[Federal Register Volume 83, Number 196 (Wednesday, October 10, 2018)]
[Notices]
[Pages 50981-50999]
[FR Doc No: 2018-21902]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84352; File No. SR-Phlx-2018-61]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend,
Reorganize and Enhance Membership, Registration and Qualification Rules
and To Make Conforming Changes to Certain Other Rules

October 3, 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, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I 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://nasdaqphlx.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
    The Exchange has adopted registration requirements to ensure that
associated persons of member organizations 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 organization's investment banking or securities business who
are to function as representatives or principals register with the
Exchange in the 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.\6\
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    \3\ See Phlx Rules 611, Principal Registration Requirements, and
613, Representative Registration.
    \4\ See Phlx Rule 614, Persons Exempt from Registration.
    \5\ See Phlx Rule 640, Continuing Education for Registered
Persons.
    \6\ The Exchange's rules governing these matters were
extensively updated and amended in 2012. See Securities Exchange Act
Release No. 66840 (April 20, 2012), 77 FR 25003 (April 26, 2012)
(SR-Phlx-2012-23).
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    Recently, the Commission approved a Financial Industry Regulatory
Authority (``FINRA'') proposed rule change adopting rules relating to
qualification and registration requirements in 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 exam 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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    \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 its own
membership, registration and qualification rules in part in response to
the FINRA Rule Changes, and also in order to conform the Exchange's
rules more closely to those of its 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 including Phlx. 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.\9\
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    \9\ 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 Rules 53, Liability
for Dues Until Transfer or Military Service; 611, Principal
Registration Requirements; 612, Categories of Principal Registration;
613, Representative Registration; 614, Persons Exempt from
Registration; 615, Waiver of Requirements; 616, Electronic Filing
Requirements for Uniform Forms; 623, Fingerprinting; and 640,
Continuing Education for Registered Persons, are proposed to be
deleted. Rule 620, Trading Floor Registration, is proposed to be
renumbered and amended.\10\
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    \10\ The Exchange also proposes conforming amendments to Rules
1, Definitions; 1024, Conduct of Accounts for Options Trading; 1090,
Clerks; 3202, Application of Other Rules of the Exchange; 9630,
Appeal; Equity Floor Procedure Advice A-7, Failure to Timely Submit
Amendments to Form U4, Form U5 and Form BD; Options Floor Procedure
Advice F-34, Failure to Timely Submit Amendments to Form U4, Form U5
and Form BD; and Section VII.C., FINRA Fees, of the Exchange's
Pricing Schedule, and the addition of new Rule 2040, Nonregistered
Foreign Finders. The Exchange is also proposing to amend the two
Floor Procedure Advices to delete references to the ``Department of
Market Regulation,'' which refer to FINRA's former Department of
Market Regulation. FINRA amended its rules recently to reflect an
internal reorganization of its Enforcement Operations. See
Securities Exchange Act Release No. 83781 (August 6, 2018), 83 FR
39802 (August 10, 2018). In July 2017, FINRA announced its plan to
consolidate its existing enforcement functions into a unified
Department of Enforcement. FINRA's recent rule change makes
technical and other non-substantive changes to FINRA Rules 9000
Series Code of Procedure to reflect the single Department of
Enforcement, which the Exchange is mirroring in the two Floor
Procedure Advices which will now refer only to FINRA's Department of
Enforcement.
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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.\11\
The proposed new 1200 Series is also being proposed for adoption by
Phlx's affiliated exchanges in order to facilitate compliance with
membership, registration and qualification requirements by members of
two or more of those affiliated exchanges.\12\ In the new 1200 Series
of

