[Federal Register Volume 82, Number 228 (Wednesday, November 29, 2017)]
[Notices]
[Pages 56672-56701]
[FR Doc No: 2017-25688]

Vol. 82

Wednesday,

No. 228

November 29, 2017

Part III

Securities and Exchange Commission

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Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Adopt Investigatory
and Disciplinary Processes Substantially Similar to Nasdaq BX, Inc. and
The Nasdaq Stock Market LLC; Notice

Federal Register / Vol. 82 , No. 228 / Wednesday, November 29, 2017 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82143; File No. SR-Phlx-2017-92]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt
Investigatory and Disciplinary Processes Substantially Similar to
Nasdaq BX, Inc. and The Nasdaq Stock Market LLC

November 22, 2017.
    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 November 15, 2017, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III, below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to adopt an investigatory and disciplinary
process identical in all material respects to the investigatory and
disciplinary processes of Nasdaq BX, Inc. (``BX'') and The Nasdaq Stock
Market LLC (``Nasdaq'').
    The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqphlx.cchwallstreet.com/ 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
    Phlx is proposing to adopt processes and related rules concerning
investigative and disciplinary matters involving Phlx Members, Member
Organizations, and persons associated with Member Organizations (also
known as ``Associated Persons''),\3\ which are identical in all
material respects to the disciplinary process of Phlx's sister exchange
BX, and substantially similar to that of Nasdaq.\4\ The proposed change
will provide uniform investigative and disciplinary processes applied
to Members, Member Organizations, and persons associated with Member
Organizations of Phlx and members and persons associated with members
of BX, and Nasdaq, and harmonize the work FINRA conducts for these
exchanges.
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    \3\ Pursuant to Rule 1(n), a Member is a permit holder which has
not been terminated in accordance with the By-Laws and these Rules
of the Exchange. A Member is a natural person. Pursuant to Rule
1(o), the term ``Member Organization'' shall mean a corporation,
partnership (general or limited), limited liability partnership,
limited liability company, business trust or similar organization,
transacting business as a broker or a dealer in securities and which
has the status of a Member Organization by virtue of (i) admission
to membership given to it by the Membership Department pursuant to
the provisions of Rules 900.1 or 900.2 or the By-Laws or (ii) the
transitional rules adopted by the Exchange pursuant to Section 6-4
of the By-Laws. Accordingly, a Member Organization is an entity and
not a person (hence the name ``organization''). Pursuant to Rule
908(c), a Member must be affiliated with a Member Organization.
Every Member Organization must have at least one Member. A Member
cannot be a broker or a dealer nor may a Member have associated
persons. The Exchange notes that certain Exchange rules may lead a
person to conclude that a Member may be a broker or a dealer and
have persons associated with the Member. See, e.g., Rule 600(c).
Notwithstanding any such ambiguities in the Phlx rules, a Member
cannot be a broker or a dealer, and a Member cannot have persons
associated with it on Phlx. In addition, Phlx does not currently
have any Members that are a broker or a dealer, nor does it
currently have any Members with associated persons. The Exchange
will not allow a Member to be a broker or a dealer and have any
associated persons in the future unless it amends its rules to allow
for such Members and associated persons. Thus, the Exchange is
replacing references to ``members'' in the BX rules with ``member
organizations'' in the New Phlx rules, is replacing references to
``persons associated with members'' in BX rules with references to
``persons associated with member organizations'' in the New Phlx
rules, and is clarifying any ambiguity in both the proposed New Phlx
rules and certain existing Phlx rules that associated persons are
associated with member organizations. As discussed above, the
Exchange is amending the definition of ``Member'' to clarify that it
is a natural person that is associated with a Member Organization.
Accordingly, any references in the rules to an ``associated person''
or ``persons associated with a member organization'' also refer to a
Member. Thus, any instance where the terms ``associated person'' or
``persons associated with a member organization'' occur in the rules
and the term ``member'' is omitted, the rule nonetheless applies to
Members. The Exchange is separately reviewing its entire rulebook to
determine where other such ambiguities exist and will file a rule
change proposal to clarify any additional ambiguities in the rules.
    \4\ The BX disciplinary rules were based on those of Nasdaq with
minor differences to the process discussed below. The Exchange is
basing its new disciplinary rules on those of BX. Nevertheless, the
majority of the new disciplinary rules proposed herein are
materially identical to those of Nasdaq as well.
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    FINRA performs, among other things, investigatory and prosecutorial
work for Phlx pursuant to a Regulatory Services Agreement between the
two parties (the ``RSA'').\5\ Under the RSA, FINRA is responsible for
the investigation of potential violations of Phlx rules and the
Exchange Act, and for the prosecution of any such violations thereof,
by Phlx Members, Member Organizations, and Associated Persons.
Moreover, under the RSA, Phlx's Regulation Department staff may elect
to exercise jurisdiction over a matter involving a Phlx Member, Member
Organization, or Associated Person, performing the investigation and
any resulting prosecutorial work without FINRA's involvement. Upon the
conclusion of FINRA's or staff's investigation of a matter involving a
Member, Member Organization, or Associated Person, a proposed
resolution is recommended to the Phlx Business Conduct Committee
(``BCC''), which is charged with, among other things, the approval of
action against a Member, Member Organization, or Associated Person.
When a matter is contested, it may be reviewed by a Phlx Hearing Panel,
which is charged with issuing a decision in such matters after
reviewing evidence and considering arguments.
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    \5\ See RSA (January 2013). The Exchange retains ultimate legal
responsibility for the regulation of its Members, Member
Organizations, and Associated Persons and its market. Both BX and
Nasdaq have entered into RSAs with FINRA to perform the work under
their respective Rule 8000 and 9000 Series. The Exchange will amend
its RSA to include the new processes under New Rule 8000 and 9000
Series, and the related changes proposed herein, thus harmonizing
the regulatory work FINRA conducts for all three self-regulatory
organizations (``SROs'').
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    As discussed in detail below, Phlx is proposing to eliminate the
BCC and the related hearings process, and adopt a new Exchange Review
Council and a related adjudicatory process that mirrors that of the
Exchange's sister exchanges, BX, and Nasdaq. Under the new process,
FINRA's responsibilities will now include the adjudicatory roles

currently performed by the BCC \6\ and Hearings Panels \7\ under the
Rule 960 Series, and the Exchange Review Council will serve as the
appellate body for cases appealed from new Hearing Panels. The Exchange
Review Council will also serve as the appellate body for other
determinations made by Phlx, such as reviewing appeals of
determinations brought by market makers seeking review of a denial of
reinstatement pursuant to Rule 3220, which are currently reviewed by
the Exchange's Market Operations Review Committee, as discussed
below.\8\ The Exchange Review Council will also be responsible for the
approval of minor rule violation plan letters and violation letters
under New Rule \9\ 9216(b), and appeals of Membership Department
determinations (for denials of membership pursuant to Rule 923) under
the new process.
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    \6\ As described below, case authorization and adjudicatory
functions of the BCC and current Hearing Panels will be administered
by FINRA's Office of Disciplinary Affairs and Office of Hearing
Officers, while other functions of the BCC will be handled by the
Phlx Regulation Department, Department of Enforcement, and the
Department of Market Regulation. In certain existing rules where the
responsibilities under the rule do not fall within the Office of
Disciplinary Affairs' purview under the Codes of Procedure for
FINRA, BX, Nasdaq or any other exchange, the Exchange is replacing
the BCC with the Chief Regulatory Officer instead of the Office of
Disciplinary Affairs.
    \7\ As described below, the current functions of the Phlx
Hearings Panels will be handled by FINRA's Hearing Panels.
    \8\ See New Rule 1(k). The Exchange Review Council will also
review appeals brought under the New Rule 9280 (Contemptuous
Conduct), New Rule 9520 Series (Eligibility Proceedings), New Rule
9550 Series (Expedited Proceedings), and New Rule 9600 Series
(Procedure for Exemptions).
    \9\ Citation to rules of the proposed 8000 and 9000 Series
herein will be preceded by ``New Rule.''
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    Decisions \10\ issued by the Exchange Review Council may be
reviewed by the Exchange Board of Directors (``Board''), which may also
issue a decision in the matter.\11\ Decisions issued by the Board are
considered final action of the Exchange in a matter for purposes of
appeals to the Commission.\12\ Should the Board decline to review an
Exchange Review Council decision, the decision is the final action of
the Exchange.\13\ Phlx notes that, because the new proposed process is
derived from the BX and Nasdaq member investigative and adjudicatory
processes, it will provide consistency in the procedure used to
investigate and resolve matters concerning members of three of Nasdaq,
Inc.'s U.S. exchanges.\14\
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    \10\ As defined by New Rule 9349. See also BX Rule 9349 and
Nasdaq Rule 9349.
    \11\ See New Rule 9351(d) and (e).
    \12\ 15 U.S.C. 78s(d).
    \13\ See New Rule 9349(c).
    \14\ Nasdaq, Inc.'s other three exchanges, Nasdaq ISE, LLC,
Nasdaq GEMX, LLC, and Nasdaq MRX, LLC, are in various stages of
harmonizing their investigative and disciplinary processes with
those of BX, Nasdaq, and FINRA.
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    To implement the proposed change, Phlx is amending Phlx By-Law,
Article V, Section 5-3, and its rules to adopt substantially similar
text to that of BX and Nasdaq, reflect the changes to the process, and
delete old text where necessary. Specifically and as discussed in
greater detail below, the Exchange is deleting its current Disciplinary
Rules found under the Rule 960 Series and replacing them with new
investigatory and disciplinary rule sets under the New Rule 8000 and
9000 Series, which are in nearly all material respects identical \15\
to the Rule 8000 and 9000 Series of BX, and substantially similar to
the Rule 8000 and 9000 Series of Nasdaq.\16\ Under the new process, the
current BCC and Phlx Hearing Panels are generally being replaced with
FINRA's Office of Disciplinary Affairs (``ODA'') \17\ and new Hearing
Panels,\18\ although in certain circumstances the BCC is being replaced
by the Department of Enforcement,\19\ the Department of Market
Regulation,\20\ Phlx Regulation Department \21\ and/or the Chief
Regulatory Officer (``CRO'').\22\ As a consequence, the Exchange is
also eliminating references to the BCC and Phlx Hearings Panels in
existing rules, deleting rules specifically relating to the BCC or Phlx
Hearings Panels, and in certain cases replacing references to the BCC
or Phlx Hearing Panels with the appropriate group or groups responsible
for the process. The Exchange notes that, under the proposed New Rules,
in certain instances the rules may reference an obligation or right of
an Associated Person and not also include such a reference to a Member,
notwithstanding that a Member is an Associated Person. In such cases,
the obligation or right also applies to the Member unless otherwise
expressly noted.
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    \15\ The proposed New Rules are based on the BX rule set, which
is substantially similar to the corresponding Nasdaq rule set.
Significantly, the Nasdaq rules define Special Panelist, which is a
category of Hearing Panelist BX does not have. A Special Panelist is
an individual approved by the Nasdaq Board of Directors and selected
by the Chief Hearing Officer to participate in proceedings in which
certain issues arise, about which Nasdaq determined individuals with
appropriate expertise and knowledge should be chosen. See Nasdaq
Rule 9120(u). Like BX rules, the Exchange's rules do not provide for
such a category of Hearing Panelist and the Exchange does not
believe that Special Panelists are needed at this juncture. Nasdaq
also has a legacy category of Panelist who the Chief Hearing Officer
may select, who is a person that served on FINRA's National
Adjudicatory Council (``NAC''), or on a disciplinary subcommittee
thereof, prior to the date that Nasdaq commenced operation as a
national securities exchange. See Nasdaq Rules 9231(b)(1)(D) and
9820(a)(4). Like BX, the Exchange is not adopting this category of
person eligible to serve on a Panel.
    \16\ As discussed in greater detail below, unlike Nasdaq and BX,
the Exchange operates a physical trading floor, which necessitates
some changes to accommodate regulation of the floor.
    \17\ As defined under New Rule 9120(w).
    \18\ As defined under New Rule 9120(s).
    \19\ New Rule 9120(f)
    \20\ New Rule 9120(g).
    \21\ The Exchange is proposing to adopt a new defined term
``Phlx Regulation Department'' under New Rule 9120(v), which mirrors
the definitions of ``the Exchange's Regulation Department'' and
``Nasdaq Regulation'' under BX and Nasdaq Rules 9120(w),
respectively, however, the proposed definition also expressly
includes the Exchange's Enforcement Department. Options Exchange
Officials and Exchange staff acting in certain capacities are also
considered staff of the Phlx Regulation Department. See note 47,
infra for a description of the Phlx Regulation Department. The
Exchange's Enforcement Department is specifically charged with
pursuing disciplinary action against Members, Member Organizations,
Associated Persons and persons subject to the Exchange's
jurisdiction, and it is not affiliated with FINRA's Department of
Enforcement.
    \22\ The Exchange is replacing the BCC with the CRO instead of
the ODA where the responsibilities under the rule do not fall within
the ODA's purview under the Codes of Procedure for FINRA, BX, Nasdaq
or any other exchange. For example, Rule 777(a) prohibits a branch
office manager of any member organization, an employee of any member
organization engaged in trading in securities for the organization,
and a securities salesman of any member organization, from
guaranteeing the payment of the debit balance, in a customer's
account, to his employer or to any other creditor carrying such
account, without the prior written consent of the BCC. The Exchange
is proposing to replace the BCC with the CRO in this instance
because this is not a normal function of the ODA and the CRO is in
the best position to make such determinations. The Exchange is also
replacing the BCC's role in determining penalties under the Advices
with the Department of Enforcement, the Department of Market
Regulation, and Phlx Regulation Department, which will each
individually have the authority to assess, and determine the amount
of, fines under the Advices after repeated violations thereof, with
the exception of the Advices relating to Order and Decorum for which
the Phlx Regulation Department will be solely responsible for
assessing and determining the amount of fines thereunder.
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Current Phlx Rules and Adjudicatory Process
    Responsibility for the adjudication of Phlx rules is divided into
two categories: (1) Rules for which the BCC and Hearing Panels are
responsible for adjudicating as formal disciplinary proceedings; and
(2) Rules under which fines may be assessed or privileges suspended in
lieu of disciplinary action.\23\ Specifically, in lieu of conducting a
formal disciplinary proceeding, Rules 60 (Sanctions for

