the ``Incorporated NYSE rules''). While the
NASD rules generally apply to all FINRA members, the Incorporated
NYSE rules apply only to those members of FINRA that are also
members of the NYSE.
    \8\ See Securities Exchange Act Release No. 81098 (July 7,
2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-
FINRA-2017-007). See also FINRA Regulatory Notice 17-30 (SEC
Approves Consolidated FINRA Registration Rules, Restructured
Representative-Level Qualification Examinations and Changes to
Continuing Education Requirements) (October 2017). FINRA articulated
its belief that the proposed rule change would streamline, and bring
consistency and uniformity to, its registration rules, which would,
in turn, assist FINRA members and their associated persons in
complying with the rules and improve regulatory efficiency. FINRA
also determined to enhance the overall efficiency of its
representative-level examinations program by eliminating redundancy
of subject matter content across examinations, retiring several
outdated representative-level registrations, and introducing a
general knowledge examination that could be taken by all potential
representative-level registrants and the general public. FINRA
amended certain aspects of its continuing education rule, including
by codifying existing guidance regarding the effect of failing to
complete the Regulatory Element on a registered person's activities
and compensation.
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    The Exchange now proposes to amend, reorganize and enhance certain
of its corresponding membership, registration and qualification
requirements rules in part in response to the FINRA Rule Changes, and
also in order to facilitate the adoption of similar membership,
registration and qualification rules by Nasdaq's affiliated exchanges
in the interest of uniformity and to facilitate compliance with
membership, registration and qualification regulatory requirements by
members of multiple Nasdaq-affiliated exchanges. At the same time, the
Exchange is proposing to further amend or delete certain existing
Exchange rules originally based upon FINRA rules but

which are no longer appropriate for the business conducted by Nasdaq or
its affiliated exchanges.\9\ Last, the Exchange proposes to enhance its
registration rules by adding a new registration requirement applicable
to developers of algorithmic trading systems similar to a requirement
adopted by FINRA pursuant to a 2016 FINRA proposed rule change.\10\
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    \9\ For example, the Exchange is deleting the Limited
Principal--Investment Company and Variable Contracts Products
(current Nasdaq Rule 1022(d)), Limited Representative--Investment
Company and Variable Contracts Products (current Nasdaq Rule
1032(b)) and Introducing Broker/Dealer Financial and Operations
Principal (current Nasdaq Rule 1022(c)) registration categories from
the array of registration categories recognized by the Exchange.
Although FINRA is retaining these registration categories for its
own purposes, the activities permitted by registration in those
categories have little or no practical relevance to the Exchange.
    \10\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007). In its proposed rule change FINRA addressed the
increasing significance of algorithmic trading strategies by
amending its rules to require registration, as Securities Traders,
of associated persons primarily responsible for the design,
development or significant modification of algorithmic trading
strategies, or who are responsible for the day-to-day supervision or
direction of such activities.
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    As part of this proposed rule change, current IM-1002-2, Status of
Persons Serving in the Armed Forces of the United States; IM-1002-3,
Failure to Register Personnel; 1020, Registration of Principals; 1021,
Registration Requirements; 1022, Categories of Principal Registration;
IM-1022-1, Reserved; IM-1022-2, Limited Principal-General Securities
Sales Supervisor; 1030, Registration of Representatives; 1031,
Registration Requirements, Sections (a)-(e); 1032, Categories of
Representative Registration; 1040, Registration of Assistant
Representatives; 1041, Registration Requirements for Assistant
Representatives; 1042, Restrictions for Assistant Representatives;
1043, Reserved; 1060, Persons Exempt from Registration \11\; 1070,
Qualification Examinations and Waiver of Requirements; 1080,
Confidentiality of Examinations; 1100, Reserved; 1110, Reserved; 1120,
Continuing Education Requirements; and Chapter II, Section 2,
Requirements for Options Participation, Subsections (g) and (h) and
Commentary .01, are proposed to be deleted. Rule 1140, Electronic
Filing Requirements for Uniform Forms, is proposed to be amended and
relocated. A number of other rules are proposed to be amended with
conforming changes, or relocated in view of the foregoing
amendments.\12\
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    \11\ Provisions currently found in Rule 1060(b) are being
amended and relocated to new Rule 2040, as discussed below.
    \12\ Conforming amendments are proposed to Rules 0120,
Definitions; 1050, Research Analysts; 3010, Supervision; 7003,
Registration and Processing Fees; IM-9216, Violations Appropriate
for Disposition Under Plan Pursuant to SEC Rule 19d-1(c)(2); and
9630, Appeal. In the Exchange's Options Rules, amendments are
proposed to Chapter XI, Section 2, Registration of Options
Principals and Section 3, Registration of Representatives.
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    In place of the deleted rules and rule sections, the Exchange
proposes to adopt a new 1200 Series of rules captioned Registration,
Qualification and Continuing Education, generally conforming to and
based upon FINRA's new 1200 Series of rules resulting from the FINRA
Rule Changes, but with a number of Exchange-specific variations.\13\
The proposed new 1200 Series is also being proposed for adoption by
Nasdaq's affiliated exchanges in order to facilitate compliance with
membership, registration and qualification regulatory requirements by
members of two or more of those affiliated exchanges.\14\ In the new
1200 Series the Exchange would, among other things, recognize
additional associated person registration categories, recognize a new
general knowledge examination, permit the maintenance of permissive
registrations, and require Securities Trader registration of developers
of algorithmic trading strategies consistent with a comparable existing
FINRA registration requirement.\15\
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    \13\ The proposed 1200 Series of Rules would consist of Rule
1210, Registration Requirements; Rule 1220, Registration Categories;
Rule 1230, Associated Persons Exempt from Registration; Rule 1240,
Continuing Education Requirements; and Rule 1250, Electronic Filing
Requirements for Uniform Forms.
    \14\ The Exchange's five affiliated exchanges, Nasdaq BX, Inc.
(``BX''), Nasdaq PHLX LLC (``PHLX''), Nasdaq ISE, LLC (``ISE''),
Nasdaq GEMX, LLC (``GEMX''), and Nasdaq MRX, LLC (``MRX'') (together
with Nasdaq, the ``Nasdaq Affiliated Exchanges'') are also
submitting proposed rule changes to adopt the 1200 Series of rules.
See SR-BX-2018-047, SR-Phlx-2018-61, SR-ISE-2018-82, SR-GEMX-2018-
33, and SR-MRX-2018-31. The Exchange recently added a shell
structure to its rulebook with the purpose of improving efficiency
and readability and to align its rules more closely to those of the
other Nasdaq Affiliated Exchanges. See Securities Exchange Act
Release No. 82175 (November 29, 2017), 82 FR 57494 (December 5,
2017) (SR-NASDAQ-2017-125). Ultimately, the Exchange intends to
submit another proposed rule change to transfer the 1200 Series of
rules into the new shell structure. (The Exchange notes that the
Phlx 1200 Series of rules would differ slightly from the 1200 Series
of the other Nasdaq Affiliated Exchanges given Phlx's trading floor
and its unique membership structure which features the concept of a
``member organization.'').
    \15\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (order approving SR-FINRA-2016-
007). In its proposed rule change to adopt this registration
requirement, FINRA addressed the increasing significance of
algorithmic trading strategies by proposing to require registration,
as Securities Traders, of associated persons primarily responsible
for the design, development or significant modification of
algorithmic trading strategies, or who are responsible for the day-
to-day supervision or direction of such activities.
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    The proposed rule change would become operative October 1, 2018
with the exception of the new registration requirement for developers
of algorithmic trading strategies which would become operative on April
1, 2019.
Proposed Rules
A. Registration Requirements (Proposed Rule 1210)
    Exchange Rules 1021(a) and 1031(a) currently require that persons
engaged, or to be engaged, in the investment banking or securities
business of a member who are to function as representatives or
principals register with the Exchange in the category of registration
appropriate to their functions as specified in Exchange Rules 1022 and
1032.\16\ The Exchange is proposing to consolidate and streamline
provisions of Exchange Rules 1021(a) and 1031(a) and to adopt them as
Exchange Rule 1210, subject to several changes.\17\
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    \16\ In addition, IM-1002-3 provides that the failure to
register an individual as a registered representative may be deemed
to be conduct inconsistent with just and equitable principles of
trade and may be sufficient cause for appropriate disciplinary
action. As explained below the Exchange proposes to delete IM-1002-3
as superfluous.
    \17\ Rule 1031, Registration Requirements, contains certain
sections that are not affected by this proposed rule change.
However, due to the overall organizational restructuring of the
registration rules, those sections (current Rules 1031(c), (d) and
(e)) are being relocated with non-substantive amendments to new
Supplementary Material .12, Application for Registration and
Jurisdiction, to proposed Rule 1210, Registration Requirements.
These relocated provisions govern the process for applying for
registration and amending the registration application, as well as
for notifying the Exchange of termination of a member's association
with a person registered with the Exchange. The Exchange proposes to
adopt Rule 1210, Supplemental Material .12, into the 1200 Series in
order to have uniform processes and requirements in this area across
the Nasdaq Affiliated Exchanges. This relocated language is unique
to the Exchange--the FINRA Rule Changes do not contain a counterpart
Rule 1210 Supplementary Material .12. The Exchange anticipates
amending Rule 1031(f) in a future proposed rule change.
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    Proposed Rule 1210 provides that each person engaged in the
securities business of a member must register with the Exchange as a
representative or principal in each category of registration
appropriate to his or her functions and responsibilities as specified
in proposed Rule 1220, unless exempt from registration pursuant to
proposed Rule 1230. Unlike current Rules 1021(a) and 1031(a), proposed
Rule 1210 would not