rules 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.\13\
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    \11\ The proposed Phlx 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; Rule 1250, Electronic
Filing Requirements for Uniform Forms; and Rule 1260, Trading Floor
Registration.
    \12\ The Exchange's five affiliated exchanges, The Nasdaq Stock
Market LLC (``Nasdaq''), Nasdaq BX, Inc. (``BX''); Nasdaq ISE, LLC
(``ISE''); Nasdaq GEMX, LLC (``GEMX''); and Nasdaq MRX, LLC
(``MRX'') (together with Phlx, the ``Nasdaq Affiliated Exchanges'')
are also submitting proposed rule changes to adopt the 1200 Series
of rules. See SR-NASDAQ-2018-078, SR-BX-2018-047, 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 closer to those of
the other Nasdaq Affiliated Exchanges. See Securities Exchange Act
Release No. 82169 (November 29, 2017), 82 FR 57508 (December 5,
2017) (SR-Phlx-2017-97). Ultimately, the Exchange intends to submit
another proposed rule change to transfer the Exchange's 1200 Series
of rules into the new shell structure. 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.'' The Phlx 1200 Series would therefore include a Rule
1260, Trading Floor Registration. Additionally, each of the new Phlx
1200 Series of rules (except Rule 1260) would contain a statement
that references to a ``member'' in that rule shall be deemed to be
references to a ``member organization.''
    \13\ 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 April 1,
2019.
Proposed Rules
A. Registration Requirements (Proposed Rule 1210)
    Exchange Rules 613(a) and 611(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 613 and
612.\14\ The Exchange is proposing to consolidate and streamline
provisions of Exchange Rules 613(a) and 611(a) and to adopt them as
Exchange Rule 1210, subject to several changes.\15\
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    \14\ Section (a) of Rule 613 includes an exception for members
whose activities are limited to the Exchange's options trading floor
and who are registered pursuant to Rule 620(a), as well as for
associated persons whose activities are limited to the Exchange's
options trading floor and are registered pursuant to Rule 620(b). As
discussed below, the Exchange proposes to preserve this exception as
new section (c) of proposed Rule 1260.
    \15\ In general the 1200 Series would conform the Exchange's
rules to FINRA's rules as revised in the FINRA Rule Changes, with
modifications tailored to the business of the Exchange and of the
other Nasdaq Affiliated Exchanges. However, the Exchange also
proposes to adopt Rule 1210, Supplementary Material .12, which is
not based upon a FINRA rule but instead on current Nasdaq Rule
1031(c), (d) and (e), which Nasdaq is proposing in SR-Nasdaq-2018-
078 to relocate to Rule 1210, Supplementary Material .12 in the
Nasdaq rulebook. These provisions govern the process for applying
for registration and amending the registration application, as well
as for notifying the Exchange of termination of the member's
association with a person registered with the Exchange. The Exchange
proposes to adopt Rule 1210, Supplemental Material .12, in order to
have uniform processes and requirements in this area across the
Nasdaq Affiliated Exchanges.
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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 613(a) and 611(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.\16\ Proposed 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.
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    \16\ Miami International Securities Exchange LLC (``MIAX'') Rule
203(a) and current 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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B. Minimum Number of Registered Principals (Proposed Rule 1210.01)
    Existing Rule 611(e), Requirement of Two Registered Principals, at
section (i) requires members other than sole proprietorships to have at
least two officers or partners who are registered as principals with
respect to each aspect of the member organization's investment banking
and securities business pursuant to the applicable provisions of Rule
611; provided, however, that a proprietary trading firm with 25 or
fewer registered representatives is only required to have one officer
or partner who is registered as a principal.\17\ Under Rule 611(e)(ii)
the Exchange may waive the provisions of paragraph (e)(i) in situations
that indicate conclusively that only one person should be required to
register as a principal. Additionally, Rule 611(e)(iii) requires an
applicant for membership to have at least one person qualified for
registration as a Limited Principal--Financial and Operations, pursuant
to Rule 612(b)(i).\18\
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    \17\ Rule 611(e)(i)(A)-(D) defines the term ``proprietary
trading firm''. Because the Exchange is proposing to delete Rule 611
in its entirety, Rule 611(e)(i) (A)-(D) would be reworded and
relocated to Rule 1, Definitions, Section (kk) as a defined term.
    \18\ The Exchange's rules currently refer to various categories
of limited principal registration as ``Limited Principal--''
followed by the name of the registration category. In this proposed
rule change, the Exchange will no longer employ the term ``Limited
Principal--'' in discussing 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 delete these requirements and in their
place to adopt new Rule 1210.01. The new rule would provide firms that
limit the scope of their business with flexibility in satisfying 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.\19\ 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. Additionally, Exchange
Rule 1210.01 provides that any member with only one associated person
is excluded from the two principal requirement. Proposed Rule 1210.01
would provide that existing members as well as new applicants may
request a waiver of the two-principal requirement, consistent with
current Exchange Rule 611(e)(ii). 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.\20\ The Financial and

Operations Principal requirement of current Rules 611(e)(i) and
612(b)(i), which it references, would be revised and relocated to
proposed Rule 1220(a)(4)(A).
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    \19\ The principal registration categories are described in
greater detail below.
    \20\ 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)
    Current Rule 611(a) prohibits member organizations from maintaining
a principal registration with the Exchange for any person (A) who is no
longer active in the member organization's investment banking or
securities business, (B) who is no longer functioning as a principal,
or (C) where the sole purpose is to avoid the examination requirement
of the rule. A member organization may not make application for the
registration of any person as principal where there is no intent to
employ such person in the member organization's investment banking or
securities business. However, a member organization may maintain or
make application for the registration as a principal of a person who
performs legal, compliance, internal audit, back-office operations, or
similar duties for the member organization or a person engaged in the
investment banking or securities business of a foreign securities
affiliate or subsidiary of the member organization. Exchange Rule
613(b) is a parallel provision applicable to representatives.
    The Exchange is proposing to replace these provisions with new 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.\21\ 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.\22\
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    \21\ 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.
    \22\ 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)
    Current Rule 611(a) provides that before a registration can become
effective, persons who are to function as principals must pass a
qualification examination for principals appropriate to the category of
registration as specified in the rule. Rule 613(d) provides that no
member organization shall permit any member or person associated with
it to engage in the investment banking or securities business unless
the member organization determines that such person satisfies the
qualification requirements established by the Board and is not subject
to statutory disqualification as defined in Section 3(a)(39) \23\ of
the Act. The Exchange is proposing to replace these provisions with new
Rule 1210.03.
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    \23\ 15 U.S.C. 78c(a)(39).
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    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 permitted under the existing 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, under current Rule 615, the Exchange may, in exceptional
cases and where good cause is shown, waive the applicable qualification
examination and accept other standards as evidence of an applicant's
qualifications for registration. The Exchange is proposing to replace
Rule 615 with proposed Rule 1210.03 with changes that track FINRA Rule
1210.03. 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.
E. Requirements for Registered Persons Functioning as Principals for a
Limited Period (Proposed Rule 1210.04)
    Current Rule 611(d) provides that any person associated with a
member organization as a registered representative whose duties are
changed by the member organization so as to require registration in any
principal classification is allowed a period of 90 calendar days
following the change in his or her duties during which to pass the
appropriate qualification examination for principals. It further
provides that any person not presently associated with a member
organization as registered representative seeking registration as a
principal shall submit the appropriate application for registration and
any required registration and examination fees. Such person shall be
allowed a period of 90 days after all applicable prerequisites are
fulfilled to pass the appropriate qualification examination for
principals. A person who has never been registered does not qualify for
this exception. This provision specifically applies to a person
associated with a member organization of another registered national
securities exchange or association who is required to register in a
principal classification under