Breach of Regulations) and 970 (Floor Procedure Advices: Violations,
Penalties, and Procedures) provide alternative disposition of
violations through assessment of a fine and/or suspension of trading
floor privileges.\24\ Rules 60 and 970 provide the process for
administering fines for violations of the Options Floor Procedure
Advices and Equity Floor Procedure Advices \25\ (collectively, the
``Advices''), which include regulations that comprise the Exchange's
minor rule violation plan (``MRVP'') as well as violations of Order and
Decorum Regulations that are not included in the Exchange's MRVP but
may be considered minor in nature and thus possibly resolved outside of
the formal disciplinary process.\26\
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    \23\ Fines may be assessed by an Options Exchange Official or by
Exchange staff. In certain circumstances, an Options Exchange
Official and an officer of the Exchange, as defined by Rule
60(c)(ii), may exclude a Member from the trading floor.
    \24\ None of the fines assessed in lieu of formal disciplinary
action exceed [sic] $10,000. Under both Rules 60 and 970, matters
may alternatively be referred for formal disciplinary proceedings.
    \25\ The Exchange notes that it no longer operates an equity
trading floor. The regulations under the Equity Trading Floor
Advices relate to requirements such as notices, record retention,
and compliance with Exchange inquiries.
    \26\ For example, Options Floor Procedure Advice F-35 concerns
violations of exercise and exercise advice rules for noncash-settled
equity option contracts imposes a fine of $1,000 for the first
violation of the Advice, a fine of $2,500 for the second violation
of the Advice, and $5,000 for the third and each subsequent
violation of the Advice. The first two fines would fall under the
Exchange's MRVP as they are $2,500 or less in amount, whereas the
third and subsequent violations would not as they are in excess of
$2,500, but may be considered as ``minor'' and not subject to formal
disciplinary action. As is currently the case, the Exchange may
choose to pursue formal disciplinary action in lieu of resolving a
violation of the Advices through fine and/or suspension.
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    Generally, notice to the SEC of final disciplinary action by an SRO
is required pursuant to Rule 19d-1 of the Exchange Act; however,
uncontested fines of $1,000 or less or exclusion of a clerical employee
from the trading floor for five days or less for violations of
regulations that relate to administration of order, decorum, health,
safety, and welfare (``Order and Decorum'') are not required to be
reported to the SEC. In addition, uncontested fines of $2,500 or less
assessed for violation of MRVP rules are subject to abbreviated
periodic SEC reporting.
    Rule 60 provides the process for regulating Order and Decorum on
the Exchange's trading floor. The Order and Decorum rules are found
under Section H of the Options Floor Procedure Advices. Pursuant to
Rule 60, both Exchange staff and Options Exchange Officials \27\ have
authority to fine a Member, Member Organization, or Associated Person
for violations of any of the Order and Decorum regulations under the
Options Floor Procedure Advices in lieu of conducting a formal
disciplinary proceeding.
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    \27\ The President of the Exchange and his designated staff
shall have general supervision over: (i) The options trading floor
as well as general supervision of the dealings of members on the
trading floor and on Exchange trading systems and of the premises of
the Exchange immediately adjacent thereto; (ii) the activities of
specialists, registered option traders, floor brokers, or other
types of market makers and shall establish standards and procedures
for the training and qualification of members active on the trading
floor; (iii) all trading floor employees of members, and shall make
and enforce such rules with respect to such employees as it may deem
necessary; (iv) all connections or means of communications with the
options trading floor and may require the discontinuance of any such
connection or means of communication when, in the opinion of the
President or his designee, it is contrary to the welfare or interest
of the Exchange; (v) the location of equipment and the assignment
and use of space on the options trading floor; and (vi) relations
with other options exchanges. See Rule 1000(e).
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    In addition, an Options Exchange Official and an officer of the
Exchange may exclude a Member or Associated Person from the trading
floor. Both Exchange staff and Options Exchange Officials may
alternatively refer the matter to the BCC for formal disciplinary
proceeding, which would be charged with determining whether a fine or
formal disciplinary proceeding is appropriate.
    Under Rule 60, a Member, Member Organization, or Associated Person
may contest a fine by requesting a hearing before a Hearing Director
appointed by the Chair of the BCC, who may overturn, affirm, or modify
the citation. The Hearing Director's determination is final. A
determination to exclude a Member, Member Organization, or Associated
Person from the trading floor is not appealable.
    Rule 970 provides the process for regulating other behavior
pursuant to the Advices not related to Order and Decorum through
assessment of a fine.\28\ Fines assessed under the Advices increase
with each subsequent violation and after a set number of repeated
violations, are thereafter are [sic] assessed at the discretion of the
BCC, which may, as an alternative to assessing a fine, recommend the
matter for formal disciplinary proceeding. Notwithstanding,
determinations to issue a fine are made on a case by case basis,
whereby the Exchange considers the individual facts and circumstances
to determine whether a fine of more or less than the recommended amount
is appropriate for the violation, or whether the violation requires
formal disciplinary action. Fines of $2,500 or less levied for
violations of the Advices, other than Order and Decorum, are included
in the Exchange's MRVP, whereas any fine exceeding $2,500 under the
Advices is not. If a Member, Member Organization, or Associated Person
contests a fine, it must provide a written response meeting the
requirements of an ``Answer,'' as set forth in Rule 960.4, which is
thereafter provided to the BCC for its consideration.
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    \28\ Under the Advices, the Exchange assesses fines ranging from
$50 to $10,000. Pursuant to paragraph (c) of Rule 19d-1 of the
Exchange Act, the Commission allows SROs to submit for Commission
approval plans for the abbreviated reporting of minor disciplinary
infractions (i.e., an MRVP). Any disciplinary action taken by an SRO
against any person for violation of a rule of the SRO which has been
designated as a minor rule violation pursuant to such an MRVP filed
with, and declared effective by, the Commission shall not be
considered ``final'' for purposes of Rule 19d-1(c)(1) of the
Exchange Act if the sanction imposed consists of a fine not
exceeding $2,500 and the sanctioned person has not sought an
adjudication, including a hearing, or otherwise exhausted his
administrative remedies under Section 19d-1(c)(2). Most fines
assessed under both Advices that do not exceed $2,500 are included
in the MRVP pursuant to Exchange Act Rule 19d-1(c)(2). Order and
Decorum Regulations under the Option Floor Procedure Advices,
however, are not included in the MRVP, but may be subject to an
exemption from the notice requirement of Exchange Act Rule 19d-
1(c)(1) if the fine does not exceed $1,000.
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    With respect to violations that are adjudicated by the BCC and
Hearing Panels, Rule 960.2(f)(i) requires the BCC to direct Exchange
staff to initiate a Statement of Charges when it appears that there is
probable cause for finding that a violation within the jurisdiction of
the Exchange has occurred and disciplinary action is warranted.
    The BCC is a Board-appointed committee \29\ with jurisdiction to
monitor compliance with the Act and the rules and regulations
thereunder, the By-Laws and rules of the Exchange or any interpretation
thereof, and the rules, regulations, resolutions, and stated policies
of the Board or any Exchange committee, by Members, Member
Organizations, and Associated Persons.\30\ The BCC reviews disciplinary
matters involving Members, Member Organizations, and Associated
Persons, which are first identified generally by Phlx's Market
Surveillance group and referred to FINRA to investigate and to propose
a recommended resolution pursuant to the RSA.\31\
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    \29\ The BCC meets quarterly and on an as-needed basis.
    \30\ See Phlx By-Law, Article V, Sec. 5-3(b).
    \31\ The Phlx Market Surveillance group is responsible for
detecting potentially violative conduct among Members, Member
Organizations, and Associated Persons and referring such conduct to
FINRA for investigation pursuant to the RSA. In a small number of
cases, Phlx enforcement staff will investigate potentially violative
conduct and recommend a resolution to the BCC.
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    Under the RSA, FINRA is responsible for, among other things, the
investigation of matters referred from the Phlx Market Surveillance and

Membership departments, and the performance of routine and cause
examinations of Phlx Members, Member Organizations, and Associated
Persons. FINRA is also responsible for providing services related to
Phlx's formal disciplinary process, including issuance of Wells
Notices, Cautionary Action Letters, Statements of Charges, settlements,
disciplinary decisions, and prosecution.
    Upon completion of an investigation, FINRA analyzes the evidence
and applicable law, and makes a preliminary determination of whether or
not a violation appears to have occurred. Known as a ``Sufficiency of
Evidence'' review, it is the same process followed by FINRA staff in
matters involving Members, Members Organizations and Associated Persons
for the Exchange; however, in such matters the BCC provides
authorization to proceed as proposed by FINRA instead of the ODA, as
described below.\32\ The Sufficiency of Evidence review determines
whether FINRA will recommend that the Exchange negotiate a settlement,
issue a Cautionary Action Letter, or pursue formal action against a
Member, Member Organization, or Associated Person.\33\ FINRA presents
its recommendations to the BCC for approval at both periodic and ad hoc
meetings. In order to become an official action of the Exchange, FINRA
must gain BCC approval of its recommendation.\34\ The BCC may approve,
deny or modify each recommendation presented to it. In cases that FINRA
recommends issuance of a Statement of Charges,\35\ it prepares a
memorandum and draft Statement of Charges for review and approval by
the BCC. In certain cases, FINRA will also negotiate a settlement with
a Respondent in addition to recommending the issuance of a Statement of
Charges. In such cases, FINRA will provide the BCC with an offer of
settlement together with a draft Statement of Charges for the BCC's
review and approval.\36\ If a recommendation to issue a Statement of
Charges is approved, FINRA will finalize the approved Statement of
Charges based on the BCC's recommendation, which is signed by the BCC's
chairperson and then served on the Member, Member Organization, and/or
Associated Person.\37\
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    \32\ See FINRA Regulatory Notice 09-17 (March 2009) at 3
(available at http://www.finra.org/sites/default/files/NoticeDocument/p118171.pdf).
    \33\ Id.
    \34\ Rule 960.2.
    \35\ Rule 960.3.
    \36\ The offer of settlement is negotiated with, and signed by,
the Respondent prior to FINRA's presentation of the proposed
Statement of Charges to the BCC. Providing a draft Statement of
Charges together with the proposed offer of settlement to the BCC at
the same meeting facilitates expeditious resolution in cases where
both parties have come to an agreement on how to settle the matter.
The process also allows the BCC to consider the facts and
circumstances of the matter at the time it is presented to it for
approval, including that the Respondent has committed to settle the
matter based on the Statement of Charges recommended by FINRA. If
the BCC approves the issuance of the Statement of Charges in these
matters it also accepts the offer of settlement, and considers it
the Respondent's Answer. Like other matters involving an offer of
settlement, where the BCC accepts an offer of settlement it must
issue a decision and impose sanctions consistent with the terms of
such offer. See Rule 960.7. Thus, after issuance of the Statement of
Charges and acceptance of the offer of settlement, FINRA provides
the BCC Chair, or its designee, with a draft Decision informing the
Respondent that the BCC has accepted the offer of settlement.
    \37\ Rule 960.3.
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    In certain cases, a Member, Member Organization, or Associated
Person will not accept the allegations made against it in the Statement
of Charges. If a Member, Member Organization, or Associated Person does
not agree with the allegations, it may request that a Hearing Panel
review the matter pursuant to Rule 960.5(a)1. Hearing Panels are
charged with reviewing the facts and circumstances of a contested
matter, and determining whether the Member, Member Organization, or
Associated Person has committed a violation and if so, what the
appropriate sanctions are, if any. A Hearing Panel also issues a
written decision in conformity with its determination.\38\ Moreover, a
Hearing Panel may hold summary disposition hearings and issue a summary
decision in cases where any Member, Member Organization, or Associated
Person has admitted to a violation, or if there is no dispute
concerning those material facts which give rise to such a
violation.\39\ Pursuant to Rule 960.9, a Hearing Panel decision may be
appealed to the Board.
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    \38\ Rule 960.5(a)(3).
    \39\ Rule 960.6.
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    The BCC may also examine the business conduct and financial
condition of a Member, Member Organization or Associated Person, and
may authorize the initiation of any disciplinary actions or proceedings
brought by the Exchange.\40\ With respect to disciplinary actions, the
BCC or its designee (including a Hearing Panel) shall impose
appropriate sanctions of expulsion, suspension, fine, censure or any
other fitting sanction where the BCC or its designee finds that a
violation within the disciplinary jurisdiction of the Exchange has been
committed.\41\ The BCC may also direct a general partner(s) or an
executive officer(s) of a Member Organization to appear before the BCC
or its designee for examination upon forty-eight hours' notice, either
oral or in writing and, after such examination, the BCC has authority
to suspend such Member Organization until the requirements of the
financial responsibility and reporting rule \42\ are fully met.
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    \40\ Phlx By-Law, Article V, Sec. 5-3(b).
    \41\ Id.
    \42\ See Phlx By-Law, Article V, Sec. 5-3(b)(c); see also Rule
703.
---------------------------------------------------------------------------