require persons engaged in the investment banking business of a member
to register with the Exchange since a member's investment banking
business is not the primary concern of the Exchange or the focus of its
operations.\18\ Proposed Exchange Rule 1210 also provides that such
person is not qualified to function in any registered capacity other
than that for which the person is registered, unless otherwise stated
in the rules. This latter provision is a consolidation of similar
provisions in the registration categories under the current Exchange
rules.
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    \18\ Miami International Securities Exchange LLC (``MIAX'') Rule
203(a) and ISE Rule 313(a)(1) likewise require registration of
associated persons of members engaged in the member's securities
business, but do not require registration with the exchanges of
associated persons of members who engage in the member's investment
banking business. Because the Exchange's proposed registration rules
focus solely on securities trading activity, the proposed rules
differ from the FINRA Rule Changes by omitting references to
investment banking in proposed Rules 1210, 1210.03, 1210.10,
1220(a)(1), 1220(a)(2)(B), 1220(b), and 1240(b)(1), and also by
omitting as unnecessary from Rule 1220(a)(10) a limitation on the
qualification of a General Securities Sales Supervisor to supervise
the origination and structuring of an underwriting.
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    Further, the Exchange is proposing to delete Exchange IM-1002-3
because it is superfluous. The failure to register a representative as
required under current Exchange Rule 1031(a) is in fact a violation of
Exchange rules.
B. Minimum Number of Registered Principals (Proposed Rule 1210.01)
    Rule 1021(e)(1) currently requires that a member, except a sole
proprietorship, have a minimum of two registered principals with
respect to each aspect of the member's investment banking and
securities business pursuant to the applicable provisions of Rule 1022,
provided however that a proprietary trading firm with 25 or fewer
registered representatives shall only be required to have one
registered principal. This requirement applies to applicants for
membership and existing members. Exchange Rule 1021(e)(2) also provides
that, pursuant to the Exchange's Rule 9600 Series, the Exchange may
waive the principal requirements of Rule 1021(e)(1) in situations that
indicate conclusively that only one person associated with an applicant
for membership should be required to register as a principal. Rule
1021(e)(3) provides that an applicant for membership, if the nature of
its business so requires, must also have at least one person qualified
for registration under Rule 1022(b) and (c) as a Financial and
Operations Principal (or an Introducing Broker/Dealer Financial and
Operations Principal).\19\
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    \19\ Exchange Rules 1022(b) and (c) as well as other Exchange
rules currently refer to categories of limited principal
registration as ``Limited Principal--'' followed by the name of the
registration category. In this proposed rule change and in the
proposed rules, the Exchange will no longer employ the term
``Limited Principal--'' in identifying various principal
registration categories. No substantive change is intended;
shortening the names of the various principals simply improves
readability of the rules.
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    The Exchange is proposing to adopt Rule 1021(e) as Rule 1210.01,
subject to the following changes. The Exchange proposes to provide
firms that limit the scope of their business with greater flexibility
to satisfy the two-principal requirement. In particular, proposed Rule
1210.01 requires that a member have a minimum of two General Securities
Principals, provided that a member that is limited in the scope of its
activities may instead have two officers or partners who are registered
in a principal category that corresponds to the scope of the member's
activities.\20\ For instance, if a firm's business is limited to
securities trading, the firm may have two Securities Trader Principals,
instead of two General Securities Principals. Currently, a sole
proprietor member (without any other associated persons) is not subject
to the two-principal requirement because such member is operating as a
one-person firm. Given that one-person firms may be organized in legal
forms other than a sole proprietorship (such as a single-person limited
liability company), proposed Exchange Rule 1210.01 provides that any
member with only one associated person is excluded from the two
principal requirement. In addition, proposed Rule 1210.01 clarifies
that existing members as well as new applicants may request a waiver of
the two-principal requirement. Finally, the Exchange is proposing to
retain the existing rule's provision permitting a proprietary trading
firm with 25 or fewer registered representatives to have just one
registered principal. The FINRA Rule Changes do not include this
provision.\21\
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    \20\ The principal registration categories are described in
greater detail below.
    \21\ The Exchange is not proposing provisions conforming to the
new FINRA Rule 1210.01 requirements that all FINRA members are
required to have a Principal Financial Officer and a Principal
Operations Officer, because it believes that its proposed Rule
1220(a)(4), Financial and Operations Principal, which requires
member firms operating pursuant to certain provisions of SEC rules
to designate at least one Financial and Operations Principal, is
sufficient. Further, the Exchange is not adopting the FINRA Rule
1210.01 requirements that (1) a member engaged in investment banking
activities have an Investment Banking Principal, (2) a member
engaged in research activities have a Research Principal, or (3) a
member engaged in options activities with the public have a
Registered Options Principal. The Exchange does not recognize the
Investment Banking Principal or the Research Principal registration
categories, and the Registered Options Principal registration
requirement is set forth in Rule 1210.08 and its inclusion is
therefore unnecessary in Rule 1210.01.
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C. Permissive Registrations (Proposed Rule 1210.02)
    Rules 1021(a) and 1031(a) currently permit a member to register or
maintain the registration(s) as a representative or principal of an
individual performing legal, compliance, internal audit, back-office
operations or similar responsibilities for the member. Rule 1031(a)
also permits a member to register or maintain the registration as a
representative of an individual performing administrative support
functions for registered persons. In addition, Rules 1021(a) and
1031(a) permit a member to register or maintain the registration(s) as
a representative or principal of an individual engaged in the
investment banking or securities business of a foreign securities
affiliate or subsidiary of the member.
    The Exchange is proposing to consolidate these provisions under
Rule 1210.02. The Exchange is also proposing to expand the scope of
permissive registrations and to clarify a member's obligations
regarding individuals who are maintaining such registrations.
    Specifically, proposed Rule 1210.02 allows any associated person to
obtain and maintain any registration permitted by the member. For
instance, an associated person of a member working solely in a clerical
or ministerial capacity, such as in an administrative capacity, would
be able to obtain and maintain a General Securities Representative
registration with the member. As another example, an associated person
of a member who is registered, and functioning solely, as a General
Securities Representative would be able to obtain and maintain a
General Securities Principal registration with the member. Further,
proposed Rule 1210.02 allows an individual engaged in the securities
business of a foreign securities affiliate or subsidiary of a member to
obtain and maintain any registration permitted by the member.
    The Exchange is proposing to permit the registration of such
individuals for several reasons. First, a member may foresee a need to
move a former representative or principal who has not been registered
for two or more years back into a position that would require such
person to be registered. Currently, such persons are required to
requalify (or obtain a waiver of the applicable qualification
examinations) and reapply for registration. Second, the proposed

rule change would allow members to develop a depth of associated
persons with registrations in the event of unanticipated personnel
changes. Third, allowing registration in additional categories
encourages greater regulatory understanding. Finally, the proposed rule
change would eliminate an inconsistency in the current rules, which
permit some associated persons of a member to obtain permissive
registrations, but not others who equally are engaged in the member's
business.
    Individuals maintaining a permissive registration under the
proposed rule change would be considered registered persons and subject
to all Exchange rules, to the extent relevant to their activities. For
instance, an individual working solely in an administrative capacity
would be able to maintain a General Securities Representative
registration and would be considered a registered person for purposes
of rules relating to borrowing from or lending to customers, but the
rule would have no practical application to his or her conduct because
he or she would not have any customers.
    Consistent with the Exchange's supervision rules, members would be
required to have adequate supervisory systems and procedures reasonably
designed to ensure that individuals with permissive registrations do
not act outside the scope of their assigned functions.\22\ With respect
to an individual who solely maintains a permissive registration, such
as an individual working exclusively in an administrative capacity, the
individual's day-to-day supervisor may be a nonregistered person.
Members would be required to assign a registered supervisor to this
person who would be responsible for periodically contacting such
individual's day-to-day supervisor to verify that the individual is not
acting outside the scope of his or her assigned functions. If such
individual is permissively registered as a representative, the
registered supervisor must be registered as a representative or
principal. If the individual is permissively registered as a principal,
the registered supervisor must be registered as a principal.\23\
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    \22\ The FINRA Proposed Rules at Rule 1210.02 cite FINRA's own
supervision rule, by number. Because the 1200 Series of rules is
intended to apply to the Exchange as well as to its affiliates which
have different supervision rules, proposed Rule 1210.02 refers
generally to the supervision rules rather than identifying them by
number.
    \23\ In either case, the registered supervisor of an individual
who solely maintains a permissive registration would not be required
to be registered in the same representative or principal
registration category as the permissively-registered individual.
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D. Qualification Examinations and Waivers of Examinations (Proposed
Rule 1210.03)
    Rules 1021(a) and 1031(a) currently set forth general requirements
that an individual pass an appropriate qualification examination before
his or her registration as a representative or principal can become
effective. The Exchange is proposing to consolidate these provisions
and adopt them as Rule 1210.03.
    In addition, as part of the FINRA Rule Changes FINRA has adopted a
restructured representative-level qualification examination program
whereby representative-level registrants would be required to take a
general knowledge examination (the Securities Industry Essentials Exam
or ``SIE'') and a specialized knowledge examination appropriate to
their job functions at the firm with which they are associating.
Therefore, proposed Rule 1210.03 provides that before the registration
of a person as a representative can become effective under proposed
Rule 1210, such person must pass the SIE and an appropriate
representative-level qualification examination as specified in proposed
Rule 1220. Proposed Rule 1210.03 also provides that before the
registration of a person as a principal can become effective under
proposed Rule 1210, such person must pass an appropriate principal-
level qualification examination as specified in proposed Rule 1220.
    Further, proposed 1210.03 provides that if the job functions of a
registered representative, other than an individual registered as an
Order Processing Assistant Representative, change and he or she needs
to become registered in another representative-level category, he or
she would not need to pass the SIE again. Rather, the registered person
would need to pass only the appropriate representative-level
qualification examination.\24\ Thus under the proposed rule change,
individuals seeking registration in two or more representative-level
categories would experience a net decrease in the total number of exam
questions they would be required to answer because the SIE content
would be tested only once.
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    \24\ The exception for Order Processing Assistant
Representatives and Foreign Associates was adopted by FINRA in FINRA
Rule 1210.03, and is included in proposed Exchange Rule 1210.03
without the reference to Foreign Associates which is a registration
category the Nasdaq Affiliated Exchanges do not recognize. FINRA has
stated that the SIE would assess basic product knowledge; the
structure and function of the securities industry markets,
regulatory agencies and their functions; and regulated and
prohibited practices. Proposed Rule 1210.03 provides that all
associated persons, such as associated persons whose functions are
solely and exclusively clerical or ministerial, are eligible to take
the SIE. Proposed Rule 1210.03 also provides that individuals who
are not associated persons of firms, such as members of the general
public, are eligible to take the SIE. FINRA has stated its belief
that expanding the pool of individuals who are eligible to take the
SIE would enable prospective securities industry professionals to
demonstrate to prospective employers a basic level of knowledge
prior to submitting a job application. Further, this approach would
allow for more flexibility and career mobility within the securities
industry. While all associated persons of firms as well as
individuals who are not associated persons would be eligible to take
the SIE pursuant to proposed Rule 1210.03, passing the SIE alone
would not qualify them for registration with the Exchange. Rather,
to be eligible for registration with the Exchange, an individual
would be required to pass an applicable representative or principal
qualification examination and complete the other requirements of the
registration process.
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    The proposed rule change solely impacts the representative-level
qualification requirements. The proposed rule change does not change
the scope of the activities under the remaining representative
categories. For instance, after the operative date of the proposed rule
change, a previously unregistered individual registering as a
Securities Trader for the first time would be required to pass the SIE
and an appropriate specialized knowledge examination. However, such
individual may engage only in those activities in which a current
Securities Trader may engage under current Exchange Rules.
    Individuals who are registered on the operative date of the
proposed rule change would be eligible to maintain those registrations
without being subject to any additional requirements. Individuals who
had been registered within the past two years prior to the operative
date of the proposed rule change would also be eligible to maintain
those registrations without being subject to any additional
requirements, provided that they reregister with the Exchange within
two years from the date of their last registration.
    Further, registered representatives, other than an individual
registered as an Order Processing Assistant Representative, would be
considered to have passed the SIE in the CRD system, and thus if they
wish to register in any other representative category after the
operative date of the proposed rule change, they could do so by taking
only the appropriate specialized knowledge examination.\25\ However,
with respect to