Exchange rules but who is not required to be so registered under the
rules of the other exchange or association, as well as to a person
associated with a member organization who was not required to register
with the Exchange as a principal prior to the adoption of Exchange Rule
611.
    The Exchange is proposing to adopt these requirements of Rule
611(d) as new Rule 1210.04, subject to certain 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 and has fulfilled all
prerequisite registration, fee and examination requirements prior to
designation as principal. These requirements 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.\27\ 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.
Similarly, the rule would permit a member to designate any person
currently registered, or who becomes registered, with the member as a
principal to function in another principal category for a period of 120
calendar days prior to passing an appropriate qualification examination
as specified under Rule 1220. Proposed Rule 1210.04 would increase the
existing rule'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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    \27\ 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 registration category.
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    The Exchange is not conserving in new Rule 1210.04 the language in
existing Rule 611 that the provisions apply to a person associated with
a member organization of another registered national securities
exchange or association who is required to register in a principal
classification under Exchange rules but who is not required to be so
registered under the rules of the other exchange or association, as
well as to a person associated with a member organization who was not
required to register with the Exchange as a Principal prior to the
adoption of Exchange Rule 611. The Exchange believes this language to
be superfluous as the applicability to various individuals of proposed
Rule 1210.04 speaks for itself and requires no elaboration.\28\
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    \28\ 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 qualification examination, FINRA's Sanction Guidelines recommend a
bar.\29\
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    \29\ 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 707.\30\ 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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    \30\ Exchange Rule 707 prohibits members, member organizations
or persons associated with or employed by a member or member
organization from engaging in acts or practices inconsistent with
just and equitable principles of trade. FINRA Rule 1210.05 cites
FINRA Rule 2010, which is a comparable rule.
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    Proposed Rule 1210.05 also 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.\31\
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    \31\ 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)
    The Exchange proposes to adopt new Rule 1210.06, which 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.\32\ 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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    \32\ Proposed Rule 1210.06 has no counterpart in existing
Exchange rules.
    \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 Exchange Rule 640, no member organization shall
permit any registered person to continue to, and no registered person
shall continue to, perform duties as a registered person, unless such
person has complied with the continuing education requirements of
paragraph (a) of Rule 640. Under the rule 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 current Rule 640 as any member, registered representative or other
person registered or required to be registered under Exchange Rules,
but does not include such person whose activities are limited solely to
the transaction of business on the Exchange's trading floor, with
members or registered broker-dealers.\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 organization's securities sales, trading or investment
banking activities, and to the immediate supervisors of such
persons.\38\
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    \34\ See Rule 640(a).
    \35\ See Rule 640(b).
    \36\ Pursuant to Rule 640(a), each registered person is required
to complete the Regulatory Element on the occurrence of their second
registration anniversary date(s), and every three years thereafter
or as otherwise prescribed by the Exchange. On each occasion, the
Regulatory Element must be completed within 120 days after the
person's registration anniversary date.
    \37\ See Rule 640, Commentary .01.
    \38\ See Rule 640(b)(1).
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    The Exchange proposes to delete current Rule 640. The CE
requirements set forth in Rule 640 are proposed to be reorganized and
renumbered, and to be adopted as new Rule 1240. The Exchange believes
that all persons registered pursuant to Rule 1210, 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.\39\ Therefore, the Exchange is proposing Rule
1210.07, to clarify that all ``covered persons'' as defined in Rule
1240(a)(5), including those who solely maintain a permissive
registration, are required to satisfy the Regulatory Element, as
specified in proposed new Rule 1240, discussed below.\40\ 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 would also provide 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.
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    \39\ The Exchange notes that Rule 625 also may require
individuals who are not required to register pursuant to Rule 1210
to complete mandatory training. The rule provides that all members
and persons employed by or associated with such member or a member
organization shall successfully complete mandatory training, as
required by the Exchange. Training topics include, but are not
limited to, training related to that person's function at the
Exchange, changes in existing automated systems or any new
technology that is utilized by the Exchange, compliance with
Exchange Rules and federal securities laws, and issues related to
conduct, health and safety on the trading floor. In addition, floor
members shall complete mandatory training programs, on at least a
semi-annual basis, that address compliance with the federal
securities laws and the Exchange's Rules in place to prevent and
deter unlawful trading by floor members.
    \40\ Current Rule 640 would be deleted, replaced by proposed
Rule 1240. Rule 1240(a)(5) would define the term ``covered person''
as any person registered with the Exchange pursuant to Rule 1210,
including any person who is permissively registered pursuant to Rule
1210.02, and any person who is designated as eligible for a waiver
pursuant to Rule 1210.09.
---------------------------------------------------------------------------

    Individuals whose activities are limited solely to the transaction
of business on the Exchange's trading floor, with members or registered
broker-dealers, would continue to be excluded from the CE
requirement.\41\ Pursuant to proposed Rule 1260, Section (c), members
whose activities are limited to the Exchange's options trading floor
and who are registered pursuant to proposed Rule 1260(a) as well as
associated persons whose activities are limited to the Exchange's
options trading floor and who are registered pursuant to proposed Rule
1260(b) would be exempt from the representative registration
requirements of proposed Rules 1210 and 1220. The CE requirements of
proposed Rule 1240 would apply only to ``covered persons,'' defined in
turn in proposed Rule 1240 as persons registered pursuant to Rule 1210.
---------------------------------------------------------------------------

    \41\ See existing Rule 640, Commentary .01, which excludes such
individuals from the term ``registered person'' as it is used in
Rule 640.
---------------------------------------------------------------------------