    The BCC may also prescribe regulations for the carrying of
securities on margin by Members and Member Organizations for customers,
and it may also make such regulations in regard to the segregation or
hypothecation of securities carried in customers' accounts as it deems
advisable.\43\ The BCC may prohibit trading by a Member or Member
Organization that is excessive in view of such person's or
organization's capital.\44\ The BCC may require or request detailed
financial reports or such other operational reports as it deems
necessary,\45\ and supervise the advertising of Members and Member
Organizations.\46\
---------------------------------------------------------------------------

    \43\ Phlx By-Law, Article V, Sec. 5-3(b)(d). Such proscriptive
power is subject to the SEC rulemaking process.
    \44\ Phlx By-Law, Article V, Sec. 5-3(b)(e).
    \45\ Phlx By-Law, Article V, Sec. 5-3(b)(f).
    \46\ Phlx By-Law, Article V, Sec. 5-3(b)(g).
---------------------------------------------------------------------------

The New Process and FINRA's Role
Resolution by Fine or Acceptance, Waiver, and Consent
    Under the proposed new process, the Exchange will continue to have
authority to resolve certain violations outside of the formal
disciplinary process. Options Exchange Officials and Exchange staff
will continue to have authority to investigate possible violations of
the Advices, issue fines, and in certain cases suspend trading floor
access for violations of the Advices. The authority to resolve
violations outside of the formal disciplinary process exists under
proposed New Rule 9216. New Rule 9216 provides alternatives to the
issuance of a formal complaint and the initiation of a formal
disciplinary proceeding, which include the assessment of fines or
exclusion from the Exchange's options trading floor. The Exchange is
proposing to adopt New Rule 9216(a) (Acceptance, Waiver, and Consent
Procedures). It will provide a new process by which the Phlx Regulation
Department, the Department of Enforcement or the Department of Market
Regulation \47\--if they have

reason to believe a violation has occurred and the Member, Member
Organization or Associated Person does not dispute the violation--may
prepare and request that the Member, Member Organization or Associated
Person execute a letter accepting a finding of violation, consenting to
the imposition of sanctions, and agreeing to waive such Member's,
Member Organization's or Associated Person's right to a hearing before
a Hearing Panel or, if applicable, an Extended Hearing Panel, and any
right of appeal to the Exchange Review Council, the Commission, and the
courts, or to otherwise challenge the validity of the letter, if the
letter is accepted. If the acceptance, waiver and consent is accepted,
the matter is resolved without issuance of a complaint. The Exchange
does not currently have an analogous process. However, the Exchange
believes that providing its Members, Member Organizations and
Associated Persons the optionality to dispose of a matter prior to the
issuance of a complaint will make the process fairer for its
participants. In certain respects, the process is similar to the
Exchange's current offer of settlement process, discussed above, by
which FINRA recommends acceptance of an offer of settlement and
provides a draft Statement of Charges to the BCC for its review and
approval, together with an executed offer of settlement. This process
results from negotiation with the Member, Member Organization or
Associated Person prior to the approval of the offer of settlement,
like an acceptance, waiver, and consent. An important difference is
that, unlike the current offer of settlement process, which requires
the issuance of a Statement of Charges and decision, an acceptance,
waiver and consent under New Rule 9216(a) is proposed in lieu of a
complaint.\48\ Thus, under the new rule, if the Phlx Regulation
Department, the Department of Enforcement or the Department of Market
Regulation has reason to believe a violation has occurred and the
Member, Member Organization, or Associated Person does not dispute the
violation, then the Phlx Regulation Department, the Department of
Enforcement or the Department of Market Regulation may prepare and
request that the Member, Member Organization, or Associated Person
execute a letter accepting the violation, consenting to the imposition
of sanctions, and agreeing to waive any right of appeal, if the letter
is accepted.\49\ The letter must be approved by the Review
Subcommittee,\50\ FINRA's ODA,\51\ or the Exchange Review Council to
become a final action of the Exchange.\52\ The process under New Rule
9216(a) is the same process used by BX and Nasdaq under their
respective Rules 9216(a).
---------------------------------------------------------------------------

    \47\ Phlx is adopting new defined terms ``Department of
Enforcement'' the ``Department of Market Regulation'' under New
Rules 9120(f) and (g), respectively, which are also defined in BX
and Nasdaq under their respective Rules 9120. These two departments
are authorized to act on behalf of BX and Nasdaq in investigating
and administering disciplinary matters pursuant to [sic] regulatory
service [sic] agreement, and will do the same for Phlx upon adoption
of the new process. Phlx is also adopting a new defined term ``Phlx
Regulation Department,'' which is the department of Phlx that
administers the Code, and includes the Phlx Enforcement Department.
See New Rule 9120(v); see also note 21, supra. As described above,
Options Exchange Officials, and Exchange staff acting in certain
capacities are also considered staff of the Phlx Regulation
Department. Phlx notes that the Phlx Regulation Department currently
exists and is responsible for, among other things, preparing matters
for review by the BCC. Under the new process, the Phlx Regulation
Department will have the option of investigating and bringing
matters to the ODA directly for review and possible authorization of
a disciplinary action, or alternatively may provide a matter to the
Department of Enforcement or Department of Market Regulation to
investigate and present to the ODA for possible authorization of a
disciplinary action.
    \48\ The Exchange is also adopting New Rule 9270, which provides
the settlement process once a complaint has been issued in a matter.
Thus, the process under New Rule 9216(a) occurs in lieu of the
issuance of a complaint, whereas the process under New Rule 9270 is
applicable to Respondents that have been provided notice that a
proceeding has been instituted against him or her [sic]. New Rule
9270 will replace the settlement process provided under Rule 960.7,
as discussed below.
    \49\ New Rule 9216(a)(1).
    \50\ As defined in New Rule 9120(bb).
    \51\ The Office of Disciplinary Affairs is a FINRA group
independent of the enforcement function. See discussion infra, p. 25
[sic].
    \52\ New Rule 9216(a)(3) and (4).
---------------------------------------------------------------------------

    The Exchange is also adopting New Rule 9216(b) to address the
process for administering violations of regulations that are resolved
by assessment of a fine, including regulations subject to the
Exchange's minor rule violation regulations,\53\ other than Order and
Decorum, in lieu of the current process under Rule 970.\54\ The
Exchange is adopting procedures applicable to violations of the Advices
subject to the MRVP under New Rule 9216(b)(1), and is adopting
procedures applicable to other violations of the Advices not included
in the MRVP under New Rule 9216(b)(2). The Exchange notes that neither
BX nor Nasdaq have [sic] regulations analogous to the Advices with
fines up to $10,000. Therefore, BX and Nasdaq do not need to adopt
separate rules addressing how violations resolved through a fine in
lieu of formal disciplinary proceedings in excess of $2,500 are
managed. Thus, both BX and Nasdaq Rules 9216(b) solely address the
procedures for violations of rules subject to their respective MRVPs
pursuant to Rule 19d-1(c)(2) of the Exchange Act.
---------------------------------------------------------------------------

    \53\ The Exchange's minor rule violation regulations include
both fines included in its MRVP and other fines up to $10,000.
    \54\ As discussed below, the Exchange is adopting New Rules
9216(b)(1)(E) and 9216(b)(2)(E) to account for the process provided
under Rule 970 concerning imposing fines under the Option Floor
Procedure Advices, when the number of violations under Exchange
Rules is determined based upon an exception-based surveillance
program. BX and Nasdaq Rules 9216(b) do not have a similar rule,
allowing ``batching'' of violations under certain conditions. Thus,
the Exchange is keeping the process provided by Rule 970, Commentary
.01.
---------------------------------------------------------------------------

    The Exchange is proposing to adopt New Rule 9216(b)(1) to address
the process for administering fines included in the Advices that do not
exceed $2,500 and are included in the MRVP. Unlike Rule 970, which
provides a process whereby the Exchange issues a citation that may be
subsequently contested by the Member, Member Organization, or
Associated Person, New Rule 9216(b) does not provide a similar process.
Under New Rule 9216(b)(1) and like the comparable rules of BX and
Nasdaq, the Department of Enforcement or Department of Market
Regulation may prepare and provide an MRVP letter to a Member, Member
Organization, or Associated Person for its signature. Unlike the BX and
Nasdaq rules, the Exchange is also vesting the Phlx Regulation
Department with the same authority given to the Department of
Enforcement and Department of Market Regulation to administer the MRVP
letter process.\55\ The Exchange notes that a Member, Member
Organization, or Associated Person is not obligated to agree to the
terms of an MRVP fine or submit an MRVP letter for approval. The
Exchange will issue an MRVP letter for execution by the Member, Member
Organization, or Associated Person,\56\ and the executed letter must
thereafter be approved by the Exchange Review Council, Review
Subcommittee or the ODA.\57\ If the terms are not accepted, then the

Exchange or FINRA on behalf of the Exchange may pursue formal
disciplinary proceedings.\58\ As a consequence, under the New Rules
there is no ability for a fine to be reversed, modified or affirmed,
prior to formal disciplinary proceedings. The Exchange notes that this
is consistent with the processes used by BX, Nasdaq, and FINRA.
---------------------------------------------------------------------------

    \55\ The Phlx Regulation Department would prepare MRVP letters
(and violation letters as discussed below) when it is the body that
investigated the violation. This would occur commonly with
violations of floor-based Advices. Options Exchange Officials are
considered members of the Phlx Regulation Department, as are
Exchange Staff when acting pursuant to the Advices; thus, Options
Exchange Official and Exchange Staff rulings are considered action
of the Phlx Regulation Department.
    \56\ New Rule 9216(b)(1)(A).
    \57\ New Rule 9216(b)(1)(C). The Exchange notes that, as is the
case with BX and Nasdaq Rules 9216(b), a letter issued under New
Rule 9216(b) is considered an action of the Review Council; however,
the Review Subcommittee of the Review Council or ODA may accept such
a letter on behalf of the Review Council by delegated authority. See
New Rules 9216(b)(1)(A) and (C), and New Rules 9216(b)(2)(A) and
(C).
    \58\ New Rule 9216(b)(1)(D).
---------------------------------------------------------------------------

    The Exchange will follow the same process for violations of the
Advices not included in the MRVP.\59\ Specifically, the Exchange is
proposing to adopt New Rule 9216(b)(2) to address the Exchange's
authority to issue fines for violation of the Advices, other than
violation of the Order and Decorum regulations, that exceed $2,500 (and
are thus not included in the MRVP), but are not greater than $10,000.
As discussed above, under Rule 970 the Exchange has authority to assess
a fine up to $10,000 under the Advices in lieu of pursuing formal
disciplinary proceedings. The Exchange is proposing to provide the same
procedures as applied to fines assessed for violations of regulations
subject to the MRVP. However, violations of the Advices that result in
a fine greater than $2,500 up to the maximum fine assessed under the
Advices of $10,000 are not eligible for an exception to the reporting
requirements of Rule 19d-1(c)(1) of the Act.\60\
---------------------------------------------------------------------------

    \59\ Instead of issuing an MRVP letter, letters issued by the
Exchange under New Rule 9216(b)(2) are termed ``violation letters.''
As a consequence of the two types of minor rule violation letters,
the Exchange is adopting New Rule 9143(e)(3) and New Rule
9144(c)(3), which discuss certain waivers in relation to ex parte
communications and separation of functions, to include violation
letters in addition to MRVP letters. As a consequence, these two new
rules differ from the analogous rules of BX and Nasdaq, neither of
which have [sic] violation letters.
    \60\ See 17 CFR 240.19d-1(c)(1); supra note 28.
---------------------------------------------------------------------------