an individual who is not registered on the operative date of the
proposed rule change but was registered within the past two years prior
to the operative date of the proposed rule change, the individual's SIE
status in the CRD system would be administratively terminated if such
individual does not register within four years from the date of the
individual's last registration.\26\
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    \25\ Under the proposed rule change, only individuals who have
passed an appropriate representative-level examination would be
considered to have passed the SIE. Registered principals who do not
hold an appropriate representative-level registration would not be
considered to have passed the SIE. For example, an individual who is
registered solely as a Financial and Operations Principal (Series
27) today would have to take the Series 7 to become registered as a
General Securities Representative. Under the proposed rule change,
in the future, this individual would have to pass the SIE and the
specialized Series 7 examination to obtain registration as a General
Securities Representative.
    \26\ As discussed below, the Exchange is proposing a four-year
expiration period for the SIE.
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    In addition, individuals, with the exception of Order Processing
Assistant Representatives, who had been registered as representatives
two or more years, but less than four years, prior to the operative
date of the proposed rule change would also be considered to have
passed the SIE and designated as such in the CRD system. Moreover, if
such individuals re-register with a firm after the operative date of
the proposed rule change and within four years of having been
previously registered, they would only need to pass the specialized
knowledge examination associated with that registration position.
However, if they do not register within four years from the date of
their last registration, their SIE status in the CRD system would be
administratively terminated. Similar to the current process for
registration, firms would continue to use the CRD system to request
registrations for representatives. An individual would be able to
schedule both the SIE and specialized knowledge examinations for the
same day, provided the individual is able to reserve space at one of
FINRA's designated testing centers.
    Finally, paragraph (d) of Rule 1070 currently permits the Exchange,
in exceptional cases and where good cause is shown, to waive the
applicable qualification examination and accept other standards as
evidence of an applicant's qualifications for registration. The
Exchange is proposing to transfer the provisions of Rule 1070(d) into
proposed Rule 1210.03 with changes which track FINRA Rule 1210.03.\27\
The proposed rule provides that the Exchange will only consider
examination waiver requests submitted by a firm for individuals
associated with the firm who are seeking registration in a
representative- or principal-level registration category. Moreover,
proposed Rule 1210.03 states that the Exchange will consider waivers of
the SIE alone or the SIE and the representative- and principal-level
examination(s) for such individuals.
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    \27\ Rules 1070(a), (b) and (c) provide general information
relating to the examination process. The Exchange is proposing to
delete these provisions given that they relate to the administration
of the examination program rather than rule requirements.
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E. Requirements for Registered Persons Functioning as Principals for a
Limited Period (Proposed Rule 1210.04)
    Exchange Rule 1021(d) provides that a person who is currently
registered with a member as a representative and whose duties are
changed by the member so as to require registration as a principal may
function as a principal for up to 90 calendar days before he or she is
required to pass the appropriate qualification examination for
principal. In addition, it allows a formerly registered representative
who is required to register as a principal to function as a principal
without passing the appropriate principal qualification examination for
up to 90 calendar days, provided the person first satisfies all
applicable prerequisite requirements. A person who has never been
registered does not qualify for this exception. This provision applies
to a person associated with a member of another registered national
securities exchange or association who is required to register in a
principal classification under Nasdaq rules but who is not required to
be so registered under the rules of the other exchange or association.
    The Exchange is proposing to adopt Rule 1021(d) as Rule 1210.04,
subject to the following changes. Proposed Rule 1210.04 states that a
member may designate any person currently registered, or who becomes
registered, with the member as a representative to function as a
principal for a limited period, provided that such person has at least
18 months of experience functioning as a registered representative
within the five-year period immediately preceding the designation. This
change is intended to ensure that representatives designated to
function as principals for the limited period under the proposed rule
have an appropriate level of registered representative experience. The
proposed rule clarifies that the requirements of the rule apply to any
principal category, including those categories that are not subject to
a prerequisite representative-level registration requirement, such as
the Financial and Operations Principal registration category.\28\ The
Exchange is not conserving in Rule 1210.04 the language that this
provision applies to a person associated with a member of another
registered national securities exchange or association who is required
to register in a principal classification under the Nasdaq rules but
who is not required to be so registered under the rules of the other
exchange or association. The Exchange believes this language is
superfluous as the applicability to various individuals of proposed
Rule 1210.04 speaks for itself and requires no elaboration.\29\
Proposed Rule 1210.04 would increase the Rule 1021(d)'s 90 day period
to 120 days, to provide additional flexibility for representatives
functioning as principals for a limited period of time.
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    \28\ In this regard, the Exchange notes that qualifying as a
registered representative is currently a prerequisite to qualifying
as a principal on the Exchange except with respect to the Financial
and Operations Principal and the Introducing Broker/Dealer Financial
and Operations Principal.
    \29\ Proposed Rule 1210.04 omits FINRA Rule 1210.04's reference
to Foreign Associates, which is a registration category not
recognized by the Nasdaq Affiliated Exchanges, but otherwise tracks
the language of FINRA Rule 1210.04.
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F. Rules of Conduct for Taking Examinations and Confidentiality of
Examinations (Proposed Rule 1210.05)
    Before taking an examination, FINRA currently requires each
candidate to agree to the Rules of Conduct for taking a qualification
examination. Among other things, the examination Rules of Conduct
require each candidate to attest that he or she is in fact the person
who is taking the examination. These Rules of Conduct also require that
each candidate agree that the examination content is the intellectual
property of FINRA and that the content cannot be copied or
redistributed by any means. If FINRA discovers that a candidate has
violated the Rules of Conduct for taking a qualification examination,
the candidate may forfeit the results of the examination and may be
subject to disciplinary action by FINRA. For instance, for cheating on
a qualifications examination, FINRA's Sanction Guidelines recommend a
bar. \30\
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    \30\ See SR-FINRA-2017-007, pp. 26-27.
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    Effective October 1, 2018 FINRA has codified the requirements
relating to the Rules of Conduct for examinations under FINRA Rule
1210.05. FINRA also adopted Rules of Conduct for taking the SIE for
associated persons and non-associated persons who take the SIE.
    The Exchange proposes to adopt its own version of Rule 1210.05,
which would provide that associated persons taking the SIE are subject
to the SIE Rules of Conduct, and that associated persons taking any
representative or principal examination are subject to the Rules of
Conduct for representative and

principal examinations. Under the proposed rule, a violation of the SIE
Rules of Conduct or the Rules of Conduct for representative and
principal examinations by an associated person would be deemed to be a
violation of Exchange rules requiring observance of high standards of
commercial honor or just and equitable principles of trade, such as
Exchange Rule 2010A.\31\ Further, if the Exchange determines that an
associated person has violated the SIE Rules of Conduct or the Rules of
Conduct for representative and principal examinations, the associated
person may forfeit the results of the examination and may be subject to
disciplinary action by the Exchange.
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    \31\ Pursuant to Exchange Rule 2010A, a member, in the conduct
of its business, shall observe high standards of commercial honor
and just and equitable principles of trade. FINRA Rule 1210.05 cites
FINRA Rule 2010, which is a comparable rule.
---------------------------------------------------------------------------

    Proposed Rule 1210.05 states that the Exchange considers all of the
qualification examinations content to be highly confidential. The
removal of examination content from an examination center,
reproduction, disclosure, receipt from or passing to any person, or use
for study purposes of any portion of such qualification examination or
any other use that would compromise the effectiveness of the
examinations and the use in any manner and at any time of the questions
or answers to the examinations would be prohibited and would be deemed
to be a violation of Exchange rules requiring observance of high
standards of commercial honor or just and equitable principles of
trade. Finally, proposed Rule 1210.05 would prohibit an applicant from
receiving assistance while taking the examination, and require the
applicant to certify that no assistance was given to or received by him
or her during the examination.\32\
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    \32\ In view of proposed Rule 1210.05, the Exchange is proposing
to delete Rule 1080, Confidentiality of Examinations, which is
largely duplicative. The Exchange is not adopting portions of
FINRA's Rule 1210.05 which apply to non-associated persons, over
whom the Exchange would in any event have no jurisdiction.
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G. Waiting Periods for Retaking a Failed Examination (Proposed Rule
1210.06)
    Rule 1070(e) currently sets forth waiting periods for retaking
failed examinations. The rule provides that a person who fails a
qualification examination would be permitted to retake the examination
after either a period of 30 calendar days has elapsed from the date of
the prior examination or the next administration of an examination
administered on a monthly basis. However, if the person fails an
examination three or more times in succession, he or she would be
prohibited from retaking the examination either until a period of 180
calendar days has elapsed from the date of his or her last attempt to
pass the examination or until the sixth subsequent administration of an
examination administered on a monthly basis. The Exchange is proposing
to adopt Rule 1070(e) as Rule 1210.06, with the following changes.
    Proposed Rule 1210.06 provides that a person who fails an
examination may retake that examination after 30 calendar days from the
date of the person's last attempt to pass that examination. The
proposed rule deletes the reference to examinations administered on a
monthly basis because examinations are no longer administered in such a
manner.
    Proposed Rule 1210.06 further provides that if a person fails an
examination three or more times in succession within a two-year period,
the person is prohibited from retaking that examination until 180
calendar days from the date of the person's last attempt to pass it.
These waiting periods would apply to the SIE and the representative-
and principal-level examinations.\33\
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    \33\ FINRA Rule 1210.06 requires individuals taking the SIE who
are not associated persons to agree to be subject to the same
waiting periods for retaking the SIE. The Exchange is not including
this language in proposed Rule 1210.06, as the Exchange will not
apply the 1200 Series of rules in any event to individuals who are
not associated persons of members.
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H. CE Requirements (Proposed Rule 1210.07)
    Pursuant to current Rule 1120, the CE requirements applicable to
registered persons consist of a Regulatory Element \34\ and a Firm
Element.\35\ The Regulatory Element applies to registered persons and
must be completed within prescribed time frames.\36\ For purposes of
the Regulatory Element, a ``registered person'' is defined in the
current rule as any person registered with the Exchange as a
representative, principal, or assistant representative.\37\ The Firm
Element consists of annual, member-developed and administered training
programs designed to keep covered registered persons current regarding
securities products, services and strategies offered by the member. For
purposes of the Firm Element, the term ``covered registered persons''
is defined as any registered person who has direct contact with
customers in the conduct of the member's securities sales, trading and
investment banking activities, and the immediate supervisors of such
persons.\38\
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    \34\ See Rule 1120(a).
    \35\ See Rule 1120(b).
    \36\ Pursuant to Rule 1120(a), each registered person is
required to complete the Regulatory Element initially within 120
days after the person's second registration anniversary date and,
thereafter, within 120 days after every third registration
anniversary date. Unless otherwise determined by the Exchange, a
registered person who has not completed the Regulatory Element
program within the prescribed time frames will have their
registrations deemed inactive until such time as the requirements of
the program have been satisfied. Any person whose registration has
been deemed inactive under Rule 1120(a) must cease all activities as
a registered person and is prohibited from performing any duties and
functioning in any capacity requiring registration. A registration
that is inactive for a period of two years will be administratively
terminated. A person whose registration is so terminated may
reactivate the registration only by reapplying for registration and
meeting the qualification requirements of the applicable provisions
of the Exchange's rules. The Exchange may, upon application and a
showing of good cause, allow for additional time for a registered
person to satisfy the program requirements.
    \37\ See Rule 1120(a)(5).
    \38\ See Rule 1120(b)(1).
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    The Exchange proposes to delete Rule 1120 and to replace it with
Rule 1240, Continuing Education Requirements. The Exchange believes
that all registered persons, regardless of their activities, should be
subject to the Regulatory Element of the CE requirements so that they
can keep their knowledge of the securities industry current. Therefore,
the Exchange is proposing Rule 1210.07, to clarify that all registered
persons, including those who solely maintain a permissive registration,
are required to satisfy the Regulatory Element, as specified in
proposed Rule 1240. Individuals who have passed the SIE but not a
representative or principal-level examination and do not hold a
registered position would not be subject to any CE requirements.
    Consistent with current practice, proposed Rule 1210.07 also
provides that a registered person of a member who becomes CE inactive
would not be permitted to be registered in another registration
category with that member or be registered in any registration category
with another member, until the person has satisfied the Regulatory
Element.
I. Lapse of Registration and Expiration of SIE (Proposed Rule 1210.08)
    Rule 1021(c) currently states that any person whose registration
has been revoked pursuant to Rule 8310 \39\ or