I. Lapse of Registration and Expiration of SIE (Proposed Rule 1210.08)
    Existing Rule 611(c) states that any person whose registration has
been revoked by the Exchange as a disciplinary sanction or whose most
recent registration as principal has been terminated for 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 611. The two year period is calculated from the termination date
to the date the Exchange receives a new application for registration. A
comparable provision applicable to representatives is found in Rule
613(c). The Exchange is proposing to delete existing Rules 611(c) and
613(c), and to replace them with Rule 1210.08, Lapse of Registration
and Expiration of SIE.
    Proposed Rule 1210.08 contains language comparable to that of
existing Rules 611(c) and 613(c) but also 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 new process
whereby individuals who would be working for a financial services
industry affiliate of a member \42\ 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.\43\ 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.
---------------------------------------------------------------------------

    \42\ 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.
    \43\ 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.\44\ 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 \45\ 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.\46\
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    \44\ 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.
    \45\ 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.
    \46\ 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 Rule 640, Continuing Education
(proposed to be renumbered as Rule 1240).
    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,\47\ 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:
---------------------------------------------------------------------------

    \47\ 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.\48\ 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.
---------------------------------------------------------------------------

    \48\ 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)
    Current Rule 53, Inactive Status of Currently Registered Persons,
provides specific relief to registered persons serving in the Armed
Forces of the United States. Among other things, the rule permits a
registered person of a member or member organization who volunteers for
or is called into active duty in the Armed Forces of the United States
to be placed, after proper notification to the Exchange, upon inactive
status and remain eligible to receive ongoing transaction-related
compensation. The rule also includes specific provisions regarding the
deferment of the lapse of registration requirements in Rules 611, 613
and 3228 for formerly registered person serving in the Armed Forces of
the United States.
    The Exchange is proposing to adopt Rule 53 as Rule 1210.10 with
certain 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.\49\
---------------------------------------------------------------------------

    \49\ 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 incorporates language from existing
Nasdaq and BX 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.
---------------------------------------------------------------------------

L. Impermissible Registrations (Proposed Rule 1210.11)
    Existing Rule 611(a) and 613(a) prohibit a member organization from
maintaining a principal or representative registration with the
Exchange for any person who is no longer active in the member
organization's investment banking or securities business, who is no
longer functioning in the registered capacity, or where the sole
purpose is to avoid an examination requirement. The rules also prohibit
a member organization from applying for the registration of a person as
representative or principal where the member organization 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 identified in Rules 611(a) and 613(a).\50\
---------------------------------------------------------------------------

    \50\ Rules 611(a) allows for permissive principal registration
of individuals who perform legal, compliance, internal audit, back-
office operations, or similar duties for the member organization or
a person engaged in the investment banking or securities business of
a foreign securities affiliate or subsidiary of the member
organization. Rule 613(a) permits permissive registration as a
representative of an individual who performs legal, compliance,
internal audit, back-office operations, or similar responsibilities
for the member organization, or a person who performs administrative
support functions for registered personnel, or a person engaged in
the investment banking or securities business of a foreign
securities affiliate or subsidiary of the member organization.
---------------------------------------------------------------------------

    In light of proposed Rule 1210.02, Permissive Registrations,
discussed above the Exchange is proposing to delete these provisions of
Rule 611(a) and 613(a) 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.\51\
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    \51\ 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 Nasdaq Rule 1031.
---------------------------------------------------------------------------

M. Registration Categories (Proposed Rule 1220)
    The Exchange is proposing to adopt new and revised registration
category rules and related definitions in proposed Rule 1220,
Registration Categories.\52\
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    \52\ For ease of reference, the Exchange proposes to adopt as
Rule 1220, Supplementary Material .07, in chart form, a Summary of
Qualification Requirements in chart form for each of the Exchange's
permitted registration categories discussed below.
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1. Definition of Principal (Proposed Rule 1220(a)(1))
    Current Rule 611(b) defines ``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 organization's investment banking or securities business,
such as supervision, solicitation, conduct of business or the training
of persons associated with a member organization for any of these
functions. The Exchange is proposing to streamline and adopt Rule
611(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. Proposed Rule 1220(a)(1) 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))
    Current Rule 612(a) currently requires that an associated person
who meets the definition of ``principal'' under Rule 611 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 Rules
611(b)-(e). Further, the rule does not preclude individuals registered
in a limited principal category from registering as General Securities
Principals. Rule 612(a) also

includes transitioning and grandfathering provisions for CCO's.
    Rule 612(a) requires individuals seeking to register and qualify as
a General Securities Principal, prior to or concurrent with such
registration, to become registered as a General Securities
Representative. It also includes a grandfathering provision for persons
who were registered as principals before the adoption of the General
Securities Principal registration category. Finally, it provides that
an associated person registered solely as a General Securities
Principal is not qualified to function as a Limited Principal--
Financial and Operations, Limited Principal--General Securities Sales
Supervisor or Securities Trader Principal.
    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, except 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.\53\ 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 would be required to register as a
General Securities Sales Supervisor or as a Registered Options
Principal.\54\
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    \53\ 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.
    \54\ 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). It therefore proposes to reserve Rules
1220(a)(2)(A)(ii) and (iv).
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    Proposed Rule 1220(a)(2)(B) requires that an individual registering
as a General Securities Principal satisfy the General Securities
Representative prerequisite registration and pass the General
Securities Principal qualification examination.
    In conjunction with the elimination of the Corporate Securities
Representative registration category by FINRA, the Exchange is
proposing that Rule 1220(a)(2)(B) provide 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.\55\ Proposed
Rule 1220(a)(2)(B) requires all other individuals registering as
General Securities Principals after October 1, 2018, to first become
registered as a General Securities Representative pursuant to Rule
1220(b)(2).\56\
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    \55\ The Exchange itself does not recognize the Corporate
Securities Representative registration category, but understands
that FINRA and Nasdaq currently accept Corporate Securities
Representative registration as a prerequisite to General Securities
Principal registration.
    \56\ 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.
---------------------------------------------------------------------------