    Last, the Exchange is proposing to adopt New Rule 9216(c) to
address the process followed for violations of the Order and Decorum
regulations under the Advices, none of which are [sic] included in the
MRVP. The fines assessed for violations of the Order and Decorum
Advices range from $50 to $10,000. Thus, fines assessed for violation
of Order and Decorum regulations of $1,000 or less may be exempt from
the reporting requirements of Rule 19d-1(c)(1) of the Exchange Act.\61\
The Exchange notes that, because BX and Nasdaq do not have trading
floors, their respective Rules 9216 do not address violations of Order
and Decorum. Accordingly, the Exchange is incorporating the provisions
of current Rule 60 into proposed New Rule 9216(c), largely unchanged.
The Exchange is retaining sole jurisdiction to review violations of
Order and Decorum under New Rule 9216(c) because the regulations arise
from the operation of the trading floor. Nevertheless, non-compliance
with the Order and Decorum regulations may result in referral for
formal disciplinary action, which would then proceed pursuant to the
New Rule 9000 Series.\62\
---------------------------------------------------------------------------

    \61\ Id.
    \62\ In cases where the Phlx Regulation Department determines
that formal disciplinary action is appropriate for a violation of
Order and Decorum, it would provide the recommendation to the ODA
directly, or may provide it to the Department of Enforcement or
Department of Market Regulation to manage the ODA review process.
See, e.g., New Rule 9216(c). The Exchange notes that Phlx Regulation
Department may provide the recommendation to the ODA directly, or
may provide it to the Department of Enforcement or Department of
Market Regulation to manage the ODA review process for each of the
processes under New Rule 9216(a), (b) and (c). As discussed above,
both Options Exchange Officials and Exchange Staff are considered
members of the Phlx Regulation Department. Supra note 55.
---------------------------------------------------------------------------

Disciplinary Process
    With respect to the formal disciplinary process, Phlx is retiring
the BCC and its related processes and adopting new policy and
disciplinary processes that are derived from those of BX and Nasdaq.
Phlx and FINRA amended the RSA to include the processes formerly
conducted by the BCC and Hearing Panels. As such, FINRA will now not
only investigate possible violation of Phlx rules and federal
securities laws and recommend action against Members, Member
Organizations, and Associated Persons, but FINRA will also adjudicate
matters pursuant to the Exchange's new rules.\63\ In this regard, the
case authorization and adjudicatory functions of the BCC and current
Hearing Panels will be administered by FINRA's ODA and Office of
Hearing Officers (``OHO''), respectively.
---------------------------------------------------------------------------

    \63\ In certain instances, as set forth in proposed New Rule
9211(a)(1), Phlx Regulation will retain discretion to investigate
potentially violative conduct itself and recommend a resolution to
FINRA. In this respect, New Rule 9211(a)(1) will differ from the
corresponding provisions of the BX and Nasdaq Rules.
---------------------------------------------------------------------------

    The ODA is an office within FINRA, independent of the FINRA
enforcement function and not involved in investigating or litigating
cases.\64\ Similar to the BCC, the ODA reviews each proposed complaint
to determine the legal and evidentiary sufficiency of proposed charges
and settlements.\65\ Like matters presented to the BCC for its
determination of whether to initiate charges,\66\ a recommendation
proposed by FINRA staff or the Phlx Regulation Department as proposed
herein in a matter involving formal disciplinary action cannot proceed
without approval by the ODA.\67\ If a complaint is authorized by the
ODA, then FINRA's Department of Enforcement or the Department of Market
Regulation or the Phlx Regulation Department as proposed herein \68\
must issue the complaint, which is filed with the OHO.\69\
---------------------------------------------------------------------------

    \64\ Supra note 32 at 4.
    \65\ Id. The ODA also reviews and accepts uncontested offers of
settlement for FINRA matters (FINRA Rule 9270(e)(2)), and for BX and
Nasdaq matters pursuant to their respective Rules 9270(e)(2). The
ODA also has sole authority to accept or reject uncontested offers
of settlement involving affiliates of BX and Nasdaq pursuant to
their respective Rules 9270(e). As a practical matter, FINRA has
informed the Exchange that the ODA reviews nearly all uncontested
offers of settlement for possible acceptance, however, the ODAs
authority to reject uncontested offers of settlement is limited to
those involving affiliates of the Exchange. Accordingly, the
Exchange is proposing to make it clear in New Rule 9270(e) and
subparagraph (2) thereunder that the ODA may accept an offer of
settlement and order of acceptance or refer them to the Exchange
Review Council, and it may also reject uncontested offers of
settlement in matters involving an affiliate of the Exchange
pursuant to New Rule 9270(e).
    \66\ See Rule 960.2(f).
    \67\ Supra note 32 at 4; see also New Rule 9211(a).
    \68\ In addition to retaining discretion to investigate
potentially violative conduct and recommending a resolution to
FINRA, the Phlx Regulation Department is also retaining discretion
to prosecute matters as a party before Hearing Panels. As a
consequence, the Exchange has included reference to the Phlx
Regulation Department in the New Rule 9200, 9300 and 9800 Series
whereas the analogous rules of BX and Nasdaq do not include
references to their respective Regulation Departments. Likewise, the
Exchange is proposing to include the Phlx Regulation Department in
the definition of ``Party'' under proposed New Rule 9120(z) for
purposes of the New Rule 9200, 9300 and 9800 Series. The Exchange is
also including the New Rule 9400 Series as covered by the term
``Party.'' Although, omitted from the related definitions of
``Party'' under the BX, Nasdaq and FINRA rules, the Exchange
believes that it is appropriate to include the New Rule 9400 Series
because it concerns expedited client suspensions whereby the Phlx
Regulation Department, Department of Enforcement, or the Department
of Market Regulation at the direction of the CRO or another senior
officer, may initiate expedited suspension proceedings with respect
to alleged violations of Rule 774. The New Rule 9400 Series includes
a hearings process in which the Phlx Regulation Department,
Department of Enforcement, or the Department of Market Regulation
and the Member, Member Organization or Associated Person subject to
expedited suspension are considered Parties to the matter. The
Exchange notes that, although the BX and Nasdaq rules do not include
the Department of Enforcement or the Department of Market
Regulation, nor do they mention FINRA, it believes that including
FINRA and its departments in proposed New Rule 9400 Series is
appropriate because they may be involved in the initiation of such a
matter for BX and Nasdaq currently. Thus, the proposed addition is a
clarifying change. As such, the Exchange believes that including the
New Rule 9400 Series under the definition ``Party'' is appropriate.
    \69\ See New Rule 9212(a)(1).
---------------------------------------------------------------------------

    The OHO, like the ODA, is an independent office within FINRA not

involved in investigating or litigating cases. The OHO is responsible
for the administration of the hearing process. Under the new process,
hearings will be held before a Hearing Officer and two Panelists, with
limited exception.\70\ Panelists are selected by the Chief Hearing
Officer and must be a person who: (i) Previously served on the Exchange
Review Council; (ii) previously served on a disciplinary subcommittee
of the Exchange Review Council, including a Subcommittee, an Extended
Proceeding Committee, or their predecessor subcommittees; (iii)
previously served as a Director, or as a Governor of the Exchange prior
to its acquisition by Nasdaq, Inc., but does not serve currently in
that position; or (iv) is a FINRA Panelist approved by the Board at
least annually, including a member of FINRA's Market Regulation
Committee or who previously served on the Market Regulation Committee
not earlier than four years before the date the complaint was served
upon the Respondent who was the first served Respondent in the
disciplinary proceeding for which the Hearing Panel or the Extended
Hearing Panel is being appointed, or from other sources the Board deems
appropriate given the responsibilities of Panelists.\71\
---------------------------------------------------------------------------

    \70\ New Rule 9231(b). As noted in the New Rule, there are
certain limited circumstances whereby a hearing may proceed without
the participation of a Hearing Officer or two Panelists, such as
when Hearing Officer becomes incapacitated, or otherwise is unable
to continue service after being appointed, and the replacement
Hearing Officer determines to allow the Panelist to resolve the
matter without his or her participation. See New Rule 9231(e)(1).
See also New Rule 9234(a), (c), (d), and (e).
    \71\ New Rule 9231(b).
---------------------------------------------------------------------------

    Upon the filing of a complaint, the respondent is afforded time to
reply and request a hearing.\72\ The hearing process begins at this
juncture, unless the respondent waives a hearing,\73\ and the Hearing
Officer, Hearing Panel or, if applicable, the Extended Hearing
Panel,\74\ does not order a hearing on his or her own motion.\75\
Should a hearing be waived and the Hearing Officer or Hearing Panel
declines [sic] to hold a hearing, the matter may be considered by the
Hearing Panel on the record, as defined in New Rule 9267.\76\ Should
the hearing process proceed, it is governed by the New Rule 9200
Series. The hearing process concludes with either all of the causes of
action in the matter summarily disposed of on motion,\77\ acceptance of
an offer of settlement,\78\ or the issuance of a decision by the
Hearing Panel.\79\
---------------------------------------------------------------------------

    \72\ See New Rules 9215 and 9221.
    \73\ Under New Rule 9221(a), a respondent may waive its right to
a hearing if it fails to request a hearing in its answer.
    \74\ Under New Rules 9231(c) and 9331(a)(2), the Chief Hearing
Officer and Exchange Review Council or Review Subcommittee,
respectively, may determine that a matter be designated as an
Extended Hearing or Extended Proceeding, and that such matter be
considered by an Extended Hearing Panel or Extended Proceeding
Committee. Under New Rule 9231(c), in making its determination, the
Chief Hearing Officer will consider complexity of the issues
involved, the probable length of the hearing, or other factors that
the Chief Hearing Officer deems material. Under New Rule 9331(a)(2),
in making its determination, the Exchange Review Council or the
Review Subcommittee will consider the volume and complexity of the
certified record, or other factors that the Exchange Review Council
or the Review Subcommittee deems material. For purposes of this
filing, references to Hearing Panels and Hearing Panelists include
references to Extended Hearing Panels and Extended Hearing
Panelists, and references to Subcommittees and Subcommittee members
include references to Extended Proceeding Committees and Extended
Proceeding Committee members, unless otherwise noted.
    \75\ See New Rule 9120 for definitions of these terms.
    \76\ New Rule 9221(c).
    \77\ After a hearing on the merits has commenced, either the
Respondent or the Phlx Regulation Department, the Department of
Enforcement or the Department of Market Regulation may make a motion
for summary disposition of any or all of the causes of action in the
complaint with respect to that Respondent or defenses raised in that
Respondent's answer only with leave of the Hearing Officer. See New
Rule 9264.
    \78\ New Rule 9270.
    \79\ New Rule 9268.
---------------------------------------------------------------------------

The Exchange Review Council
    The Exchange is eliminating two committees under the By-Laws and
adopting the Exchange Review Council in their stead. The Exchange
Review Council will have, in all material respects, the same broad
authority as the BX and Nasdaq Review Councils.\80\ As such, the new
Exchange Review Council will be charged with ensuring the consistent
and fair application of the rules pertaining to discipline of Members,
Member Organizations, and Associated Persons, and considering and
making recommendations to the Board on policy and rule changes relating
to business and sales practices of Members, Member Organizations, and
Associated Persons and enforcement policies, including policies with
respect to fines and other sanctions.\81\ The policy function of the
Exchange Review Council is similar to that of the BCC, yet broader in
scope.\82\ The Exchange is also eliminating the Market Operations
Review Committee, whose duties will be the responsibility of the
Exchange Review Council, which is discussed in greater detail below.
---------------------------------------------------------------------------

    \80\ The Review Councils of BX and Nasdaq preside over matters
involving appeals of their respective Rules 4612 (Registration as an
Equities/Nasdaq Market Maker), 4619 (Withdrawal of Quotations), 4620
(Voluntary Termination of Registration), and 11890 (Clearly
Erroneous Transactions). See Rules 0120(m) of BX and Nasdaq.
Moreover, the Nasdaq Review Council presides over matters involving
appeals of Nasdaq Options Rule Chapter V Section 6 (Obvious and
Catastrophic Errors). See Nasdaq Rule 0120(m). The Exchange Review
Council presides over matters involving, in part, appeals of Rules
124 (Disputes-Options), 1092 (Obvious Errors and Catastrophic
Errors), 3219 (Withdrawal of Quotations), 3220 (Voluntary
Termination of Registration), and 3312 (Clearly Erroneous
Transactions). See New Rule 1(k). BX and Nasdaq Rules 4619, 4620 and
11890 are materially identical to Exchange Rules 3219, 3220 and
3312, respectively. Nasdaq Options Rule Chapter V, Section 6, and
Exchange Rule 1092 both address obvious and catastrophic errors on
their respective options markets. Last, Exchange Rule 124 is unique
to Phlx as it addresses disputes occurring on and relating to the
Exchange's trading floor. Neither BX nor Nasdaq have [sic] a
physical trading floor.
    \81\ See New Phlx By-Law, Article V, Sec. 5-3(b)(i). The
Exchange Review Council also may consider and make recommendations
to the Board on policy and rule changes relating to business and
sales practices of members, member organizations and associated
persons and enforcement policies, including policies with respect to
fines and other sanctions, may advise the Board on regulatory
proposals and industry initiatives relating to quotations,
execution, trade reporting, and trading practices and may advise the
Board in its administration of programs and systems for the
surveillance and enforcement of rules governing member, member
organization and associated person conduct and trading activities in
the national securities exchange operated by the Company. Id. The
same provisions of the BX and Nasdaq by-laws only apply this role as
it relates to their respective members. The Exchange notes that
programs and systems for the surveillance and enforcement of rules
governing member conduct and trading activities, as described in the
BX and Nasdaq by-laws, implicitly apply to such conduct and activity
of associated persons. Thus, the proposed addition of Members and
Associated Persons to this provision of New Phlx By-Law, Article V,
Sec. 5-3(b)(i), is done for clarification purposes.
    \82\ Specifically, the proposed amended By-Laws provide that the
Exchange Review Council may be authorized to: Act for the Board with
respect to appeals or reviews of disciplinary proceedings; act for
the Board with respect to statutory disqualification proceedings;
act for the Board with respect to membership proceedings; review
offers of settlement, letters of acceptance, waiver and consent, and
minor rule violation plan letters; exercise exemptive authority;
consider and make recommendations to the Board on policy and rule
changes relating to business and sales practices of Members, Member
Organizations and Associated Persons and enforcement policies,
including policies with respect to fines and other sanctions;
exercise other such powers and duties as the Board deems
appropriate. See New Phlx By-Law, Article V, Sec. 5-3(b)(i).
---------------------------------------------------------------------------