whose most recent registration as a principal has been terminated for a
period of two or more years immediately preceding the date of receipt
by the Exchange of a new application is required to pass a
qualification examination for principals appropriate to the category of
registration as specified in Rule 1022. Pursuant to Rule 1031(b), any
person whose registration has been revoked pursuant to Rule 8310 or
whose most recent registration as a representative or principal has
been terminated for a period of two or more years immediately preceding
the date of receipt by the Exchange of a new application is required to
pass a qualification examination for representatives appropriate to the
category of registration as specified in Rule 1032.\40\ The two years
are calculated from the termination date stated on the individual's
Form U5 (Uniform Termination Notice for Securities Industry
Registration) and the date the Exchange receives a new application for
registration.
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    \39\ Under Rule 8310(a)(3), the Exchange may impose one or more
sanctions on a member or person associated with a member for each
violation of the federal securities laws, rules or regulations
thereunder, or Exchange rules, including suspending the membership
of a member or suspending the registration of a person associated
with a member for a definite period or a period contingent on the
performance of a particular act.
    \40\ In addition, Exchange Rule 1041(c) provides that if any
person whose most recent registration as an Assistant
Representative--Order Processing has been terminated for a period of
two or more years immediately preceding the date of receipt by the
Exchange of a new application is required to pass a qualification
examination for Assistant Representative--Order Processing. As
discussed below, the Exchange is proposing to eliminate Rule 1041(c)
as part of the elimination of the Assistant Representative--Order
Processing registration category on the Exchange.
---------------------------------------------------------------------------

    The Exchange is proposing to consolidate the requirements of Rules
1021(c) and 1031(b) and adopt them as Rule 1210.08. Proposed Rule
1210.08 clarifies that, for purposes of the proposed rule, an
application would not be considered to have been received by the
Exchange if that application does not result in a registration.
    Proposed Rule 1210.08 also sets forth the expiration period of the
SIE. Based on the content covered on the SIE, the Exchange is proposing
that a passing result on the SIE be valid for four years. Therefore,
under the proposed rule change, an individual who passes the SIE and is
an associated person of a firm at the time would have up to four years
from the date he or she passes the SIE to pass a representative-level
examination to register as a representative with that firm, or a
subsequent firm, without having to retake the SIE. In addition, an
individual who passes the SIE and is not an associated person at the
time would have up to four years from the date he or she passes the SIE
to become an associated person of a firm, pass a representative-level
examination and register as a representative without having to retake
the SIE.
    Moreover, an individual holding a representative-level registration
who leaves the industry after the operative date of the proposed rule
change would have up to four years to re-associate with a firm and
register as a representative without having to retake the SIE. However,
the four-year expiration period in the proposed rule change extends
only to the SIE, and not the representative- and principal-level
registrations. The representative- and principal-level registrations
would continue to be subject to a two year expiration period as is the
case today.
J. Waiver of Examinations for Individuals Working for a Financial
Services Industry Affiliate of a Member (Proposed Rule 1210.09)
    The Exchange is proposing Rule 1210.09 to provide a process whereby
individuals who would be working for a financial services industry
affiliate of a member \41\ would terminate their registrations with the
member and would be granted a waiver of their requalification
requirements upon re-registering with a member, provided the firm that
is requesting the waiver and the individual satisfy the criteria for a
Financial Services Affiliate (``FSA'') waiver. \42\ The purpose of the
FSA waiver is to provide a firm greater flexibility to move personnel,
including senior and middle management, between the firm and its
financial services affiliate(s) so that they may gain organizational
skills and better knowledge of products developed by the affiliate(s)
without the individuals having to requalify by examination each time
they returned to the firm.
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    \41\ Proposed Rule 1210.09 defines a ``financial services
industry affiliate of a member'' as a legal entity that controls, is
controlled by or is under common control with a member and is
regulated by the SEC, Commodity Futures Trading Commission
(``CFTC''), state securities authorities, federal or state banking
authorities, state insurance authorities, or substantially
equivalent foreign regulatory authorities.
    \42\ There is no counterpart to proposed Rule 1210.09 in the
Exchange's existing rules. FINRA Rule 1210.09 was recently adopted
as a new waiver process for FINRA registrants, as part of the FINRA
Rule Changes.
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    Under the proposed waiver process, the first time a registered
person is designated as eligible for a waiver based on the FSA
criteria, the member with which the individual is registered would
notify the Exchange of the FSA designation. The member would
concurrently file a full Form U5 terminating the individual's
registration with the firm, which would also terminate the individual's
other SRO and state registrations.
    To be eligible for initial designation as an FSA-eligible person by
a member, an individual must have been registered for a total of five
years within the most recent 10-year period prior to the designation,
including for the most recent year with that member.\43\ An individual
would have to satisfy these preconditions only for purposes of his or
her initial designation as an FSA-eligible person, and not for any
subsequent FSA designation(s). Thereafter, the individual would be
eligible for a waiver for up to seven years from the date of initial
designation \44\ provided that the other conditions of the waiver, as
described below, have been satisfied. Consequently, a member other than
the member that initially designated an individual as an FSA-eligible
person may request a waiver for the individual and more than one member
may request a waiver for the individual during the seven-year
period.\45\
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    \43\ For purposes of this requirement, a five year period of
registration with the Exchange, with FINRA or with another self-
regulatory organization would be sufficient.
    \44\ Individuals would be eligible for a single, fixed seven-
year period from the date of initial designation, and the period
would not be tolled or renewed.
    \45\ The following examples illustrate this point:
    Example 1. Firm A designates an individual as an FSA-eligible
person by notifying the Exchange and files a Form U5. The individual
joins Firm A's financial services affiliate. Firm A does not submit
a waiver request for the individual. After working for Firm A's
financial services affiliate for three years, the individual
directly joins Firm B's financial services affiliate for three
years. Firm B then submits a waiver request to register the
individual.
    Example 2. Same as Example 1, but the individual directly joins
Firm B after working for Firm A's financial services affiliate, and
Firm B submits a waiver request to register the individual at that
point in time.
    Example 3. Firm A designates an individual as an FSA-eligible
person by notifying the Exchange and files a Form U5. The individual
joins Firm A's financial services affiliate for three years. Firm A
then submits a waiver request to reregister the individual. After
working for Firm A in a registered capacity for six months, Firm A
re-designates the individual as an FSA-eligible person by notifying
FINRA and files a Form U5. The individual rejoins Firm A's financial
services affiliate for two years, after which the individual
directly joins Firm B's financial services affiliate for one year.
Firm B then submits a waiver request to register the individual.
    Example 4. Same as Example 3, but the individual directly joins
Firm B after the second period of working for Firm A's financial
services affiliate, and Firm B submits a waiver request to register
the individual at that point in time.
---------------------------------------------------------------------------

    An individual designated as an FSA-eligible person would be subject
to the Regulatory Element of CE while working for a financial services
industry affiliate of a member. The individual would be

subject to a Regulatory Element program that correlates to his or her
most recent registration category, and CE would be based on the same
cycle had the individual remained registered. If the individual fails
to complete the prescribed Regulatory Element during the 120-day window
for taking the session, he or she would lose FSA eligibility (i.e., the
individual would have the standard two-year period after termination to
re-register without having to retake an examination). The Exchange is
making corresponding changes to proposed Rule 1240 (currently Rule
1120, Continuing Education Requirements).
    Upon registering an FSA-eligible person, a firm would file a Form
U4 and request the appropriate registration(s) for the individual. The
firm would also submit an examination waiver request to the
Exchange,\46\ similar to the process used today for waiver requests,
and it would represent that the individual is eligible for an FSA
waiver based on the conditions set forth below. The Exchange would
review the waiver request and make a determination of whether to grant
the request within 30 calendar days of receiving the request. The
Exchange would summarily grant the request if the following conditions
are met:
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    \46\ The Exchange would consider a waiver of the representative-
level qualification examination(s), the principal-level
qualification examination(s) and the SIE, as applicable.
---------------------------------------------------------------------------

    (1) Prior to the individual's initial designation as an FSA-
eligible person, the individual was registered for a total of five
years within the most recent 10-year period, including for the most
recent year with the member that initially designated the individual as
an FSA-eligible person;
    (2) The waiver request is made within seven years of the
individual's initial designation as an FSA-eligible person by a member;
    (3) The initial designation and any subsequent designation(s) were
made concurrently with the filing of the individual's related Form U5;
    (4) The individual continuously worked for the financial services
affiliate(s) of a member since the last Form U5 filing;
    (5) The individual has complied with the Regulatory Element of CE;
and
    (6) The individual does not have any pending or adverse regulatory
matters, or terminations, that are reportable on the Form U4, and has
not otherwise been subject to a statutory disqualification while the
individual was designated as an FSA-eligible person with a member.
    Following the Form U5 filing, an individual could move between the
financial services affiliates of a member so long as the individual is
continuously working for an affiliate. Further, a member could submit
multiple waiver requests for the individual, provided that the waiver
requests are made during the course of the seven-year period.\47\ An
individual who has been designated as an FSA-eligible person by a
member would not be able to take additional examinations to gain
additional registrations while working for a financial services
affiliate of a member.
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    \47\ For example, if a member submits a waiver request for an
FSA-eligible person who has been working for a financial services
affiliate of the member for three years and re-registers the
individual, the member could subsequently file a Form U5 and re-
designate the individual as an FSA-eligible person. Moreover, if the
individual works with a financial services affiliate of the member
for another three years, the member could submit a second waiver
request and re-register the individual upon returning to the member.
---------------------------------------------------------------------------