    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.\57\
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    \57\ 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.
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3. Compliance Official (Proposed Rule 1220(a)(3))
    Current Rule 612(a) provides that each person designated as a Chief
Compliance Officer on Schedule A of Form BD of a member organization to
which Rule 611 applies, be required to register with the Exchange as a
General Securities Principal and shall pass the Series 24 examination
before such registration may become effective, unless such person's
activities are so limited as to qualify such person for one or more of
the limited categories of principal registration specified Rule 612(b)-
(e).\58\ The Exchange proposes to delete this provision.
---------------------------------------------------------------------------

    \58\ The limited registration categories identified in Rule
612(b)-(e) are Limited Principal--Financial and Operations, Limited
Principal--General Securities Sales Supervisor, Limited Principal--
Registered Options Principal, and Securities Trader Principal.
---------------------------------------------------------------------------

    In its place, the Exchange proposes to adopt Rule 1220(a)(3)
providing 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 would be required, prior to or concurrent with such
registration, to 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, Rule 1220(a)(3) would provide 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.\59\
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    \59\ 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))
    Existing Rule 612(b) provides that every member organization to
which Rule 611 applies and that is 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
perform the duties described in Rule 612(b)(ii).\60\ It requires each
person associated with a member organization who performs such duties
to be registered as a Limited Principal--Financial and Operations with
the Exchange and to pass the Series 27 examination before such
registration may become effective.
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    \60\ Those 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 organization's books and records from
which such reports are derived; (E) supervision and/or performance
of the member organization'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 organization's back office operations; or (G) any
other matter involving the financial and operational management of
the member organization. A person registered solely as a Limited
Principal--Financial and Operations shall not be qualified to
function in a Principal capacity with responsibility over any other
area of business activity.
---------------------------------------------------------------------------

    The Exchange is proposing to delete Rule 612(b) and to adopt in its
place Rule 1220(a)(4), substituting the word ``and'' for the current
word ``or'' found in Rule 612(b)(ii)(F) in order to conform to FINRA
Rule 1220(a)(4)(A) in describing the duties of a Financial and
Operations Principal.\61\
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    \61\ 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.
---------------------------------------------------------------------------

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))
    Existing Rule 612(e) provides that each person associated with a
member who is included within the definition of principal in Rule
611(b) and who will have supervisory responsibility over the securities
trading activities described in Rule 613(f) shall become qualified and
registered as a Securities Trader Principal. To qualify for
registration as a Securities Trader Principal, such person must become
qualified and registered as a Securities Trader under Rule 613(f) and
pass the General Securities Principal qualification examination. A
person who is qualified and registered as a Securities Trader Principal
under this provision may only have supervisory responsibility over the
Securities Trader activities specified in Rule 613(f), unless such
person is separately qualified and registered in another appropriate
principal registration category, such as the General Securities
Principal registration category. Conversely, a person who is registered
as a General Securities Principal is not qualified to supervise the
trading activities described in Rule 613(f), unless such person has
also become qualified and registered as a Securities Trader under Rule
613(f) by passing the Securities Trader qualification examination and
become registered as a Securities Trader Principal.
    The Exchange is proposing to delete Rule 612(e) and to adopt in its
place Rule 1220(a)(7), Securities Trader Principal. Proposed Rule
1220(a)(7) requires that a principal responsible for supervising the
securities trading activities specified in proposed Rule 1220(b)(4)
\62\ 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.
---------------------------------------------------------------------------

    \62\ Proposed Rule 1220(b)(4), discussed below, provides for
registration in the representative-level ``Securities Trader''
category.
---------------------------------------------------------------------------

8. Registered Options Principal (Proposed Rules 1220(a)(8))
    Rule 612(d) provides that each person associated with a member
organization to which Rule 611 applies and who is included in the
definition of principal in Rule 611 may register with the Exchange as a
Limited Principal--Registered Options Principal if: (A) His or her
supervisory responsibilities in the investment banking and securities
business are limited exclusively to the options activities of a member
organization, (B) he or she is registered pursuant to Exchange rules as
a General Securities Representative, and (C) he or she is qualified to
be so registered by passing the Series 4 examination. It also provides
that a person registered in this category solely on the basis of having
passed the Series 4 examination for Limited Principal--Registered
Options Principal shall not be qualified to function in a principal
capacity with responsibility over any area of business activity not
described in paragraph (d)(i)(A).
    The Exchange is proposing to delete Rule 612(d) and to adopt Rule
1220(a)(8)(A), Registered Options Principal, which would require under
its section (a)(8)(A) that each member that is engaged in transactions
in options with the public to have at least one Registered Options
Principal.\63\
---------------------------------------------------------------------------

    \63\ Proposed Rule 1220(a)(8) differs from FINRA Rule 1220(a)(8)
in that it omits certain references to other specific FINRA rules.
---------------------------------------------------------------------------

    In addition, each principal as defined in paragraph (a)(1) of the
rule who is responsible for supervising a member's options sales
practices with the public would be required to register with the
Exchange as a Registered Options Principal, subject to the following
exception. If a principal's options activities are limited solely to
those activities that may be supervised by a General Securities Sales
Supervisor, then such person may register as a General Securities Sales
Supervisor pursuant to paragraph (a)(10) of the Rule in lieu of
registering as a Registered Options Principal.\64\
---------------------------------------------------------------------------