    In its adjudicatory role, the Exchange Review Council will serve as
an appellate body, with jurisdiction to: (i) Review decisions issued in
disciplinary proceedings,\83\ statutory disqualification proceedings,
or membership proceedings; \84\ (ii) review an offer of settlement, a
letter of acceptance, waiver, and consent, and a minor rule violation
plan letter; \85\ (iii) review the exercise of exemptive authority;
\86\ and (iv) review such other proceedings or

actions as may be authorized by the Exchange rules.\87\ As such, the
Exchange Review Council will perform a role identical to that of the
Review Councils of BX and Nasdaq, and FINRA's NAC. The NAC reviews
decisions rendered by Hearing Panels in FINRA disciplinary proceedings
and Member Regulation Department decisions rendered in membership
proceedings involving FINRA members, among other things.\88\
---------------------------------------------------------------------------

    \83\ See New Rule 9300 Series.
    \84\ See New Rule 9520 Series.
    \85\ See New Rule 9216.
    \86\ New Rule 9600 Series.
    \87\ New Phlx By-Law, Article V, Sec. 5-3(b)(i).
    \88\ FINRA Regulation, Inc. By-Law, Article V, Sec. 5.1.
---------------------------------------------------------------------------

    Likewise, the Exchange Review Council will review decisions issued
by Hearing Panels concerning disciplinary matters and Membership
Department decisions in membership proceedings concerning Members,
Member Organizations, [sic] Associated Persons.\89\ Hearing Panel
decisions may be appealed to the Exchange Review Council by either the
respondent or the Phlx Regulation Department, the Department of
Enforcement or the Department of Market Regulation.\90\ Appeals must be
made in writing within 25 days after service of the decision.\91\
---------------------------------------------------------------------------

    \89\ New Phlx By-Law, Article V, Sec. 5-3(b)(i).
    \90\ New Rule 9311(a).
    \91\ Id.
---------------------------------------------------------------------------

    The Exchange Review Council may also call a Hearing Panel decision
for review on its own motion, except that default decisions issued
pursuant to New Rule 9269 shall be subject to a call for review by the
CRO and a decision with respect to a Member, Member Organization, or
Associated Person that is an affiliate of the Exchange within the
meaning of Rule 985 may not be called for review.\92\ Decisions of the
Exchange Review Council are final unless called for review by the
Board.\93\ This process is consistent with the current process by which
the BX and Nasdaq Boards may call for review a decision made by their
Review Councils arising from their respective disciplinary and
membership rules, as well as the process followed by the FINRA Board of
Directors in its review of such decisions issued by the NAC.\94\
---------------------------------------------------------------------------

    \92\ New Rule 9312.
    \93\ New Rules 923(a)(x)(C), 9349(c), and 9351.
    \94\ See Nasdaq Rules 1016, 9349(c) and 9351, BX Rules 1016,
9349(c) and 9351, and FINRA Rules 1016, 9349(c) and 9351.
---------------------------------------------------------------------------

    The Exchange notes that both Nasdaq and BX eliminated their
respective Market Operations Review Committees and transferred those
committees' responsibilities to their Review Councils.\95\ Accordingly,
the Exchange is proposing to eliminate its Market Operations Review
Committee (``MORC'') and include its responsibilities within those of
the new Exchange Review Council. The MORC is responsible for
considering appeals of determinations made pursuant to Exchange Rules
124, 1092, 3219, 3220, and 3312. Decisions of the MORC in these matters
are not appealable,\96\ however, determinations of the MORC with
respect to Rule 3312 may be arbitrated.\97\ The By-Laws require that
the MORC be comprised of a number of Member Representative members that
is equal to at least 20 percent of the total number of members of the
MORC.\98\ Moreover, the By-Laws require that no more than 50 percent of
the members of the MORC be engaged in market making activity or
employed by a Member whose revenues from market making exceed 10
percent of its total revenues.\99\ The By-Laws do not provide a
description of what is a quorum for purposes of holding a meeting of
the MORC, however, the committee has adopted a three member quorum
requirement.\100\
---------------------------------------------------------------------------

    \95\ See Securities Exchange Act Release No. 72151 (May 12,
2014), 79 FR 28571 (May 16, 2014) (SR-NASDAQ-2014-048) and
Securities Exchange Act Release No. 72149 (May 12, 2014), 79 FR
28564 (May 16, 2014) (SR-BX-2014-024).
    \96\ Unlike disciplinary proceedings under the New Rule 9000
Series, speedy resolution of matters under the MORC's jurisdiction
is important to ensuring fair and equitable treatment of Members.
    \97\ See Rule 3312(c)(3).
    \98\ Phlx By-Law, Article V, Sec. 5-3(d).
    \99\ Id.
    \100\ Rule 3312(c)(2) expressly requires a panel to consist of
three or more members of the MORC, provided that no more than 50
percent of the members of any panel are directly engaged in market
making activity or employed by a Member firm whose revenues from
market making activity exceed ten percent of its total revenues. The
rule also states that in no case shall a MORC Panel include a person
affiliated with a party to the trade in question. The amended
Exchange By-Laws define an Exchange Review Council quorum for the
transaction of business with regard to an appeal of proceedings
involving Exchange Rules 124, 1092, 3219, 3320, and 3312 (currently
under the MORC's jurisdiction) [sic] shall consist of three members
of the Exchange Review Council.
---------------------------------------------------------------------------

Structure of the New Rules
    The Exchange is adopting a New Rule 8000 and 9000 Series, which are
modeled on the BX and Nasdaq Rules, and which replace the current Rule
960 Series.
    The New Rule 8000 Series is titled ``Investigations and
Sanctions,'' and it governs the regulation of Member Organizations,
Members and Associated Persons, investigations and sanctions. With
respect to regulation of Member Organizations, Members and Associated
Persons, the New Rule 8000 Series generally describes the regulatory
contract between the Exchange and FINRA,\101\ and requires Member
Organizations to keep and maintain current paper or electronic copies
of both the FINRA and Exchange manuals.\102\
---------------------------------------------------------------------------

    \101\ New Rule 8001.
    \102\ New Rule 8110.
---------------------------------------------------------------------------

    The New Rule 8200 Series concerns the investigative process. It
grants the Phlx Regulation Department, including FINRA staff, the right
to require Members, Member Organizations, Associated Persons and
persons subject to the Exchange's jurisdiction to provide information
and to testify under oath,\103\ and to permit inspections of their
books and records, and accounts with respect to any matter involved in
the investigation, complaint, examination, or proceeding.\104\ The New
Rule 8200 Series also extends this authority to investigations
conducted by a domestic or foreign SRO, association, securities or
contract market, or regulator of such markets with which the Exchange
has entered into an agreement providing for the exchange of information
and other forms of material assistance solely for market surveillance,
investigative, enforcement, or other regulatory purposes.\105\ The New
Rule 8211 Series imposes a new obligation on member organizations to
submit certain trade data \106\ to the Phlx Regulation Department,
including FINRA staff, in such an automated format as the New Rule
prescribes. Pursuant to the New Rule 9600 Series, the Exchange may
exempt a Member Organization from this requirement for good cause
shown.
---------------------------------------------------------------------------

    \103\ New Rule 8210(a)(1).
    \104\ New Rule 8210(a)(2).
    \105\ New Rule 8210(b).
    \106\ The data required is based on whether the transaction was
proprietary or effected for a customer, however, the Phlx Regulatory
Department also may require a member organization to submit other
information in an automated format. See New Rule 8211(b)-(d).
---------------------------------------------------------------------------

    The New Rule 8300 Series describes the nature and effect of
sanctions the Exchange may impose on a Member, Member Organization or
Associated Person after compliance with the New Rule 9000 Series,
including the circumstances under which the Exchange will release
information concerning a disciplinary matter.\107\ The New Rule 8300
Series also provides the requirements concerning payment of fines,
other monetary sanctions, and the consequences of non-payment.\108\
---------------------------------------------------------------------------

    \107\ New IM-8310-3.
    \108\ See New Rule 8320. New Rule 8330 provides that a Member,
Member Organization or Associated Person that is disciplined
pursuant to New Rule 8310 shall bear such costs of the proceeding,
as the Adjudicator deems fair and appropriate under the
circumstances.
---------------------------------------------------------------------------

    The New Rule 9000 Series is titled ``Code of Procedure.'' It
governs proceedings for: disciplining Members, Member Organizations,
and Associated

Persons; regulating Member Organizations experiencing financial or
operational difficulties; summary or non-summary suspensions,
cancellations, bars, prohibitions, or limitations; and obtaining relief
from the eligibility requirements of the Exchange By-Laws and the
Exchange Rules. The New Rule 9000 Series generally describes the RSA
between the Exchange and FINRA.\109\
---------------------------------------------------------------------------

    \109\ See New Rule 9001.
---------------------------------------------------------------------------

    The New Rule 9100 Series describes the application and purpose of
the New Rule 9000 Series, including the types of proceedings covered by
the New Rules,\110\ the rights, duties, and obligations of Members,
Member Organizations and Associated Persons,\111\ jurisdiction,\112\
defined terms,\113\ and rules concerning the filing and service of
papers.\114\ The New Rule 9100 Series also provides rules concerning
proceedings, including appearance and practice,\115\ withdrawal by
attorney or representative,\116\ ex parte communications,\117\
separation of functions among Adjudicators and Interested Staff,\118\
rules of evidence and official notice,\119\ motions,\120\ rulings on
procedural matters,\121\ and interlocutory review.\122\
---------------------------------------------------------------------------

    \110\ See New Rule 9110.
    \111\ Id.
    \112\ Id.
    \113\ See New Rule 9120. The Exchange notes that it is adopting
a more comprehensive definition of ``Interested Staff'' under New
Rule 9120(t) than the comparable definitions under BX and Nasdaq.
Specifically, the Exchange is adopting new text that accounts for
the role of the Phlx Regulation Department, including the
involvement of employees thereof. Thus, the proposed new definition
will include all individuals that should be considered as
``Interested Staff'' for purposes of the New Rule 9000 Series.
    \114\ See New Rules 9131-9138.
    \115\ See New Rule 9141.
    \116\ See New Rule 9142.
    \117\ See New Rule 9143.
    \118\ See New Rule 9144.
    \119\ See New Rule 9145.
    \120\ See New Rule 9146.
    \121\ See New Rule 9147.
    \122\ See New Rule 9148.
---------------------------------------------------------------------------

    The New Rule 9200 Series sets forth the disciplinary process,
including rules concerning the authorization and issuance of a
complaint,\123\ the briefing and hearings process,\124\ issuance of a
decision,\125\ the settlement process,\126\ and sanctions for
contemptuous conduct.\127\ The New Rule 9200 Series also includes rules
concerning adjudication that imposes [sic] a temporary or permanent
cease-and-desist order.\128\
---------------------------------------------------------------------------

    \123\ See New Rules 9211 and 9212.
    \124\ See New Rules 9215-9267.
    \125\ See New Rules 9268 and 9269.
    \126\ See New Rule 9270.
    \127\ See New Rule 9280.
    \128\ See New Rules 9290 and 9291.
---------------------------------------------------------------------------

    The New Rule 9300 Series sets forth the process for review of
disciplinary proceedings by the Exchange Review Council and the
Board.\129\ The New Rule 9300 Series also describes the role of Counsel
to the Exchange Review Council, review of Counsel decisions,\130\ and
the time when sanctions become effective,\131\ including when a
Respondent appeals a decision to the Securities and Exchange
Commission.\132\
---------------------------------------------------------------------------

    \129\ The New Rules include provisions for the appeal of a
matter to the Exchange Review Council (New Rule 9311), review
proceedings initiated by the Exchange Review Council (New Rule
9312), and discretionary review by the Board (New Rule 9350 Series).
    \130\ See New Rule 9313.
    \131\ See New Rule 9360.
    \132\ See New Rule 9370.
---------------------------------------------------------------------------