K. Status of Persons Serving in the Armed Forces of the United States
(Proposed Rule 1210.10)
    IM-1002-2(a) and (b) currently provide specific relief to
registered persons serving in the Armed Forces of the United States.
Among other things, these rules permit a registered person of a member
who volunteers for or is called into active duty in the Armed Forces of
the United States to be registered in an inactive status and remain
eligible to receive ongoing transaction-related compensation. IM-1002-
2(c) also includes specific provisions regarding the deferment of the
lapse of registration requirements in Exchange Rules 1021(c), 1031(b)
and 1041(c) for formerly registered persons serving in the Armed Forces
of the United States.
    The Exchange is proposing to adopt IM-1002-2 as Rule 1210.10 with
the following changes. To enhance the efficiency of the current
notification process for registered persons serving in the Armed
Forces, proposed Rule 1210.10 requires that the member with which such
person is registered promptly notify the Exchange of such person's
return to employment with the member. A sole proprietor must similarly
notify the Exchange of his or her return to participation in the
securities business. Further, proposed Rule 1210.10 provides that the
Exchange would also defer the lapse of the SIE for formerly registered
persons serving in the Armed Forces of the United States.\48\
---------------------------------------------------------------------------

    \48\ Proposed Rule 1210.10 tracks FINRA Rule 1210.10 except for
the statement that inactive registered persons are not to be
included within the definition of ``Personnel'' for purposes of dues
or assessments as provided in Article VI of the FINRA By-Laws.
Instead, proposed Rule 1210.10 conserves language from existing IM-
1002-2 stating that inactive persons under the rule are not included
within the scope of fees, if any, charged by the Exchange with
respect to registered persons.
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L. Impermissible Registrations (Proposed Rule 1210.11)
    Rules 1021(a) and 1031(a) currently prohibit a member from
maintaining a representative or principal registration with the
Exchange for any person who is no longer active in the member's
investment banking or securities business, who is no longer functioning
as a representative or principal as defined under the rules or where
the sole purpose is to avoid the requalification requirement applicable
to persons who have not been registered for two or more years. These
rules also prohibit a member from applying for the registration of a
person as representative or principal where the member does not intend
to employ the person in its investment banking or securities business.
These prohibitions do not apply to the current permissive registration
categories.
    In light of proposed Rule 1210.02, the Exchange is proposing to
delete these provisions and instead adopt Rule 1210.11 prohibiting a
member from registering or maintaining the registration of a person
unless the registration is consistent with the requirements of proposed
Rule 1210.\49\
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    \49\ As discussed above, the Exchange is also proposing Rule
1210, Supplementary Material .12, Application for Registration and
Jurisdiction, which is not included in FINRA Rule 1210. Proposed
Exchange Rule 1210, Supplementary Material .12, is based upon
portions of existing Exchange Rule 1031.
---------------------------------------------------------------------------

M. Registration Categories (Proposed Rule 1220)
    The Exchange is proposing to integrate the various registration
categories and related definitions under the Exchange's rules into a
single rule, Rule 1220, subject to the changes described below.\50\
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    \50\ For ease of reference, the Exchange proposes to adopt as
Rule 1220, Supplementary Material .07, in chart form, a Summary of
Qualification Requirements in chart form for each of the Exchange's
permitted registration categories discussed below.
---------------------------------------------------------------------------

1. Definition of Principal (Proposed Rule 1220(a)(1))
    Rule 1021(b) currently defines the term ``principal'' to include
sole proprietors, officers, partners, managers of offices of
supervisory jurisdiction and directors who are actively engaged in the
management of the member's investment banking or securities

business, such as supervision, solicitation, conduct of business or the
training of persons associated with a member for any of these
functions. The Exchange is proposing to streamline and adopt Rule
1021(b) as Rule 1220(a)(1).
    For the reason discussed above in connection with proposed Rule
1210, proposed Rule 1220(a)(1) would not apply to individuals who are
not engaged in the management of the member's securities business even
if they are engaged in the management of the member's investment
banking business. The proposed rule clarifies that a member's chief
executive officer (``CEO'') and chief financial officer (``CFO'') (or
equivalent officers) are considered principals based solely on their
status. The proposed rule further clarifies that the term ``principal''
includes any other associated person who is performing functions or
carrying out responsibilities that are required to be performed or
carried out by a principal under Exchange rules. In addition, the
proposed rule provides that the phrase ``actively engaged in the
management of the member's securities business'' includes the
management of, and the implementation of corporate policies related to,
such business as well as managerial decision-making authority with
respect to the member's securities business and management-level
responsibilities for supervising any aspect of such business, such as
serving as a voting member of the member's executive, management or
operations committees.
2. General Securities Principal (Proposed Rule 1220(a)(2))
    Rule 1022(a)(1) currently requires that an associated person who
meets the definition of ``principal'' under Rule 1021 and each person
designated as Chief Compliance Officer (``CCO'') on Schedule A of the
member's Form BD (Uniform Application for Broker-Dealer Registration)
register as a General Securities Principal. A person registering as a
General Securities Principal must pass the General Securities Principal
examination. The rule, however, provides that such person is not
required to register as a General Securities Principal if the person's
activities are so limited as to qualify such person for one or more of
the limited principal categories specified in Rule 1022. Further, the
rule does not preclude individuals registered in a limited principal
category from registering as General Securities Principals. Rule
1022(a)(1) also includes transitioning and grandfathering provisions
for CCO's.
    Rule 1022(a) provides that a person seeking to register as a
General Securities Principal must satisfy the General Securities
Representative or Corporate Securities Representative prerequisite
registration. Rule 1022(a)(2) qualifies this provision by providing
that the Corporate Securities Representative prerequisite registration
gives a General Securities Principal only limited supervisory
authority.
    Rule 1022(a)(3) includes a grandfathering provision for persons who
were registered as principals before the adoption of the General
Securities Principal registration category.
    Rule 1022(a)(4) provides that an associated person registered
solely as a General Securities Principal is not qualified to function
as a Financial and Operations Principal (or an Introducing Broker-
Dealer Financial and Operations Principal, as applicable), or Limited
Principal--General Securities Sales Supervisor, unless the General
Securities Principal is also registered in these other categories.
    Exchange Rule 1022(a)(5) currently requires that each associated
person who is included within the definition of ``principal'' in Rule
1021 with supervisory responsibility over the securities trading
activities described in Rule 1032(f)(1) \51\ register as a Securities
Trader Principal. To qualify for registration as a Securities Trader
Principal, an individual must be registered as a Securities Trader and
pass the General Securities Principal qualification examination. The
rule provides that a person qualified and registered as a Securities
Trader Principal may only have supervisory responsibility over the
activities specified in Rule 1032(f)(1), unless such person is
separately registered in another appropriate principal registration
category, such as the General Securities Principal registration
category. The rule further provides that a person registered as a
General Securities Principal is not qualified to supervise the trading
activities described in Rule 1032(f)(1), unless he or she qualifies and
registers as a Securities Trader (by passing the Series 57 Securities
Trader examination) and affirmatively registers as a Securities Trader
Principal.
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    \51\ Current Rule 1032(f)(1) provides for the registration as a
Securities Trader of an associated person if, with respect to
transactions in equity, preferred or convertible debt securities or
foreign currency options on Nasdaq, such person is engaged in
proprietary trading, the execution of transactions on an agency
basis, or the direct supervision of such activities, other than any
person associated with a member whose trading activities are
conducted principally on behalf of an investment company that is
registered with the Commission pursuant to the Investment Company
Act of 1940 and that controls, is controlled by or is under common
control, with the member.
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    The Exchange is proposing to streamline the provisions of Rule
1022(a) and adopt them as Rule 1220(a)(2) with the following changes.
    The Exchange is proposing to more clearly set forth the obligation
to register as a General Securities Principal. Specifically, proposed
Rule 1220(a)(2)(A) states that each principal as defined in proposed
Rule 1220(a)(1) is required to register with the Exchange as a General
Securities Principal, subject to the following exceptions. The proposed
rule provides that if a principal's activities are limited to the
functions of a Compliance Official, a Financial and Operations
Principal, a Securities Trader Principal, a Securities Trader
Compliance Officer, or a Registered Options Principal, then the
principal shall appropriately register in one or more of these
categories.\52\ Proposed Rule 1220(a)(2)(A) further provides that if a
principal's activities are limited solely to the functions of a General
Securities Sales Supervisor, then the principal may appropriately
register in that category in lieu of registering as a General
Securities Principal, provided that if the principal is engaged in
options sales activities he or she shall be required to register as a
General Securities Sales Supervisor or as a Registered Options
Principal.\53\
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    \52\ The Exchange is proposing to recognize the Compliance
Official and Securities Trader Compliance Officer registration
categories for the first time as a result of this proposed rule
change.
    \53\ The Exchange's proposed Rule 1220(a)(2)(A) deviates
somewhat from the counterpart FINRA rule in that it does not offer
various limited registration categories provided for in FINRA's new
Rule 1220(a)(2)(A).
---------------------------------------------------------------------------

    Proposed Rule 1220(a)(2)(B) requires that an individual registering
as a General Securities Principal satisfy the General Securities
Representative prerequisite registration and pass the General
Securities Principal qualification examination. In conjunction with the
elimination of the Corporate Securities Representative registration
category, the Exchange is proposing in Rule 1220(a)(2) to delete the
provision in Rule 1022(a)(1)(A) permitting the Corporate Securities
Representative prerequisite registration. However, proposed Rule
1220(a)(2)(B) provides that, subject to the lapse of registration
provisions in proposed Rule 1210.08, General Securities Principals who
obtained the Corporate Securities Representative prerequisite
registration on the Exchange in lieu of the General Securities
Representative prerequisite registration and individuals who had

been registered as such within the past two years prior to the
operative date of the proposed rule change, may continue to supervise
corporate securities activities as currently permitted. Proposed Rule
1220(a)(2)(B) requires all other individuals registering as General
Securities Principal after October 1, 2018, to first become registered
as a General Securities Representative pursuant to Rule 1220(b)(2).\54\
---------------------------------------------------------------------------