    \64\ Current Exchange Rule 1024, Conduct of Accounts for Options
Trading, provides that members, member organizations and individuals
associated with member organizations shall not be approved to
transact options business with the public until such persons, who
are designated as Options Principals, have been approved by and
registered with the Exchange. Further, persons engaged in the
supervision of options sales practice or a person to whom the
designated general partner or executive officer (pursuant to Rule
1025) or another Registered Options Principal delegates the
authority to supervise options sales practices shall be designated
as options principals. Rule 1024, Commentary .06 provides that
individuals engaged in the supervision of options sales practices
and designated as Options Principals are required to qualify as an
Options Principal by passing the Registered Options Principal
Qualification Examination (Series 4) or the Sales Supervisor
Qualification Examination (Series 9/10), and is proposed to be
deleted in view of new Rule 1220(a)(8)(a). Under Rule 1024.07,
individuals who are delegated responsibility pursuant to Rule 1025
for the acceptance of discretionary accounts, for approving
exceptions to a member's criteria or standards for uncovered options
accounts, and for approval of communications, shall be designated as
Options Principals and are required to qualify as an Options
Principal by passing the Registered Options Principal Qualification
Examination (Series 4). Further, Exchange Rule 1024.08 states that a
person accepting orders from non-member customers (unless such
customer is a broker-dealer registered with the Securities and
Exchange Commission) is required to register with the Exchange and
to be qualified by passing the General Securities Registered
Representative Examination (Series 7). Except for Rule 1024,
Commentary .06, the foregoing provisions of Rule 1024 are specific
to conducting an options business with the public and are not
proposed to be amended in this proposed rule change. However, Rule
1024(a) also contains 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.

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

    Pursuant to proposed Rule 1220(a)(8)(B), subject to the lapse of
registration provisions in Rule 1210.08, each person registered as a
Registered Options Principal on October 1, 2018 and each person who was
registered as a Registered Options Principal within two years prior to
October 1, 2018 would be qualified to register as a Registered Options
Principal without passing any additional qualification examinations.
All other individuals registering as Registered Options Principals
after October 1, 2018 would, prior to or concurrent with such
registration, be required to become registered pursuant to paragraph
Rule 1220(b)(2) of the Rule as a General Securities Representative and
pass the Registered Options Principal qualification examination.\65\
---------------------------------------------------------------------------

    \65\ The Exchange is also proposing to adopt Rule 1220,
Supplementary Material .02, which provides 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 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. 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 event, the Exchange does not currently offer
security futures products for trading. In addition, the Exchange is
also proposing to adopt Rule 1220, Supplementary Material .03 which
requires notification to the Exchange in the event such person is
terminated, resigns, becomes incapacitated or is otherwise unable to
perform the duties of a Registered Options Principal, and imposes
certain restrictions on the member's options business in that event.
---------------------------------------------------------------------------

9. Government Securities Principal. [sic] (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)
    Current Rule 612(c) provides that each person associated with a
member organization to which Rule 611 applies and who is included in
the definition of Principal in Rule 611 may register with the Exchange
as a Limited Principal--General Securities Sales Supervisor if: (A) His
or her supervisory responsibilities in the investment banking and
securities business are limited to the securities sales activities of a
member organization, including the training of sales and sales
supervisory personnel and the maintenance of records of original entry
and/or ledger accounts of the member organization required to be
maintained in branch offices by SEC record keeping rules; (B) he or she
is registered pursuant to Exchange Rules as a General Securities
Representative; and (C) he or she is qualified to be so registered by
passing the Series 9 or Series 10 examination. Under the rule a person
registered in this category solely on the basis of having passed the
Series 9 or Series 10 examination for Limited Principal--General
Securities Sales Supervisor is not qualified to: (A) Function in a
Principal capacity with responsibility over any area of business
activity not described in paragraph (c)(i)(A); (B) be included for
purposes of the Principal numerical requirements of Rule 611(e); or (C)
perform for a member organization any or all 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 Rule 605; (4)
supervision of the custody of firm or customer funds and/or securities
for purposes of SEC Rule 15c3-3; or (5) supervision of overall
compliance with financial responsibility rules for broker/dealers
promulgated pursuant to the provisions of the Act. Rule 612(c)(iii)
explains the purpose of the General Securities Sales Supervisor
registration category.
    The Exchange is proposing to adopt Rule 612(c)(i) and (ii) and Rule
612(c)(iii), with changes, as Rules 1220(a)(10) and 1220.04,
respectively.\66\ 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.
---------------------------------------------------------------------------

    \66\ The Exchange is not proposing to carry over into proposed
Rule 1220(a)(10) the current Rule 612(c)(ii)(C)(3) 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.
---------------------------------------------------------------------------

    Each person seeking to register as a General Securities Sales
Supervisor would be required, prior to or concurrent with such
registration, to become registered pursuant to Rule 1220(b)(2) of the
rule as a General Securities Representative and pass the General
Securities Sales Supervisor qualification examinations.
11. Investment Company and Variable Contracts Products Principal and
Direct Participation Programs Principal (Rules 1220(a)(11) and (a)(12))
    The Exchange does not recognize the Investment Company and Variable
Contracts Products Principal and the Direct Participation Programs
Principal registration categories and is reserving Rule 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 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 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))
    Current Rule 1(a)(ee) defines ``Representative'' as a member or an
associated person of a registered broker or dealer, including assistant
officers other than principals, who is engaged in the investment
banking or securities business for the member organization including
the functions of supervision, solicitation or conduct of business in
securities or who is engaged in the training of persons associated with
a broker or dealer for any of these functions.
    The Exchange now proposes to amend Exchange Rule 1(a)(ee) to
incorporate by reference a new definition of ``representative'' in
proposed 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.
15. General Securities Representative (Proposed Rule 1220(b)(2))
    Under Rule 613(a), except for members whose activities are limited
to the Exchange's options trading floor and who are registered pursuant
to Rule 620(a) as well as associated persons whose activities are
limited to the Exchange's options trading floor and who are registered
pursuant to Rule 620(b), all persons engaged or to be engaged in the
investment banking or securities business of a member organization who
are to function as representatives shall be registered as such with the
Exchange through WebCRD under PHLX in the category of registration
appropriate to the function to be performed as specified in paragraph
(e),\67\ Categories of Representative Registration--General Securities
Representative or (f), Securities Trader.
---------------------------------------------------------------------------