    The New Rule 9400 Series provides the process for expedited client
suspension proceedings, involving alleged violations of New Rule 774
(Disruptive Quoting and Trading Activity Prohibited).
    The New Rule 9500 Series provides the process for proceedings other
than formal disciplinary proceedings. The New Rule 9520 Series sets
forth procedures for a person to become or remain associated with a
Member Organization, notwithstanding the existence of a statutory
disqualification, and provides the process for a Member, Member
Organization, or Associated Person to obtain relief from the
eligibility or qualification requirements. The New Rule 9550 Series
\133\ provides the process followed for violations of Phlx rules
subject to expedited proceedings, including: Failures to provide
information or keep information current (New Rule 9552); failures to
pay Exchange dues, fees and other charges (New Rule 9553); failures to
comply with an arbitration award or related settlement or an order of
restitution or settlement providing for restitution (New Rule 9554);
failures to meet the eligibility or qualification standards or
prerequisites for access to services (New Rule 9555); failures to
comply with temporary and permanent cease-and-desist orders (New Rule
9556); procedures for regulating activities under Rule 703 regarding a
Member Organization experiencing financial or operational difficulties
(New Rule 9557); \134\ summary proceedings for actions authorized by
Section 6(d)(3) of the Act (New Rule 9558); and the hearing procedures
for expedited proceedings under the New Rule 9550 Series.
---------------------------------------------------------------------------

    \133\ The Exchange is proposing to include both the Phlx
Regulation Department and FINRA as authorized to provide notice
under the various expedited proceedings Rules. The Exchange notes
that the analogous BX and Nasdaq expedited proceedings Rules state
that notice is to be provided by those exchanges' respective
Regulation Department staff only. See, e.g., BX and Nasdaq Rules
9553(b). FINRA, acting on behalf of the Exchange, is authorized to
provide such notice under BX and Nasdaq rules, notwithstanding the
omission in the rule text. Thus, including both Phlx Regulation
Department staff as well as FINRA under the service of notice
provisions of the expedited hearings rules will avoid any confusion
caused by the omissions in the BX and Nasdaq rule text, and will
make it clear that such notices may be issued by either the Exchange
or FINRA. Similarly, the Exchange is proposing to adopt consistent
notification requirements under New Rule 9550 Series. BX and Nasdaq
Rules 9555(g) and 9556(g) provide a process by which a member or
person subject to a limitation or suspension, respectively, may seek
termination of the limitation or suspension. Under those rules, a
written request for such a termination must be filed with ``the head
of the Exchange department or office that issued the notice or, if
another Exchange department or office is named as the party handling
the matter on behalf of the issuing department or office, with the
head of the Exchange department or office that is so designated. The
appropriate head of the department or office may grant relief for
good cause shown.'' By contrast, BX and Nasdaq Rules 9552(f),
9553(g), 9554(g), and 9558(g) speak of filing a request for
termination a limitation, prohibition or suspension, as applicable,
with ``the head of the FINRA department or office that issued the
notice or, if another FINRA department or office is named as the
party handling the matter on behalf of the issuing department or
office, with the head of the FINRA department or office that is so
designated. The appropriate head of the department or office may
grant relief for good cause shown.'' The Exchange is proposing to
adopt a consistent notification requirement under the respective New
Rule 9550 Series by requiring notice to the ``Exchange department or
FINRA department.'' The Exchange notes that, in practice, a FINRA
department may be included as the proper department for notice based
on the respective RSAs of BX, Nasdaq and the Exchange. See BX Rule
9001, Nasdaq Rule 9001, and proposed New Rule 9001.
    \134\ Currently, the Exchange has emergency authority to suspend
a member organization pursuant to Phlx By-Law, Article VII, Sec. 7-
5(b), which provides ``The Board of Directors, or such person or
persons or committee as may be designated by the Board of Directors,
in the event of an emergency or extraordinary market conditions,
shall have the authority to take any action regarding . . . the
operation of any or all offices or systems of Members and Member
Organizations, if, in the opinion of the Board of Directors or the
person or persons hereby designated, such action is necessary or
appropriate for the protection of investors or the public interest
or for the orderly operation of the marketplace or the system.'' The
Exchange does not have an analogous rule that relates to this
authority. As such, New Rule 9557 provides a more specific
description of the exercise of this authority in instances where a
Member Organization is experiencing financial or operational
difficulties, including notice requirements, a hearing process, and
a process for the removal or reduction of a requirement or
restriction.
---------------------------------------------------------------------------

    The New Rule 9600 Series provides procedures followed when a Member
Organization seeks exemptive relief pursuant to any Exchange Rule that
references the New Rule 9600 Series.

    The New Rule 9800 Series provides the process followed by the
Exchange in administering temporary cease-and-desist orders, including
the initiation of proceeding to issue such an order,\135\ service
thereof,\136\ subsequent review of the order by the Hearing Panel,\137\
the consequences of non-compliance,\138\ and the process for seeking
Commission review of the order.\139\
---------------------------------------------------------------------------

    \135\ New Rule 9810.
    \136\ Id.
    \137\ New Rule 9850.
    \138\ New Rule 9860.
    \139\ New Rule 9870.
---------------------------------------------------------------------------

Specific Rule Changes
    As discussed above, the Exchange is amending its By-Laws, deleting
the Rule 960 Series, and adopting the New Rule 8000 and 9000 Series. As
a consequence of these changes, the Exchange has amended or deleted
other Rules, which are either not needed, duplicated elsewhere, or
referenced the deleted rules or the BCC. Below is a description of the
individual changes the Exchange is making to its Rules. The
descriptions describe the current Rule, where the rule resides in the
New Rules, and any differences between the current and New Rule.
    [ssquf] Phlx is proposing to amend its By-Laws by deleting Article
V, Section 5-3(b), ``The Board shall appoint a Business Conduct
Committee'' and replace it with a new Section 5-3(b) titled ``The Board
shall appoint an Exchange Review Council.'' Current Section 5-3(b)
describes the jurisdiction and composition requirements of the BCC. New
Section 5-3(b), which is copied from Article VII of the BX By-Laws and
Article VI of the Nasdaq By-Laws, describes the jurisdiction and
composition requirements of the Exchange Review Council. The new rule
text of Section 5-3(b) materially differs from Article VII of the BX
By-Laws and Article VI of the Nasdaq By-Laws in that new Phlx By-Law
expressly provides that the Exchange Review Council may advise the
Board in its administration of programs and systems for the
surveillance and enforcement of rules governing Member, Member
Organization and Associated Person conduct and trading activities in
the national securities exchange operated by Phlx. In contrast, the
related provisions of the BX and Nasdaq By-Laws only describe such an
advisory role with respect to their members. The Exchange believes that
BX and Nasdaq consider this Exchange Review Council advisory role to
their respective boards to implicitly extend to associated persons. The
Exchange also believes that this Exchange Review Council advisory role
should include both Member Organizations and their Associated Persons,
including Members. Consequently, the Exchange is expressly including
Members and Associated Persons in this provision. Otherwise, the new
rule text of Section 5-3(b) is identical in all material respects to
that of Article VII of the BX By-Laws and Article VI of the Nasdaq By-
Laws, differing in the By-Laws and rule numbers cited due to the
Exchange's different numbering conventions. The Exchange notes that the
majority of these Rules align with the comparable rules of BX and
Nasdaq (compare, e.g. Phlx Rule 3312 ``Clearly Erroneous Transactions''
with BX and Nasdaq Rules 11890 ``Clearly Erroneous Transactions'');
however, the Exchange includes Rule 124 ``Disputes-Options'' under the
Exchange Review Council's jurisdiction, which is currently under the
jurisdiction of the MORC as discussed above and which neither BX nor
Nasdaq have [sic]. In addition, BX and Nasdaq have a Rule 4612, which
concerns registration as a market maker and which the Exchange does not
have an analogue. The Exchange notes that appeals of determinations
made pursuant to BX and Nasdaq Rules 4612 were reviewed by their
respective MORCs prior to consolidation into their Review Councils.
Similarly, appeals of determinations made pursuant to Exchange Rule 124
are currently reviewed by the Exchange's MORC. The Exchange notes that
Section 5-3(b)(iv) of the amended By-Laws provides that each Exchange
Review Council member shall hold office for a term of three years or
until a successor is duly appointed and qualified, except in the event
of earlier termination from office by reason of death, resignation,
removal, disqualification, or other reason. Further, Section 5-3(b)(iv)
provides that the Exchange Review Council shall be divided into three
classes. To simplify the process of appointing Exchange Review Council
members, the Exchange is proposing to use the members of the BX and
Nasdaq Review Councils as the members of the Exchange Review Council,
with the same terms and classes as those members have on the BX Review
Council. The Exchange notes that this will ease the administration and
recruitment of members by harmonizing their terms, and thus when new
members must be approved by the exchange boards.
    [ssquf] Phlx is proposing to amend its By-Laws by deleting Article
V, Section 5-3(d), and holding it in reserve. Section 5-3(d)
establishes the MORC and its functions, which have been incorporated
into new Section 5-3(b).
    [ssquf] Existing Rule 1 provides definitions for purposes of the
rules of the Board, and rules and regulations of standing committees of
the Exchange.
     The Exchange is amending the definition of the terms
``Associated Person'' and ``Person Associated with a Member
Organization'' to include, for purposes of the New Rule 8000 and 9000
Series, an amended definition of what currently resides at Rule 960.1,
Interpretation and Policies .01. The Exchange is proposing to replace
use of the term ``associated person of a member,'' which as described
below is incorrectly used at Rule 960.1, Interpretation and Policies
.01 since there are no persons associated with a Member, with the
defined term ``associated person.'' The Exchange is also proposing to
make it clear that, for purposes of the 8000 and 9000 Rule Series, the
term ``person associated with a member organization'' or ``associated
person'' shall have the same meaning as the term ``persons associated
with a member'' or ``associated person of a member,'' respectively, as
provided in Section 3(a)(21) of the Exchange Act. The Exchange notes
that the proposed changes to the defined terms does [sic] not change
how they are presently applied.
     The Exchange is defining the new term ``Code of
Procedure'' as the procedural rules contained in the New Rule 9000
Series.
     The Exchange is amending the definition of the term
``Commission'' to include the term ``SEC.''
     The Exchange is defining the new term ``Exchange Review
Council,'' which is copied from BX and Nasdaq Rules 0120(m). The
Exchange notes that item (6) of the new definition differs from the BX
and Nasdaq items (6) in that it cites the analogous Rules of the
Exchange, which have different rule numbers. In addition, and as noted
above in the By-Laws discussion, the rules for which the Exchange
Review Council is the appellate body, which are listed under item (6)
of each of the three exchanges, derive from the responsibilities of the
former BX and Nasdaq MORCs that were incorporated into their Review
Councils, and such responsibilities of the Exchange's current MORC.
Accordingly, to the extent those rules differ, so do the citations
under the Exchange Review Council definitions of the three exchanges.
     The Exchange is amending the definition of ``Member'' to
add rule text that clarifies that a Member is a natural person and must
be a person associated

with a Member Organization, and, as such, any references to Exchange to
the rights or obligations of an Associated Person or person associated
with a Member Organization also includes a Member.
     The Exchange is eliminating references to the phase-in
period of Rule 611 of Regulation NMS under the definition of
``Protected Bid,'' since the phase-in period has since past. As a
consequence, the Exchange is also deleting definitions of ``Nasdaq
Global Market Security'' and ``Nasdaq Capital Market Security,'' which
were solely referenced under the deleted portions of the definition of
``Protected Bid.''
    [ssquf] Rule 50 concerns the consequences of a Member's, Member
Organization's, or Associated Person's failure to pay dues, fees, and
other charges. Phlx is replacing the Rule with New Rule 9553, which is
materially identical to the old Rule, except for the notice provisions
under Rule 50(b), which require that service of a notice of suspension,
cancellation or bar be done in accordance with Rule 960.6 (Summary
Disposition Proceedings). Rule 960.6(b) requires that notice and a copy
of a summary decision is provided to Respondents in accordance with
Rule 960.11. Rule 960.11, in turn, allows service on a Respondent or
Respondent's Counsel either personally or by deposit with the United
States Postal Service (postage pre-paid via registered or certified
mail), by courier service addressed to Respondent's Counsel or the
Respondent at his address (as it appears on the books and records of
the Exchange), or, upon mutual written consent of the parties, by
electronic delivery. By contrast, New Rule 9553(b) requires notice in
accordance with Rule 9134 (Methods of, Procedures for Service) or by
facsimile or email. Rule 9134 is generally consistent with current
requirements under Rule 50; however, Rule 9134 provides more
specificity on the source of the addresses that may be used for
service, types of allowable service by U.S. Postal Service, and when
service is complete.
    [ssquf] Rule 60 provides the process for assessing fines pursuant
to the Order and Decorum regulations under Section H of the Option
Floor Procedure Advices and Order & Decorum Regulations. The Order and
Decorum regulations provide fines assessed in lieu of formal
disciplinary proceedings for conduct relating to the administration of
order, decorum, health, safety and welfare on the Exchange. The
Exchange is proposing to adopt Rules 9216(c)(1) and (2) to address the
process for administering violations of the Order and Decorum
regulations under Section H of the Option Floor Procedure Advices.
     Rule 60(a)(i) provides an Options Exchange Official
authority to assess fines on Members, Member Organizations, and
Associated Persons for breaches of the Order and Decorum regulations.
In addition, the rule permits the Options Exchange Official to refer
the matter to the BCC, where it will proceed in accordance with the
Rule 960 Series. The Exchange is moving Rule 60(a)(i) to New Rule
9216(c)(1) with minor changes. Specifically, the Exchange is replacing
reference to the BCC with reference to the Department of Enforcement or
the Department of Market Regulation, which are the bodies responsible
for bringing formal disciplinary action under the BX and Nasdaq rules.
The Exchange is also providing that an Options Exchange Official, as a
representative of the Phlx Regulation Department, may instead request
authorization for the issuance of a complaint from the ODA
directly.\140\ In addition, the Exchange is replacing a reference to
its current disciplinary Rules 960.1--960.12 with reference to the New
Rule 8000 and 9000 Series.
---------------------------------------------------------------------------