    \54\ The Exchange is not adopting the FINRA Rule 1220(a)(2)(B)
language permitting an individual registering as a General
Securities Principal after October 1, 2018 to register as a General
Securities Sales Supervisor and to pass the General Securities
Principal Sales Supervisor Module qualification examination. The
Exchange believes that individuals registering as General Securities
Principals should be required to demonstrate their competence for
that role by passing the General Securities Principal qualification
examination.
---------------------------------------------------------------------------

    Moreover, as described in greater detail below, the Exchange is
proposing to adopt with some changes the requirements of Rule
1022(a)(1) relating to the registration of CCOs, and Rule 1022(a)(5)
relating to the supervision of securities trading activities as Rule
1220(a)(3).
    The Exchange is also proposing to eliminate the grandfathering
provision for individuals who were registered as principals prior to
the adoption of the General Securities Principal registration category
because it no longer has any practical application. Finally, the
Exchange is proposing to delete the provision that persons eligible for
registration in other principal categories are not precluded from
registering as General Securities Principals because it is
superfluous.\55\
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    \55\ Proposed Rule 1220(a)(2) generally tracks FINRA Rule
1220(a)(2), except that it omits references to a number of
registration categories which FINRA recognizes but that the Exchange
does not, and it includes a reference to the Securities Trader
Compliance Officer category which the Exchange proposes to
recognize, but which FINRA does not. Additionally, proposed Rule
1220(a)(2)(A)(i) extends that provision's exception to the General
Securities Principal registration requirement to certain principals
whose activities are ``limited to'' (rather than ``include'') the
functions of a more limited principal. The Exchange believes that
activities ``limited to'' expresses the intent of that exception
more accurately than activities that ``include.'' Finally, proposed
Rule 1220(a)(2)(B) specifies that registration as a Corporate
Securities Representative must be with the Exchange in order to
fulfill the Corporate Securities Representative registration
prerequisite for General Securities Principal registration pursuant
to that rule.
---------------------------------------------------------------------------

3. Compliance Official (Proposed Rule 1220(a)(3))
    The Exchange is proposing to adopt Rule 1022(a)(1)'s CCO
registration requirement as Rule 1220(a)(3), subject to the following
changes.
    Specifically, proposed Rule 1220(a)(3) provides that each person
designated as a Chief Compliance Officer on Schedule A of Form BD shall
be required to register with the Exchange as a General Securities
Principal, provided that such person may instead register as a
Compliance Official if his or her duties do not include supervision of
trading. All individuals registering as Compliance Official shall,
prior to or concurrent with such registration, pass the Compliance
Official qualification examination. An individual designated as a Chief
Compliance Officer on Schedule A of Form BD of a member that is engaged
in limited securities business could also be registered in a principal
category under Rule 1220(a) that corresponds to the limited scope of
the member's business.
    Additionally, proposed Rule 1220(a)(3) provides that an individual
designated as a Chief Compliance Officer on Schedule A of Form BD may
register and qualify as a Securities Trader Compliance Officer if, with
respect to transactions in equity, preferred or convertible debt
securities, or options such person is engaged in proprietary trading,
the execution of transactions on an agency basis, or the direct
supervision of such activities other than a person associated with a
member whose trading activities are conducted principally on behalf of
an investment company that is registered with the SEC pursuant to the
Investment Company Act and that controls, is controlled by, or is under
common control with a member. All individuals registering as Securities
Trader Compliance Officers would be required to first become registered
pursuant to paragraph (b)(4) as a Securities Trader, and to pass the
Compliance Official qualification exam.\56\
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    \56\ Proposed Rule 1220(a)(3) differs from FINRA Rule
1220(a)(3), Compliance Officer. The Exchange does not recognize the
Compliance Officer registration category. Similarly, FINRA does not
recognize the Compliance Official or the Securities Trader
Compliance Officer registration categories which the Exchange
proposes to recognize. However, FINRA Rule 1220(a)(3), like proposed
Rule 1220(a)(3), offers an exception pursuant to which a Chief
Compliance Officer designated on Schedule A of Form BD may register
in a principal category that corresponds to the limited scope of the
member's business.
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4. Financial and Operations Principal, (Proposed Rule 1220(a)(4))
    Rule 1022(b)(1) currently provides that every member operating
pursuant to the provisions of SEC Rule 15c3-1(a)(1)(ii), (a)(2)(i) or
(a)(8), shall designate as Limited Principal--Financial and Operations
those persons associated with it, at least one of whom shall be its
chief financial officer, who performs the duties described in Rule
1022(b)(2).\57\ Each person associated with a member who performs such
duties is required to register as a Limited Principal--Financial and
Operations with the Exchange and pass an appropriate qualification
examination before such registration may become effective. A person
registered solely as a Limited Principal--Financial and Operations is
not qualified to function in a principal capacity with responsibility
over any area of business activity not described in 1022(b)(2).
---------------------------------------------------------------------------

    \57\ These duties include (A) final approval and responsibility
for the accuracy of financial reports submitted to any duly
established securities industry regulatory body; (B) final
preparation of such reports; (C) supervision of individuals who
assist in the preparation of such reports; (D) supervision of and
responsibility for individuals who are involved in the actual
maintenance of the member's books and records from which such
reports are derived; (E) supervision and/or performance of the
member's responsibilities under all financial responsibility rules
promulgated pursuant to the provisions of the Act; (F) overall
supervision of and responsibility for the individuals who are
involved in the administration and maintenance of the member's back
office operations; or (G) any other matter involving the financial
and operational management of the member.
---------------------------------------------------------------------------

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

    \58\ These duties include (A) final approval and
responsibilities for the accuracy of financial reports submitted to
any duly established securities industry regulatory body; (B) final
preparation of such reports; (C) supervision of individuals who
assist in the preparation of such reports; (D) supervision of and
responsibility for individuals who are involved in the actual
maintenance of the member's books and records from which such
reports are derived; (E) supervision and/or performance of the
member's responsibilities under all financial responsibility rules
promulgated pursuant to the provisions of the Act; (F) overall
supervision of and responsibility for the individuals who are
involved in the administration and maintenance of the member's back
office operations; or (G) any other matter involving the financial
and operational management of the member.
---------------------------------------------------------------------------

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

subject to a prerequisite representative registration, but they must
pass the Financial and Operations Principal or Introducing Broker-
Dealer Financial and Operations Principal examination, as applicable.
    The Exchange is proposing to move the provisions in Rules 1022(b)
regarding Financial and Operations Principals to Rule 1220(a)(4)(A),
substituting the word ``and'' for the current word ``or'' found in Rule
1022(b)(2)(F) in order to conform to FINRA Rule 1220(a)(4)(A) in
describing the duties of a Financial and Operations Principal. In
addition, the Exchange proposes to delete the Introducing Broker-Dealer
Financial and Operations Principals Rule 1022(c), as the Exchange has
determined it no longer requires this registration category as it is
relatively little used.\59\
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    \59\ FINRA Rule 1220(a)(4) differs from proposed Rule 1220(a)(4)
in that it includes an Introducing Broker-Dealer Financial and
Operations Principal registration requirement. Additionally,
proposed Rule 1220(a)(4) contains a requirement, which the FINRA
rule does not, that each person associated with a member who
performs the duties of a Financial and Operations Principal must
register as such with the Exchange. Further, as discussed above, the
Exchange is not adopting a Principal Financial Officer or Principal
Operations Officer requirement like FINRA Rule 1220(a)(4)(B), as it
believes the Financial and Operations Principal requirement is
sufficient. Finally, proposed Rule 1220(a)(4)(B)(v) and (vi) contain
minor wording variations from the FINRA rule which are carried over
from existing Nasdaq Rule 1022.
---------------------------------------------------------------------------

5. Investment Banking Principal (Proposed Rule 1220(a)(5))
    The Exchange does not recognize the Investment Banking Principal
registration category and is reserving Rule 1220(a)(5), retaining the
caption solely to facilitate comparison with FINRA's rules.
6. Research Principal (Proposed Rule 1220(a)(6))
    The Exchange does not recognize the Research Principal registration
category and is reserving Rule 1220(a)(6), retaining the caption solely
to facilitate comparison with FINRA's rules.
7. Securities Trader Principal (Proposed Rule 1220(a)(7))
    The Exchange is proposing to adopt Rule 1022(a)(5) relating to
Securities Trader Principal registration as Rule 1220(a)(7). Similar to
the current rule, proposed Rule 1220(a)(7) requires that a principal
responsible for supervising the securities trading activities specified
in proposed Rule 1220(b)(4) \60\ register as a Securities Trader
Principal. The proposed rule requires individuals registering as
Securities Trader Principals to be registered as Securities Traders and
to pass the General Securities Principal qualification examination.
---------------------------------------------------------------------------

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

8. Registered Options Principal (Proposed Rules 1220(a)(8)
    Chapter II, Section 2(g) of the rulebook currently requires that
members engaged in security futures or options transactions with public
customers have at least one Registered Options and Security Futures
Principal. It also provides that every person engaged in the
supervision of options and security futures sales practices shall be
registered as a Registered Options and Security Futures Principal and
pass the appropriate qualification examination for Registered Options
and Security Futures Principal, or an equivalent examination acceptable
to the Exchange. Further, each person required to register and qualify
as a Registered Options and Security Futures Principal must, prior to
or concurrent with such registration, be or become qualified pursuant
to the Rule 1030 Series, as either a General Securities Representative
or a Limited Representative--Corporate Securities and a Registered
Options and Security Futures Representative.
    The rule provides that a person registered solely as a Registered
Options and Security Futures Principal is not qualified to function in
a principal capacity with responsibility over any area of business
activity not prescribed in Chapter II, Section 2(g). Chapter II,
Section 2(g)(5) provides that any person who is registered as a
Registered Options and Security Futures Principal, or who becomes
registered as a Registered Options and Security Futures Principal
before a revised examination that includes security futures products is
offered, must complete a firm-element continuing education program that
addresses security futures and a principal's responsibilities for
security futures before such person can supervise security futures
activities. Finally, Chapter II, Section 2 of the Exchange's options
rules further requires in Commentary .01 that members that have one
Registered Options Principal promptly notify the Exchange and agree to
specified conditions if such person is terminated, resigns, becomes
incapacitated or is otherwise unable to perform his or her duties.
    The Exchange is proposing to adopt Chapter II, Section (2)(g) as
Rule 1220(a)(8), Registered Options Principal, with certain changes.
The registration category would now be titled Registered Options
Principal, rather than Registered Options and Security Futures
Principal.\61\ All references to a revised examination that includes
security futures products would be deleted. Instead, Rule 1220(b),
Supplementary Material .02 will simply provide that each person who is
registered with the Exchange as a Registered Options Principal (or as a
General Securities Representative, Options Representative, or General
Securities Sales Supervisor) shall be eligible to engage in security
futures activities as a principal, as applicable, provided that such
individual completes a Firm Element program as set forth in proposed
Rule 1240 that addresses security futures products before such person
engages in security futures activities.\62\
---------------------------------------------------------------------------