    \67\ Rule 613(e) provides that individuals required to register
with the Exchange as a General Securities Representative under the
rule must pass the Series 7 examination before such registration may
become effective.
---------------------------------------------------------------------------

    The Exchange proposes to delete those provisions of Rule 613(a) and
to adopt new Rule 1220(b)(2), General Securities Representative.
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, subject to the exception that
if a representative's activities include the functions of a Securities
Trader, as specified in Rule 1220(b)(2), 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 except that individuals registered as a General Securities
Representatives within two years prior to October 1, 2018 would be
qualified to register as General Securities Representatives without
passing any additional qualification examinations.\68\
---------------------------------------------------------------------------

    \68\ 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.
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, Investment Company and Variable Products
Representative, Direct Participation Programs Representative and
Private Securities Offerings Representative. The Exchange does not
recognize these registration categories for its associated persons. The
Exchange is therefore reserving Rules 1220(b)(3)--Operations
Professional, and related Rule 1220.05, Scope of Operations
Professional Requirement; 1220(b)(5)--Investment Banking
Representative; 1220(b)(6)--Research Analyst; 1220(b)(7)--Investment
Company and Variable Products Representative; 1220(b)(8)--Direct
Participation Programs Representative; and 1220(b)(9)--Private
Securities Offerings Representative, retaining the captions for each of
them solely to facilitate comparison with FINRA's rules.
    Securities Trader--Proposed Rule 1220(b)(4). Pursuant to current
Exchange Rule 613(f)(1) and (2), associated persons must pass the
qualification examination for Securities Trader (the Series 57
examination) and register with the Exchange 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, 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.\69\
---------------------------------------------------------------------------

    \69\ Rule 613(f)(3) provides that a person registered as a
Securities Trader is 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 delete Exchange Rule 613(f) and to
replace it with proposed Rule 1220(b)(4).\70\ Rule

1220(b)(4) would require each representative as defined in Rule
1220(b)(1) of the rule to register with the Exchange as a Securities
Trader if, with respect to transactions in equity, preferred or
convertible debt securities, or options \71\ 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. Rule
1220(b)(4) would require individuals registering as Securities Traders
to pass the SIE as well as the Securities Trader qualification exam.
---------------------------------------------------------------------------

    \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.
    \71\ Current Rule 613(f) refers to transactions in foreign
currency options. Proposed Rule 1220(b)(4) would instead refer to
``options'' generally, to clarify that equity options as well as
foreign currency options are products with respect to which
Securities Trader registration requirements would apply.
---------------------------------------------------------------------------

    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.\72\
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    \72\ 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).
---------------------------------------------------------------------------

    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.\73\
---------------------------------------------------------------------------

    \73\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007).
---------------------------------------------------------------------------