    \140\ See notes 47 and 55, supra.
---------------------------------------------------------------------------

     Rule 60(a)(ii) provides Exchange staff authority to assess
fines on Members, Member Organizations, or persons associated with
Member Organizations for breaches of the Order and Decorum regulations
and is otherwise identical in all respects to Rule 60(a)(i), including
permitting Exchange staff to refer the matter to the BCC, where it will
proceed in accordance with the Rule 960 Series. The Exchange is moving
Rule 60(a)(ii) to New Rule 9216(c)(1), which combines Rules 60(a)(i)
and (ii), as modified by the minor changes described above. The
Exchange is also providing that Exchange staff, acting as a
representative of the Phlx Regulation Department, may instead request
authorization of a complaint from the ODA directly.\141\
---------------------------------------------------------------------------

    \141\ Id.
---------------------------------------------------------------------------

     Rule 60(b)(i) provides Options Exchange Officials and
officers of the Exchange authority exclude a Member or Associated
Person from the trading floor for breaches of Order and Decorum
regulations that occurred on the trading floor, or on the premises
immediately adjacent to the trading floor. In particular, Members and
Associated Persons are excluded if they pose an immediate threat to the
safety of persons or property, are seriously disrupting Exchange
operations, or are in possession of a firearm. Under the rule, Members
or Associated Persons so excluded may be excluded for a period of up to
five business days. The Exchange is moving the Rule to New Rule
9216(c)(2), with only a minor change to delete text that defines a
``Member'' as either a Member or a person associated with a Member
Organization. As described above, a Member must be a person associated
with a Member Organization; however, use of the term to refer to both
types of Associated Persons may be confusing. Thus, the Exchange is
instead including both terms individually.
     Rule 60(b)(ii) \142\ defines an ``officer of the
Exchange'' for purposes of Rule 60 to mean an officer who is a vice
president or higher. The Exchange is moving the rule unchanged to New
Rule 9216(c)(2)(A).
---------------------------------------------------------------------------

    \142\ The Exchange notes that Rule 60(c) was mistakenly placed
between Rules 60(b)(i) and (ii). See Securities Exchange Act Release
No. 61207 (December 18, 2009), 74 FR 69185 (December 30, 2009) (SR-
Phlx-2009-84).
---------------------------------------------------------------------------

     Rule 60(b)(iii) defines the ``premises immediately
adjacent to the trading floor'' to include: (1) All premises other than
the trading floor that are under Exchange control, and (2) premises in
the building where the Exchange maintains its principal office and
place of business, namely FMC Tower, 2929 Walnut Street, Philadelphia,
Pennsylvania. The Exchange is moving the rule unchanged to New Rule
9216(c)(2)(B).
     Rule 60(b)(iv) provides that exclusion from the floor may
not be the exclusive sanction for breaches of the Order and Decorum
regulations, which include, in addition to exclusion, a fine or
referral to the BCC, where it shall proceed in accordance with the Rule
960 Series. The Exchange is moving the Rule to New Rule 9216(c)(2)(C)
with minor changes. Specifically, the Exchange is replacing reference
to referring matters to the BCC with reference to the Department of
Enforcement or the Department of Market Regulation, which are the
appropriate bodies responsible for bringing formal disciplinary action
under the BX and Nasdaq rules. The Exchange is also providing that the
Phlx Regulation Department may instead request authorization of a
complaint from the ODA directly.\143\ In addition, the Exchange is
replacing references to its current disciplinary rules with the New
Rule 8000 and 9000 Series.
---------------------------------------------------------------------------

    \143\ See notes 47 and 55, supra.
---------------------------------------------------------------------------

     Rule 60(c) provides the process for Expedited Hearings for
Members and Associated Persons that are excluded for a period exceeding
forty-eight hours. Pursuant to the Rule, an expedited

hearing will be held before the Chair of the BCC or a member of the
Committee designated by the Chair within forty-eight business hours
after the Member's or Associated Person's exclusion from the trading
floor. The Rule further provides the required contents of the notice to
the Member or Associated Person and sets forth the Member's or
Associated Person's right to be represented by counsel. The Rule also
provides the hearing process, issues to be considered by the
adjudicator, and the timing and form of the determination. The Exchange
is moving the Rule to New Rule 9216(c)(2)(D) with minor changes.
Specifically, the Exchange is changing who is authorized to be an
Expedited Hearing Officer to either the Chair of the Exchange Review
Council or a member thereof. The Exchange believes that members of the
Exchange Review Council are best suited to be Expedited Hearings
panelist because of their expertise. Moreover, violations of Order and
Decorum rules are not appealable to the Exchange Review Council, thus
members thereof will not be conflicted in any subsequent appeal. The
Exchange is also adding clarifying text to New Rule 9216(c)(2)(E)(ii)
that describes in greater detail the exception to reporting provided by
Rule 19b-1(c).
     Rule 60, Commentary (a) provides the procedures to be
followed in cases where a pre-set fine of up to $10,000 is summarily
assessed. The Exchange is moving the Commentary under New Rule
9216(c)(1).
    [ssquf] Rule 60, Commentary (a).01 requires the notice of the fine
for breach of such regulations to be given by the issuance of a written
citation, served by Exchange staff. The commentary provides that the
cited party may accept or contest the written citation. The Exchange is
moving the Commentary unchanged to New Rule 9216(c)(1)(A).
    [ssquf] Rule 60, Commentary (a).02 provides the notice requirements
for hearings arising from contested citations. The Exchange is moving
the Commentary unchanged to New Rule 9216(c)(1)(B).
    [ssquf] Rule 60, Commentary (a).03 provides the hearing recordation
requirements. The Exchange is moving the Commentary unchanged to New
Rule 9216(c)(1)(C).
    [ssquf] Rule 60, Commentary (a).04 provides the procedure for
hearings of contested fines. The Exchange is moving the Commentary with
minor changes to New Rule 9216(c)(1)(D). Specifically, the Exchange is
replacing the Chair of the BCC as the individual responsible for
appointing a Hearing Director under the Rule with the Chair of the
Exchange Review Council.
    [ssquf] Rule 60, Commentary (a).05 provides the nature and timing
of the Hearing Director's determination upon conclusion of the hearing.
The Exchange is moving the Commentary unchanged to New Rule
9216(c)(1)(E).
    [ssquf] Rule 60, Commentary (a).06 provides the conditions for
assessing a forum fee. The Exchange is moving the Commentary to New
Rule 9216(c)(1)(F), with only a minor change to update a citation to
Rule 60 with New Rule 9216(c).
    [ssquf] Rule 60, Commentary (a).07 states that there is no right of
appeal of a hearing determination under the Rule. The Exchange is
moving the Commentary unchanged to New Rule 9216(c)(1)(G).
    [ssquf] Rule 60, Commentary (a).08 states that the Exchange will
file a report in appropriate form with the SEC for any fine assessed
under the Rule that is not contested and does not exceed $1,000. The
Exchange is moving the Commentary, with only minor changes, to New Rule
9216(c)(1)(H) to clarify that the exemption to SEC reporting arises
from SEC Rule 19d-1(c)(1).
     Rule 60, Commentary (b) provides the procedures to be
followed when a Member or an Associated Person is to be excluded from
the trading floor. The Exchange is moving the rule to New Rule
9216(c)(2)(E).
    [ssquf] Rule 60, Commentary (b).01 provides that the determination
that a Member or an Associated Person shall be excluded is final and
that there shall be no appeal from such determination. The Exchange is
moving the Rule unchanged to New Rule 9216(c)(2)(E)(i).
    [ssquf] Rule 60, Commentary (b).02 notes that the Exchange will
file a report in appropriate form with the SEC, except in cases where a
clerical employee is excluded for a breach of the Order and Decorum
regulations. The Exchange is moving the Rule unchanged to New Rule
9216(c)(2)(E)(ii).
     RULE 60--REGULATION AND FINE SCHEDULE provides that most
violations of the Order and Decorum Code are handled by a pre-set fine
and/or sanction, and an Options Exchange Official or Exchange staff may
refer the matter to the BCC for formal disciplinary proceedings. The
Rule also provides that in the case of repeat violations of a
regulation by the same individual, the amount of the fine is determined
by the number of such violations which have occurred within the year
immediately preceding the current violation. The Exchange is moving the
Rule to New Rule 9216(c), with minor changes to cite the new
disciplinary rules and to note that referrals for formal disciplinary
proceedings are made to either the Department of Enforcement or the
Department of Market Regulation. The Exchange is also providing that an
Options Exchange Official or Exchange Staff, as a representative of the
Phlx Regulation Department, may instead request authorization of a
complaint from the ODA directly.\144\
---------------------------------------------------------------------------

    \144\ See notes 47 and 55, supra.
---------------------------------------------------------------------------

    [ssquf] The Rule 70 Series concerns insolvency of Members and
Member Organizations, providing the Exchange with authority to suspend
the permit of a Member that fails to perform its contracts or is deemed
insolvent, and to suspend the permit of a Member or Member Organization
that has failed to meet his or its engagements or is insolvent. See
Rules 70 and 71. The Rule 70 Series consists of Rules 70 through 76,
which provide the processes for suspending and resolving suspensions
due to insolvency. These rules also provide the rights and obligations
of those subject to suspension. This series of rules were significantly
more important in the days when the Exchange required seats to transact
on the Exchange. Prior to demutualization, when the Exchange issued
seats, those seats could be leased. As a consequence, Members could be
indebted to other Members for the right to lease a seat. Since the
Exchange demutualized, there are no longer any seats, owners or lessors
thereof. Today permits provide trading rights to Members and Member
Organizations in lieu of the issuance of seats as property. Moreover,
the Exchange collects fees owed by Members and Member Organizations via
direct debit each month. Thus, these rules were designed to protect
Members and the Exchange during a time when the relationships among
Members, and between Members and the Exchange, resulted in much greater
risk exposure if a Member became insolvent than is the case today.
Under the New Rules, the Exchange will continue to have the authority
to suspend a Member, Member Organization, or an Associated Person,
which would include the ability to suspend the permit(s) associated
with a Member Organization. Specifically, New Rule 9558(a)(2), which
provides the Exchange's CRO with authority to provide written
authorization to FINRA staff to issue on a case-by-case basis a written
notice that summarily suspends a Member Organization, and its
associated permit(s), who is in such financial or operating difficulty
that FINRA staff determines and so notifies

the Commission that the Member Organization cannot be permitted to
continue to do business as a Member Organization with safety to
investors, creditors, other Member Organizations, or the Exchange.\145\
New Rule 9558 provides protections similar to the Rule 70 Series by
preventing a Member Organization, and by extension its Associated
Persons (including the Member(s) holding the permit(s)), from
transacting on the Exchange while it is having financial or operating
difficulty. Such financial or operating difficulty includes insolvency,
which is what the Rule 70 Series concerns. Accordingly, the Exchange is
proposing to delete the Rule 70 Series.
---------------------------------------------------------------------------

    \145\ Unlike the Rules 9558(a)(2) of BX and Nasdaq, the Exchange
is including authority to suspend a Member Organization's associated
permit. The Exchange notes that neither BX nor Nasdaq have [sic]
trading permits. Permits allow Members and Member Organizations the
ability to trade on the Exchange's [sic]. Consequently, suspension
of a permit is vital to suspending a Member Organization, and its
Associated Persons' ability to trade on the Exchange when subject to
a suspension under Rule 9558(a)(2).
---------------------------------------------------------------------------