    \61\ FINRA has also shortened references to ``Registered Options
and Security Futures Principal'' in its rulebook to ``Registered
Options Principal''. See Securities Exchange Act Release No. 58932
(November 12, 2008), 73 FR 69696 (November 19, 2008) (SR-FINRA-2008-
032).
    \62\ Unlike FINRA Rule 1220.02, proposed Exchange Rule 1220.02
omits references to United Kingdom Securities Representatives and
Canada Securities Representatives, which are registration categories
the Exchange does not recognize. In any case, the Exchange does not
currently offer security futures products for trading.
---------------------------------------------------------------------------

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

    \63\ Rule 1220(b), Supplementary Material .02 regarding security
futures activities will also apply to General Securities
Representatives and to Options Representatives.
---------------------------------------------------------------------------

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

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

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

    \65\ Chapter XI, Doing Business with the Public, at Section 2(a)
provides that no order entry firm (``OEF'') shall be approved to
transact options business with the public until those associated
persons who are designated as Options Principals have been approved
by and registered with the Exchange. Persons engaged in the
management and supervision of the OEF's business pertaining to
options contracts must be designated as Options Principals and shall
have responsibility for the overall oversight of the OEF's options
related activities on the Exchange. Similarly, Chapter XI, Sections
3(a) and (b) provide that no OEF shall be approved to transact
business with the public until those persons associated with it who
are designated representatives have been approved by and registered
with the Exchange, and also that persons who perform duties for the
OEF which are customarily performed by sales representatives or
branch office managers shall be designated as representatives of the
OEF. The foregoing provisions of Chapter XI are specific to
conducting an options business with the public and are not proposed
to be amended in this proposed rule change, other than to add a
customer protection requirement, similar to existing Phlx Rule
1024.08 and existing ISE Rule 602(d), that a person accepting orders
from non-member customers (unless such customer is a broker-dealer
registered with the Commission) is required to register with the
Exchange and to be qualified by passing the General Securities
Registered Representative Examination (Series 7). However, Chapter
XI, Sections 2(b) and (c) and Section 3(c) also contain provisions
regarding submission of Forms U4 and U5 to WebCRD that are
duplicative of the proposed 1200 Series of rules, in particular
proposed Rules 1210.12, Application for Registration and
Jurisdiction, and 1250, Electronic Filing Requirements for
Electronic Forms, and are therefore proposed to be deleted.

---------------------------------------------------------------------------

9. Government Securities Principal (Rule 1220(a)(9))
    The Exchange does not recognize the Government Securities Principal
registration category and is reserving Rule 1220(a)(9), retaining the
caption solely to facilitate comparison with FINRA's rules.
10. General Securities Sales Supervisor (Proposed Rules 1220(a)(10) and
1220.04)
    Pursuant to Exchange Rule 1022(g), each associated person of a
member who is included within the definition of ``principal'' in Rule
1021 may register as a Limited Principal--General Securities Sales
Supervisor, instead of separately registering in multiple principal
registration categories,\66\ if the individual's supervisory
responsibilities are limited solely to securities sales activities. A
person registering as a Limited Principal--General Securities Sales
Supervisor must satisfy the General Securities Representative
prerequisite registration and pass the General Securities Sales
Supervisor examinations.\67\ Moreover, a General Securities Sales
Supervisor is precluded from performing any of the following
activities: (1) Supervision of the origination and structuring of
underwritings; (2) supervision of market-making commitments; (3) final
approval of advertisements as these are defined in Exchange Rule 2210;
(4) supervision of the custody of firm or customer funds or securities
for purposes of SEC Rule 15c3-3; or (5) supervision of overall
compliance with financial responsibility rules. Current IM-1022-2
explains the purpose of the General Securities Sales Supervisor
registration category.
---------------------------------------------------------------------------

    \66\ For instance, a principal supervising the sale of corporate
securities and options must be registered as a General Securities
Principal and a Registered Options Principal, unless the principal
is registered as a General Securities Sales Supervisor.
    \67\ An individual may also register as a General Securities
Sales Supervisor by passing a combination of other principal-level
examinations.
---------------------------------------------------------------------------

    The Exchange is proposing to adopt Rule 1022(g) and IM-1022-2 as
Rules 1220(a)(10) and 1220.04, respectively.\68\ Rule 1220(a)(10),
however, omits the current Rule 1022(g) prohibition against supervision
of the origination and structuring of underwritings, as that activity
does not fall within the new, more limited scope of ``securities
trading'' covered by the new 1200 Series of rules.
---------------------------------------------------------------------------

    \68\ The Exchange is not proposing to carry over into proposed
Rule 1220(a)(10) the current Rule 1022(g)(2)(C)(iii) prohibition
against final approval of advertisements by General Securities Sales
Supervisors. The Exchange notes that FINRA removed this prohibition
several years ago from NASD Rule 1022(g) (Limited Principal--General
Securities Sales Supervisor) and NASD IM-1022-2 (Limited Principal--
General Securities Sales Supervisor). See Securities Exchange Act
Release No. 68918 (February 13, 2013), 78 FR 11925 (February 20,
2013) (SR-FINRA-2013-014). Also, unlike FINRA Rule 1220.04, proposed
Exchange Rule 1220.04 refers to ``multiple exchanges'' rather than
listing the various exchanges where a sales principal might be
required to qualify in the absence of the General Securities Sales
Supervisor registration category. It also omits FINRA internal
cross-references.
---------------------------------------------------------------------------

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

representative is not required to register as a General Securities
Representative if the person's activities are so limited as to qualify
such person for one or more of the limited representative categories
specified in Rule 1032, such as an Investment Company and Variable
Contracts Products Representative, a Corporate Securities
Representative, or a Securities Trader. Further, the rule does not
preclude individuals registered in a limited representative category
from registering as General Securities Representatives.
    Rule 1032(a)(2) provides that if a representative does not engage
in municipal securities activities, registration as a United Kingdom
Securities Representative or Canada Securities Representative is
equivalent to registration as a General Securities Representative.
These foreign registration categories were created in the 1990s as an
alternative to General Securities Representative registration for
individuals who do not engage in municipal securities activities and
who are in good standing as a representative with the Financial Conduct
Authority in the United Kingdom or with a Canadian stock exchange or
securities regulator. To qualify for registration as a United Kingdom
Securities Representative or Canada Securities Representative, an
individual must pass the United Kingdom Securities Representative
examination or Canada Securities Representative examinations,
respectively. Rule 1032(a)(2) also permits a person registered and in
good standing as a representative with the Japanese securities
regulators to become qualified to function as a General Securities
Representative by passing the Japan Module of the General Securities
Representative examination. The Japan Module, however, was never
implemented.
    The Exchange is proposing to streamline the provisions of Rule
1032(a) and adopt them as Rule 1220(b)(2) with the following changes.
    Similar to the proposed changes to the General Securities Principal
registration category, the Exchange is proposing to more clearly set
forth the obligation to register as a General Securities
Representative. Specifically, proposed Rule 1220(b)(2)(A) states that
each representative as defined in proposed Rule 1220(b)(1) is required
to register with the Exchange as a General Securities Representative,
except that if a representative's activities include the functions of a
Securities Trader, as specified in this Rule, then such person shall
appropriately register as a Securities Trader.
    Further, consistent with the proposed restructuring of the
representative-level examinations, proposed Rule 1220(b)(2)(B) would
require that individuals registering as General Securities
Representatives pass the SIE and the General Securities Representative
examination.\69\
---------------------------------------------------------------------------

    \69\ Proposed Rule 1220(b)(2)(B) differs from FINRA Rule
1220(b)(2)(B) in that it omits references to various registration
categories which FINRA recognizes but which the Exchange does not
propose to recognize.
---------------------------------------------------------------------------

    In addition, the Exchange is proposing to adopt Rule 1220.01 to
provide individuals who are associated persons of firms and who hold
foreign registrations an alternative, more flexible, process to obtain
an Exchange representative-level registration. The Exchange believes
that there is sufficient overlap between the SIE and these foreign
qualification requirements to permit them to act as exemptions to the
SIE. Under proposed Rule 1220.01, individuals who are in good standing
as representatives with the Financial Conduct Authority in the United
Kingdom or with a Canadian stock exchange or securities regulator would
be exempt from the requirement to pass the SIE, and thus would be
required only to pass a specialized knowledge examination to register
with the Exchange as a representative. The proposed approach would
provide individuals with a United Kingdom or Canadian qualification
more flexibility to obtain an Exchange representative-level
registration. Finally, the Exchange is proposing to delete the
provision that persons eligible for registration in other
representative categories are not precluded from registering as General
Securities Representatives because it is superfluous.
16. Operations Professional, Securities Trader, Investment Banking
Representative, Research Analyst, Investment Company and Variable
Contracts Products Representative, Direct Participation Programs
Representative and Private Securities Offerings Representative (Rules
1220(b)(3), 1220(b)(4), 1220(b)(5), 1220(b)(6), 1220(b)(7), 1220(b)(8),
1220(b)(9) and 1220.05))
    Operations Professional, Investment Banking Representative,
Research Analyst, Direct Participation Programs Representative and
Private Securities Offerings Representative. The Exchange has not
adopted these registration categories for its associated persons. The
Exchange is reserving Rules 1220(b)(3)--Operations Professional, and
related Rule 1220.05; 1220(b)(5)--Investment Banking Representative,
1220(b)(6)--Research Analyst; 1220(b)(8)--Direct Participation Programs
Representative; and 1220(b)(9)--Private Securities Offerings
Representative, retaining the captions, solely to facilitate comparison
with FINRA's rules.
    Securities Trader--Proposed Rule 1220(b)(4). Pursuant to current
Exchange Rule 1032(f), each associated person of a member who is
included within the definition of ``representative'' in Rule 1101 is
required to register as a Securities Trader if, with respect to
transactions in equity, preferred or convertible debt securities or
foreign currency options on the Exchange, such person is engaged in
proprietary trading, the execution of transactions on an agency basis
or the direct supervision of such activities. The rule provides an
exception from the registration requirement for any associated person
of a member whose trading activities are conducted principally on
behalf of an investment company that is registered with the SEC
pursuant to the Investment Company Act and that controls, is controlled
by, or is under common control with the member. Individuals registering
as Securities Traders must pass the Securities Trader examination.
Finally, the rule provides that registered Securities Traders are not
qualified to function in any other registration category, unless he or
she is also qualified and registered in such other registration
category.
    The Exchange now proposes to amend the rule, and adopt it as
proposed Rule 1220(b)(4).\70\ As amended, the Rule would require
individuals registering as Securities Traders to pass the SIE as well
as the Securities Trader qualification exam, and it would be expanded
to refer not just to foreign currency options, but to the trading of
options generally.
---------------------------------------------------------------------------

    \70\ Proposed Rule 1220(b)(4)(A) differs from FINRA Rule
1220(b)(4)(A) in that it applies to trading on the Exchange while
the FINRA rule is limited to the specified trading which is
``effected otherwise than on a securities exchange.'' Additionally,
the FINRA rule does not specifically extend to options trading.
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    Additionally, proposed Rule 1220(b)(4)(A) would require each person
associated with a member who is: (i) Primarily responsible for the
design, development or significant modification of an algorithmic
trading strategy relating to equity, preferred or convertible debt
securities or options; or (ii) responsible for the day-to-day
supervision or direction of such activities to register with the
Exchange as a Securities Trader.\71\
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    \71\ As noted above, this new registration requirement was
recently added to the FINRA rulebook. The Exchange has determined to
add a parallel requirement to its own rules, but also to add options
to the scope of products within the proposed rule's coverage. See
Securities Exchange Act Release No. 77551 (April 7, 2016), 81 FR
21914 (April 13, 2016) (Order Approving File No. SR-FINRA-2016-007).