    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, 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, to pass the
SIE and the Securities Trader qualification examination.
17. Eliminated Registration Categories (Proposed Rule 1220.06)
    Proposed Rule 1220.06 has no practical relevance to the Exchange,
but is included because the Nasdaq Affiliated Exchanges are also
proposing to adopt the new 1200 Series, on a uniform basis. Proposed
Rule 1220.06 will be relevant to Nasdaq and BX which, unlike the
Exchange, are proposing to eliminate a number of existing registration
categories that are not currently recognized by the Exchange.\74\
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    \74\ See SR-Nasdaq-2018-078.
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    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
such 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 Nasdaq
rules.\75\ As stated above, Rule 1220.06 would have no application to
the Exchange as a practical matter.\76\
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    \75\ See Nasdaq Rule 1042.
    \76\ Proposed Exchange Rule 1220.06 omits references to a number
of registration categories it does not propose to recognize, but
which FINRA refers to in its own Rule 1220.06.
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18. Grandfathering Provisions
    In addition to the grandfathering provisions in proposed Rule
1220(a)(2) (relating to General Securities Principals) and proposed
Rule 1220.06 (relating to the eliminated registration categories), the
Exchange is proposing to include grandfathering provisions in proposed
Rule 1220(a)(8) (Registered Options Principal), 1220(b)(2) (General
Securities Representative), and 1220(b)(4) (Securities Trader).
Specifically, the proposed grandfathering provisions provide that,
subject to the lapse of registration provisions in proposed Rule
1210.08, individuals who are registered in specified registration
categories on the operative date of the proposed rule change and
individuals who had been registered in such categories within the past
two years prior to the operative date of the proposed rule change would
be qualified to register in the proposed corresponding registration
categories without having to take any additional examinations.
N. Associated Persons Exempt From Registration (Proposed Rules 1230 and
1230.01)
    Existing Rule 614 currently provides that the following persons
associated with a member organization are not required to register:
    (i) Persons associated with a member organization whose functions
are solely and exclusively clerical or ministerial;
    (ii) persons associated with a member organization who are not
actively engaged in the investment banking or securities business;
    (iii) persons associated with a member organization whose functions
are related solely and exclusively to the member organization's need
for nominal corporate officers or for capital participation; and
    (iv) persons associated with a member organization whose functions
are related solely and exclusively to effecting transactions on the
floor of another national securities exchange and who are registered as
floor members with such exchange; transactions in municipal securities;
transactions in commodities; transactions in security futures, provided
that any such person is registered with FINRA or a registered futures
association; transactions in variable contracts and insurance premium
funding programs and other contracts issued by an insurance company;
transactions in direct participation programs; transactions in
government securities; or effecting sales as part of a primary offering
of securities not involving a public offering pursuant to Section 3(b),
4(2), or 4(6) of the Securities Act of 1933 and the rules and
regulations thereunder.
    The Exchange is proposing to adopt Rule 614 as Rule 1230 subject to
certain changes. Rule 614 exempts from registration those associated
persons who are not actively engaged in the securities business. It
also exempts from registration those associated persons whose functions
are related solely and exclusively to a member's need for nominal
corporate officers or for capital participation.\77\ The Exchange
believes that the determination of whether an associated person is
required to register must be based on an analysis of the person's
activities and functions in the context of the various registration
categories. The Exchange does not believe that categorical exemptions
for associated persons who are not ``actively engaged'' in a member's
securities business, associated persons whose functions are related
only to a member's need for nominal corporate officers or associated
persons whose functions are related only to a member's need for capital
participation is consistent with this analytical framework. The
Exchange therefore is proposing to delete these exemptions. Rule
614(a)(iv)(a) further exempts from registration associated persons
whose functions are related solely and exclusively to effecting
transactions on the floor of another national securities exchange as
long as they are registered as floor members with such exchange.
Because exchanges have registration categories other than the floor
member category, proposed Rule 1230 clarifies that the exemption
applies to associated persons solely and exclusively effecting
transactions on the floor of another national securities exchange,
provided they are appropriately registered with such exchange.\78\
Additionally, the Exchange proposes to add Section 3 of Rule 1230,
pursuant to which persons associated with a member that are not
citizens, nationals, or residents of the United States or any of its
territories or possessions, that will conduct all of their securities
activities in areas outside the jurisdiction of the United States, and
that will not engage in any securities activities with or for any
citizen, national or resident of the United States need not register
with the Exchange.\79\
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    \77\ These exemptions generally apply to associated persons who
are corporate officers of a member in name only to meet specific
corporate legal obligations or who only provide capital for a
member, but have no other role in a member's business.
    \78\ Proposed Rule 1230 differs from FINRA Rule 1230 in that it
includes a number of exemptions based upon current Nasdaq Rule
1060(a) which are not found in FINRA Rule 1230.
    \79\ Individuals described by Section 3 of Rule 1230 who are
associated with FINRA members may be registered with FINRA as
Foreign Associates pursuant to FINRA Rule 1220.06. FINRA is
eliminating this registration category effective October 1, 2018,
and the Exchange has never recognized it.
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    The Exchange proposes to adopt Rule 1230.01 to clarify that the
function of accepting customer orders is not considered a clerical or
ministerial function and that associated persons who accept customer
orders under any circumstances are required to be appropriately
registered. However, the proposed rule provides that an associated
person is not accepting a customer order where occasionally, when an
appropriately registered person is unavailable, the associated person
transcribes the order details and the registered person contacts the
customer to confirm the order details before entering the order.
O. Changes to Continuing Education Requirements (Proposed Rule 1240)
    As described above, existing Rule 640, Continuing Education for
Registered Persons, includes a Regulatory Element and a Firm Element.
The Regulatory Element applies to registered persons and consists of
periodic computer-based training on regulatory, compliance, ethical,
supervisory subjects and sales practice standards. The Firm Element
consists of at least annual, member-developed and administered training
programs designed to keep covered registered persons current regarding
securities products, services and strategies offered by the member. The
CE requirements set forth in Rule 640 have been reorganized and
renumbered,

and are now proposed to be adopted with amendments as new Rule
1240.\80\
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    \80\ Proposed Rule 1240 also differs slightly from FINRA Rule
1240 in that it omits references to certain registration categories
which the Exchange does not recognize as well as an internal cross
reference to FINRA Rule 4517.
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1. Regulatory Element
    The Exchange is proposing to replace the term ``registered person''
in current Rule 640 with the term ``covered person'' and make
conforming changes to proposed Rule 1240(a). For purposes of the
Regulatory Element, the Exchange is proposing to define the term
``covered person'' in Rule 1240(a)(5) as any person registered pursuant
to proposed Rule 1210, including any person who is permissively
registered pursuant to proposed Rule 1210.02, and any person who is
designated as eligible for an FSA waiver pursuant to proposed Rule
1210.09. The purpose of this change is to ensure that all registered
persons, including those with permissive registrations, keep their
knowledge of the securities industry current. The inclusion of persons
designated as eligible for an FSA waiver under the term ``covered
persons'' corresponds to the requirements of proposed Rule 1210.09. In
addition, consistent with proposed Rule 1210.09, proposed Rule 1240(a)
provides that an FSA-eligible person would be subject to a Regulatory
Element program that correlates to his or her most recent registration
category, and CE would be based on the same cycle had the individual
remained registered. The proposed rule also provides that if an FSA-
eligible person fails to complete the Regulatory Element during the
prescribed time frames, he or she would lose FSA eligibility.
    Further, the Exchange is proposing to add a rule to address the
impact of failing to complete the Regulatory Element on a registered
person's activities and compensation. Specifically, proposed Rule
1240(a)(2) provides that any person whose registration has been deemed