     Rule 70 permits the Exchange to suspend the permit of a
Member upon notice of insolvency to the Exchange. Rule 71 permits the
Exchange to suspend the permit of a Member if it appears to the BCC
that the Member or its Member Organization has failed to meet its
engagements or is insolvent. New Rule 9558(a) provides the CRO
authority to direct FINRA to suspend a Member Organization, together
with its permit(s), that is in such financial or operating difficulty
that FINRA staff determines and so notifies the Commission that the
Member Organization cannot be permitted to continue to do business as a
Member Organization with safety to investors, creditors, other Member
Organizations, or the Exchange. The Exchange notes that, although New
Rule 9558 does not provide an affirmative obligation of Member
Organizations to notify the Exchange that it is having financial
difficulties, the Exchange does not believe that such an obligation is
needed in light of the direct debit of Member Organization obligations
and the prompt notice of a deficit in a Member Organization's account.
     Rule 72 concerns investigation of insolvency, and
describes the Member's and Member Organization's obligation to
cooperate with the BCC's investigation of insolvency. New Rule 8210
provides the Exchange similar authority to conduct an investigation and
obligates a Member, Member Organization and Associated Person to
provide information and allow Phlx Regulation Department and FINRA
staff to inspect and copy books and records and accounts of such
Member, Member Organization or person.
     Rule 73 concerns the time for settlement of an insolvent
Member, and allows the Membership Department to terminate a Member's
permit if the Member fails to settle with its creditors and apply for
reinstatement within six months from the time of such suspension, and
permits the Board of Directors or their [sic] designee to extend the
time of settlement for periods not exceeding one year each. In lieu of
this process, the Exchange is instead applying the process under New
Rule 9558, which provides an expedited process for resolving
suspensions issued to Member Organizations having financial or
operating difficulties that places [sic] the safety of investors,
creditors other Member Organizations, or the Exchange at risk. In terms
of settlement with its creditors, the Exchange, FINRA acting on behalf
of the Exchange, or to the extent a hearing is held, a Hearing Panel,
may determine the steps necessary to lift the suspension. If a Member
Organization fails to satisfy those prerequisites, the Exchange may
terminate the Member Organization and its permit(s).\146\
---------------------------------------------------------------------------

    \146\ As discussed, a Member Organization may appeal a
suspension issued pursuant to New Rule 9558(a)(2) to a Hearing
Panel. Any decision thereof may be called for review by the Review
Council pursuant to New Rule 9559(q). If a Member Organization fails
to request a hearing timely, the suspension is final action of the
Exchange.
---------------------------------------------------------------------------

     Rule 74 concerns reinstatement of an insolvent Member, and
requires Members applying for reinstatement of their permits to provide
proof of settlement with their creditors, and provides the right to
appeal a denial of reinstatement to the Board of Directors. New Rule
9558(d) provides that that [sic] a Member Organization may submit a
written request for a hearing and written request for a stay, the Chief
Hearing Officer or Hearing Officer assigned to the matter [sic] finds
good cause exists to stay the limitation, prohibition or
suspension.\147\ Under New Rule 9558(g), a Member Organization may file
a written request for termination of the limitation, prohibition or
suspension on the ground of full compliance with the notice or
decision. The appropriate head of the Exchange or FINRA department or
office may grant relief for good cause shown.
---------------------------------------------------------------------------

    \147\ A Hearing held pursuant to New Rule 9558 follows the
expedited hearing procedures provided by New Rule 9559.
---------------------------------------------------------------------------

     Rule 75 allows the Exchange to proceed with [sic] against
a Member whose permit is suspended, or its affiliated Member
Organization, for any offense committed by the Member either before or
after the announcement of the suspension as if the suspension had not
occurred. New Rule 9110(d) sets forth the disciplinary jurisdiction of
the Exchange, which provides similarly broad jurisdiction.
Specifically, Rule 9110(d) provides that any Member, Member
Organization, or any partner, officer, director or person employed by
or associated with any Member Organization (the Respondent) who is
alleged to have violated or aided and abetted a violation of the
Securities Exchange Act of 1934 (Exchange Act), the rules and
regulations thereunder, the By-Laws and Rules of the Exchange or any
interpretation thereof, and the Rules, Regulations, resolutions and
stated policies of the Board of Directors or any Committee of the
Exchange, shall be subject to the disciplinary jurisdiction of the
Exchange. Moreover, the rule further provides that disciplinary
jurisdiction applies to any Member, or any partner, officer, director,
or person employed by or associated with a Member Organization, and any
Member Organization following the termination of such person's permit
or the termination of the employment by or the association with a
Member Organization of such Member or partner, officer, director or
person, or following the deregistration of a Member Organization from
the Exchange.
     Rule 76 concerns the rights of a Member suspended for
insolvency, and provides that such a Member and its affiliated Member
Organization shall be deprived during the suspension of all rights and
privileges of a Member or Member Organization, except the right to have
its business transacted at Members' commission rates. As described
above, New Rule 9558(a) provides that a Member Organization, together
with its associated permit(s), may be suspended. This effectively
ensures that it is unable to conduct business on the Exchange. New Rule
9558(d) provides that such a suspension shall remain in effect unless,
after a timely written request for a hearing and written request for a
stay, the Chief Hearing Officer or Hearing Officer assigned to the
matter finds good cause exists to stay the limitation, prohibition or
suspension. New Rule 9558(g) provides the process by which a Member
Organization subject to a suspension may request termination of the
suspension. Last, the Exchange notes that the concept of allowing a
Member or Member Organization the right to transact at Members'
commission rates applied to the time

when the Exchange had seats, and thus is no longer applicable.
    [ssquf] Rule 124 concerns disputes that occur on or relate to the
Phlx options trading floor. Under subparagraph (b) of the Rule, a
Member's, Member Organization's, or Associated Person's failure to
comply with an initial Options Exchange Official ruling may result in a
referral to the BCC. Phlx is replacing reference to the BCC with
reference to the Phlx Regulation Department, Department of Market
Regulation, or Department of Enforcement, which will be charged with
the review of any such referred non-compliance. Phlx is proposing that
the Phlx Regulation Department, Department of Market Regulation, and
Department of Enforcement have this discretion under the proposed Rules
because these departments may exercise prosecutorial discretion to
determine if formal disciplinary action is warranted. To the extent the
Phlx Regulation Department, Department of Market Regulation, or
Department of Enforcement determines that formal disciplinary action is
warranted, the department must gain approval from the ODA to issue a
complaint. As described above, the ODA is an office within FINRA,
independent of the enforcement function and not involved in
investigating or litigating cases. Thus, ultimately the referred non-
compliance will be reviewed by a committee independent of the
enforcement function. Phlx is also replacing references to Rules 60 and
970 in subparagraphs (b) and (c) of the rule with references to New
Rules 9216(c) and (b), respectively, which have replaced those Rules as
discussed both above and below. Phlx is also making it clear under Rule
124(c) that Options Exchange Official rulings issued pursuant to Floor
Procedure Advices not related to Order and Decorum are subject to the
9000 Series. As described below in relation to Rule 970, Phlx is
adopting the process used by BX and Nasdaq in administering their
MRVPs.\148\ Specifically, once the Phlx Regulation Department,\149\ the
Department of Enforcement or the Department of Market Regulation
determine [sic] that a fine should levied against a Member, Member
Organization, or an Associated Person, a draft letter is provided to
the Member, Member Organization, or Associated Person. If a Member,
Member Organization, or Associated Person does not agree to the terms
of a minor rule violation letter or violation letter proposed by the
Exchange pursuant to the Advices, then it is not compelled to accept
the letter. As a consequence, however, the Exchange or FINRA acting on
its behalf may pursue formal disciplinary action. Phlx notes that
assessing a fine pursuant to the Advices in lieu of pursuing formal
disciplinary action is always discretionary. Thus, if a Member, Member
Organization, or Associated Person does not agree to the terms of a
minor rule violation plan letter or violation letter provided, then the
matter may be resolved through the formal disciplinary process, through
which the Member, Member Organization, or Associated Person may submit
arguments in its defense through an Answer. Phlx is also replacing
references to the Market Operations Review Committee in subparagraph
(d) with references to the Exchange Review Council, which is the
committee responsible for reviewing disputed rulings under the New
Rules. Under subparagraph (d)(v) of the Rule, all decisions of the
Market Operations Review Committee that are not complied with promptly
by a Member, Member Organization, or Associated Person may result in
referral to the BCC. Phlx is replacing reference to the BCC with
reference to the Phlx Regulation Department, Department of Market
Regulation, and Department of Enforcement, each of which will have
authority to review of any such referred non-compliance since each of
these departments may exercise their prosecutorial discretion to
determine if formal disciplinary action is warranted. To the extent the
Phlx Regulation Department, Department of Market Regulation, or
Department of Enforcement determines that formal disciplinary action is
warranted, the department must gain approval from the ODA to issue a
complaint pursuant to New Rule 9211(a)(1). As described above, the ODA
is an office within FINRA, independent of the enforcement function and
not involved in investigating or litigating cases. Thus, ultimately the
referred non-compliance will be reviewed by a committee independent of
the enforcement function.
---------------------------------------------------------------------------

    \148\ New Rule 9216(b).
    \149\ See notes 47 and 55, supra.
---------------------------------------------------------------------------

    [ssquf] Rule 600 concerns a Member's and Member Organization's
obligation to provide notice to the Exchange of its address and any
changes thereto. The Rule also requires Members and Member
Organizations to use FINRA's Web Central Registration Depository for
reporting obligations. Rule 600(c) requires each Member and Member
Organization applicant that is a registered broker or dealer pursuant
to Section 15 of the Securities Exchange Act of 1934 must [sic] use Web
CRD to submit a Uniform Application for Broker-Dealer Registration,
Form BD. The Exchange is deleting the term ``member'' from Rule 600(c)
because it erroneously applies the requirement to Members, which, as
discussed above, cannot be registered brokers or dealers. The Exchange
is also adopting a new paragraph (d) to the Rule, which requires Member
Organizations to report all contact information required by the
Exchange to the FINRA Contact System. FINRA uses the FINRA Contact
System as the repository of member firm contact information for its
members, as do BX and Nasdaq under their respective Rule 1160. The
Exchange is adopting this requirement to facilitate FINRA's execution
of its responsibilities under the RSA.
    [ssquf] Rule 615 concerns the Exchange's authority to waive the
applicable Qualification Examination and accept other standards as
evidence of an applicant's qualifications for registration. The
Exchange is amending this Rule to make clear that the New Rule 9600
Series process for receiving a waiver is followed for such requests.
The New Rule 9600 Series concerns the procedures for Member
Organizations to request exemptions, and the appeal of adverse
decisions regarding an exemptive request. Thus, Member Organizations
may request an exemption to a Qualification Examination on behalf of
their Associated Persons. The Exchange notes that text of Rule 615
currently closely mirrors BX and Nasdaq Rule 1070(d) and that the new
language added to Rule 615 is taken from these BX and Nasdaq Rules.
    [ssquf] Rule 712 concerns the Exchange's requirement that each
Member Organization doing business with the public have an independent
audit of its affairs at least once a year. Under the Supplementary
Material to the Rule, the BCC provided guidance to Member Organizations
on the textual requirements of the agreement between the Member
Organization and its accountant, which is provided in supplementary
material to the Rule and is cited as a directive of the BCC. In such
references to the BCC, the Exchange is replacing it with references to
the Exchange. With the retirement of the BCC, the Exchange is adopting
the directive as a directive of the Exchange. The guidance requires
accountants to Member Organizations to agree to provide notice of the
commencement of an audit, and provide certain documents to the BCC. The
Exchange is replacing references in the guidance to the BCC with
references to the Membership

Department, which the Exchange has determined is the best entity within
the Exchange to receive such notice and documents in the absence of the
BCC. The purpose of the guidance is to ensure that the Exchange is
notified of the initiation of the required annual audit, thus aiding
the Exchange in its oversight responsibilities. Likewise, the documents
required to be provided by the auditing accountant ensures [sic] that
the Exchange is aware of any identified deficiencies. The Exchange is
now requiring that accountants performing annual audits provide the
notice discussed above to the Membership Department.
    [ssquf] Rule 722 concerns requirements for margin accounts in
miscellaneous securities. Subparagraph (d) of the rule provides that
the BCC may appoint a World Currency Options Margin Subcommittee,
charged with the monitoring of the use of letters of credit by world
currency option writers, monitoring the volatility of each world
currency underlying a class of world currency options traded on the
Exchange and for recommending to the Exchange that higher margin
requirements be imposed with respect to any world currency option
position(s) whenever such Subcommittee deems such higher margin
requirements advisable. The Exchange is replacing references to the BCC
and Subcommittee with reference to the CRO and Committee, respectively.
The Exchange believes that the CRO is best suited to select members of
such a committee to make these determinations in light of the
retirement of the BCC because the CRO has general supervision of the
Exchange's regulatory operations, including the responsibility for
overseeing its surveillance, examination, and enforcement functions and
for administering any regulatory services agreements with another self-
regulatory organization to which the Exchange is a party. The CRO meets
with the regulatory oversight committee of the Board of Directors. As
such, the Board will remain apprised of the formation of, and any
decisions made by, the new Committee. The Exchange notes that the new
Committee will have the same responsibilities under the amended rule as
the Subcommittee does currently.
    [ssquf] Rule 774 is currently held in reserve. The Exchange is
amending Rule 774 to now include an express requirement that Member
Organizations and Members not engage in disruptive quoting and trading
activity. BX and Nasdaq adopted this authority under their respective
Equities Rule 2170 and Options Rule Chapter III, Section 16 to clearly
prohibit disruptive quoting and trading activity on both the equities
and options markets.\150\ BX and Nasdaq also adopted new Rules 9400 to
permit them to take prompt action to suspend their members or their
clients that violate such rule. The Exchange is amending Rule 774 to
house the obligation of its Member Organizations and Members, which
will apply to both participation in the Exchange's equity and options