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    For purposes of this proposed new registration requirement an
``algorithmic trading strategy'' is an automated system that generates
or routes orders (or order-related messages) but does not include an
automated system that solely routes orders received in their entirety
to a market center. The proposed registration requirement applies to
orders and order related messages whether ultimately routed or sent to
be routed to an exchange or over the counter. An order router alone
would not constitute an algorithmic trading strategy. However, an order
router that performs any additional functions would be considered an
algorithmic trading strategy. An algorithm that solely generates
trading ideas or investment allocations--including an automated
investment service that constructs portfolio recommendations--but that
is not equipped to automatically generate orders and order-related
messages to effectuate such trading ideas into the market--whether
independently or via a linked router--would not constitute an
algorithmic trading strategy.\72\
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    \72\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007).
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    The associated persons covered by the expanded registration
requirement would be required to pass the requisite qualification
examination and be subject to the same continuing education
requirements that are applicable to individual Securities Traders. The
Exchange believes that potentially problematic conduct stemming from
algorithmic trading strategies--such as failure to check for order
accuracy, inappropriate levels of messaging traffic, wash sales,
failure to mark orders as ``short'' or perform proper short sale
``locates,'' and inadequate risk management controls--could be reduced
or prevented, in part, through improved education regarding securities
regulations for the specified individuals involved in the algorithm
design and development process.
    The proposal is intended to ensure the registration of one or more
associated persons that possesses knowledge of, and responsibility for,
both the design of the intended trading strategy and the technological
implementation of the strategy, sufficient to evaluate whether the
resulting product is designed to achieve regulatory compliance in
addition to business objectives. For example, a lead developer who
liaises with a head trader regarding the head trader's desired
algorithmic trading strategy and is primarily responsible for the
supervision of the development of the algorithm to meet such objectives
must be registered under the proposal as the associated person
primarily responsible for the development of the algorithmic trading
strategy and supervising or directing the team of developers.
Individuals under the lead developer's supervision would not be
required to register under the proposal if they are not primarily
responsible for the development of the algorithmic trading strategy or
are not responsible for the day-to-day supervision or direction of
others on the team. Under this scenario, the person on the business
side that is primarily responsible for the design of the algorithmic
trading strategy, as communicated to the lead developer, also would be
required to register. In the event of a significant modification to the
algorithm, members, likewise, would be required to ensure that the
associated person primarily responsible for the significant
modification (or the associated person supervising or directing such
activity), is registered as a Securities Trader.
    A member employing an algorithm is responsible for the algorithm's
activities whether the algorithm is designed or developed in house or
by a third-party. Thus, in all cases, robust supervisory procedures,
both before and after deployment of an algorithmic trading strategy,
are a key component in protecting against problematic behavior stemming
from algorithmic trading. In addition, associated persons responsible
for monitoring or reviewing the performance of an algorithmic trading
strategy must be registered, and a member's trading activity must
always be supervised by an appropriately registered person. Therefore,
even where a firm purchases an algorithm off-the-shelf and does not
significantly modify the algorithm, the associated person responsible
for monitoring or reviewing the performance of the algorithm would be
required to be registered.
    Pursuant to proposed Rule 1220(b)(4)(B) each person registered as a
Securities Trader on October 1, 2018 and each person who was registered
as a Securities Trader within two years prior to October 1, 2018 would
be qualified to register as a Securities Trader without passing any
additional qualification examinations. All other individuals
registering as Securities Traders after October 1, 2018 would be
required, prior to or concurrent with such registration, pass the SIE
and the Securities Trader qualification examination.
    Investment Company and Variable Contracts Products Representative--
Proposed Rule 1220(b)(7). Pursuant to current Rule 1032(b), each
associated person of a member who is included within the definition of
``representative'' in Rule 1031 may register as an Investment Company
and Variable Contracts Products Representative, instead of registering
as a General Securities Representative, if the individual's activities
are limited solely to redeemable securities of companies registered
under the Investment Company Act, securities of closed-end companies
registered under the Investment Company Act during the period of
original distribution and specified insurance contracts, such as
variable contracts. Individuals registering as Investment Company and
Variable Contracts Products Representatives must pass the Investment
Company and Variable Contracts Products Representative examination. The
Exchange has experienced little demand for registration in this
category. Therefore, it now proposes to eliminate the Investment
Company and Variable Contracts Products Representative category as an
acceptable category for Exchange representative registration. The
Exchange is reserving proposed Rule 1220(b)(7), retaining the caption
solely to facilitate comparison with FINRA's rule.
17. Additional Eliminated Registration Categories (Proposed Rule
1220.06)
    As noted above, the Exchange is proposing to eliminate the
Investment Company and Variable Products Representative category,
reserving proposed Rule 1220(b)(7), and retaining the caption solely to
facilitate comparison with FINRA's rule. Similarly, it is eliminating
the Investment Company and Variable Contracts Products Principal
category, reserving proposed Rule 1220(a)(11), and retaining the
caption solely to facilitate comparison with FINRA's rule.
    Consistent with the FINRA Rule Changes, the Exchange is also
proposing to eliminate from its rules the Order Processing Assistant
Representative, Options Representative, and Corporate Securities
Representative categories that FINRA is eliminating effective October
1, 2018, as discussed below.
    Order Processing Assistant Representative. Pursuant to current Rule
1041, an associated person is not required to register as a General
Securities Representative or in one or

more of the limited categories of representative registration if the
person's activities are so limited as to qualify such person for
registration as an Order Processing Assistant Representative. An Order
Processing Assistant Representative is an associated person whose only
function is to accept unsolicited customer orders from existing
customers for submission for execution by the member. Pursuant to Rule
1042, Order Processing Assistant Representatives are subject to
specified restrictions regarding their activities and compensation and
are subject to particular supervisory requirements. In addition, they
may not be registered concurrently in any other capacity.
    Options Representative. Chapter II, Section 2(h) of the Exchange's
rulebook provides that each person associated with a member who is
included within the definition of a representative as defined in Rule
1031 may register with the Exchange as a Limited Representative--
Options and Security Futures if: (A) Such person's activities in the
investment banking or securities business of the member involve the
solicitation or sale of option or security futures contracts, including
option contracts on government securities as that term is defined in
Section 3(a)(42)(D) of the Act, for the account of a broker, dealer or
public customer; and (B) such person passes an appropriate
qualification examination for Limited Representative--Options and
Security Futures. It also provides that each person seeking to register
and qualify as a Limited Representative--Options and Security Futures
must, concurrent with or before such registration may become effective,
become registered with the Exchange or another SRO as either as a
Limited Representative--Corporate Securities or Limited
Representative--Government Securities. The Limited Representative--
Options and Security Futures registration category is the same as the
Options Representative category.
    Corporate Securities Representative. Rule 1032(e) currently
provides that each associated person of a member who is included within
the definition of ``representative'' in Rule 1031 may register as a
Corporate Securities Representative, instead of a General Securities
Representative, if the individual's activities are limited solely to
securities as defined under Section 3(a)(10) of the Act, other than
municipal securities, options, mutual funds (except for money market
funds), variable contracts and direct participation program securities.
Individuals registering as Corporate Securities Representatives must
pass the Corporate Securities Representative examination.
    The Exchange is proposing to eliminate the current registration
categories of Order Processing Assistant Representative, Options
Representative, and Corporate Securities, as FINRA has done in the
FINRA Rule Changes. The Exchange believes that the utility of the Order
Processing Assistant Representative registration category has
diminished as technological advances and changes in industry practice
have reduced the need for such representatives. As a result, the volume
of candidates taking the Order Processing Assistant Representative
examination has diminished. The Options Representative and Corporate
Securities Representative registration categories were created over the
years as subcategories of the General Securities Representative
category. These subcategories currently allow an individual to sell a
subset of the products (e.g., options, common stocks and corporate
bonds) permitted to be sold by a General Securities Representative. In
recent years, however, the utility of these subcategories has also
diminished as a result of technological, regulatory and business
practice changes. This is evidenced by the low annual volume for each
of these examinations and the relatively low number of individuals who
currently hold these registrations.
    Investment Company and Variable Products Representatives,
Investment Company and Variable Contracts Products Principals, Order
Processing Assistant Representatives, Options Representatives, and
Corporate Securities Representatives would be eligible to maintain
their registrations with the Exchange. Specifically, proposed Rule
1220.06 provides that, subject to the lapse of registration provisions
in proposed Rule 1210.08, individuals who are registered with the
Exchange in any capacity recognized by the Exchange immediately prior
to October 1, 2018, and each person who was registered with the
Exchange in such categories within two years prior to October 1, 2018,
shall be eligible to maintain such registrations with the Exchange.
However, if individuals registered in these categories terminate their
registration with the Exchange and the registration remains terminated
for two or more years, they would not be able to re-register in that
category. In addition, proposed Rule 1220.06 would include the current
restrictions to which Order Processing Assistant Representatives are
subject under Rule 1042.\73\
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    \73\ Proposed Exchange Rule 1220.06 omits references to a number
of registration categories it does not propose to recognize, but
which FINRA refers to in its own Rule 1220.06.
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18. Grandfathering Provisions
    In addition to the grandfathering provisions in proposed Rule
1220(a)(2) (relating to General Securities Principals) and proposed
Rule 1220.06 (relating to the eliminated registration categories), the
Exchange is proposing to include grandfathering provisions in proposed
Rule 1220(a)(8) (Registered Options Principal), 1220(b)(2) (General
Securities Representative), and 1220(b)(4) (Securities Trader).
Specifically, the proposed grandfathering provisions provide that,
subject to the lapse of registration provisions in proposed Rule
1210.08, individuals who are registered in specified registration
categories on the operative date of the proposed rule change and
individuals who had been registered in such categories within the past