[Federal Register Volume 75, Number 223 (Friday, November 19, 2010)]
[Notices]
[Pages 70957-70961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29160]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63314; File No. SR-CBOE-2010-084]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving Proposed Rule Change Regarding
Registration and Qualification Requirements for Associated Persons
November 12, 2010.
I. Introduction
On September 10, 2010, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to apply its registration and
qualification requirements to all of its members. The proposed rule
change was published for comment in the Federal Register on September
28, 2010.\3\ The Commission received two comment letters on the
proposal.\4\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 62977 (September 22,
2010), 75 FR 59773 (``Notice'').
\4\ See letter from Frank Vivirito, Chief Compliance Officer, XR
Securities LLC, to Elizabeth M. Murphy, Secretary, Commission, dated
October 14, 2010 (``XR Securities Letter'') and letter from J. Micah
Glick, Chief Compliance Officer, Cutler Group LP, to Elizabeth M.
Murphy, Secretary, Commission, dated October 22, 2010 (``Cutler
Letter'').
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II. Background
Currently, registration, examination, and continuing education
requirements for associated persons of trading permit holder \5\
organizations (``TPH organizations'') that conduct a public customer
business are in Chapter IX, Doing Business with the Public, of CBOE's
rules.\6\ The associated persons of TPH organizations register with the
Exchange via the Uniform Application for Securities Industry
Registration or Transfer (``Form U4'') through the Financial Industry
Regulatory Authority's (``FINRA'') Central Registration Depository
System (``WebCRD''), and must pass the General Securities
Representative examination (``Series 7'') to function as
representatives; if acting as options principals engaged in the
supervision of options sales practices, they must also pass the
Registered Options Principal
[[Page 70958]]
examination (``Series 4'') or the General Securities Sales Supervisor
examination (``Series 9/10'').
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\5\ Section 1.1 of CBOE's By-Laws provides: ``The term `Trading
Permit Holder' means any individual, corporation, partnership,
limited liability company or other entity authorized by the rules
that holds a Trading Permit. If a Trading Permit Holder is an
individual, the Trading Permit Holder may also be referred to as an
`individual Trading Permit Holder.' If a Trading Permit Holder is
not an individual, the Trading Permit Holder may also be referred to
as a `TPH organization.' A Trading Permit Holder is a `member'
solely for purposes of the Act; however, one's status as a Trading
Permit Holder does not confer on that Person any ownership interest
in the Exchange.'' See Section 3(a)(3)(A) of the Act which defines
member of an exchange.
\6\ Before CBOE demutualized, Rule 3.1(a) required every
individual member or member organization to have as the principal
purpose of its membership the conduct of a public securities
business.
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Rule 3.6A, Qualification and Registration of Certain Associated
Persons, sets forth the requirement for each individual TPH or TPH
organization subject to Rule 15c3-1 under the Act to have a FINOP
(Limited Principal--Financial and Operations).\7\ Rule 3.6A also
references the registration requirements set forth in Chapter IX of
CBOE's Rulebook for associated persons of TPH organizations that
conduct a public customer business.\8\
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\7\ The Exchange is proposing to apply the existing FINOP
requirement in Rule 3.6A to all TPH organizations.
\8\ CBOE has represented that CBOE Stock Exchange (``CBSX'')
firms solely engage in proprietary trading. Chapter IX of CBOE's
Rulebook pertains toTPHs that conduct a public customer business and
is not included in Appendix A, Applicability of Rules of the
Exchange, to the CBSX rules, which lists the CBOE rules that apply
to CBSX TPHs. However, it is the Commission's understanding that it
is CBOE's intent to apply the rules of Chapter IX that are
referenced in Rule 3.6A to CBSX TPHs.
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Rule 9.3A, Continuing Education for Registered Persons, applies to
registered persons of TPHs and TPH organizations that conduct business
with the public and sets out CBOE's continuing education requirements.
III. Description of the Proposal
CBOE proposes to amend its rules and the rules of the CBSX
regarding registration, qualification, and continuing education
requirements for individual TPHs and associated persons \9\ of TPHs.
CBOE is amending its rules to make them substantially similar to the
registration, examination and continuing education requirements of
FINRA. Specifically, CBOE proposes to require all individual TPHs and
TPH associated persons, regardless of whether they conduct a public
customer or proprietary securities business, to register, qualify and
comply with continuing education requirements.\10\
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\9\ Section 3(a)(18) of the Act defines an associated person of
a broker or dealer as ``any partner, officer, director, or branch
manager of such broker or dealer (or any person occupying a similar
status or performing similar functions), any person directly or
indirectly controlling, controlled by, or under common control with
such broker or dealer, or any employee of such broker or dealer,
except that any person associated with a broker or dealer whose
functions are solely clerical or ministerial shall not be included
in the meaning of such term for purposes of section 15(b).'' 15
U.S.C. 78c(a)(18).
\10\ It is the Commission's understanding that, with these
changes to CBOE's rules, all associated persons involved in the
securities business of a firm that does business on the CBOE will
have to register, pass a qualification examination and comply with
continuing education requirements.
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CBOE and CBSX will require all individual TPHs and individual
associated persons \11\ not already registered in WebCRD to register
under Rule 3.6A within 60 days of the date of this Order (January 11,
2011) and to pass a qualification examination. CBOE is developing an
alternative to the Series 7 examination that is specifically tailored
toward individual TPHs and associated persons of TPHs that are engaged
in proprietary trading. CBOE has represented that within six months of
the date of this Order it will have completed the development of this
qualification examination \12\ and will file the examination with the
Commission. All individual TPHs and individual associated persons must
take and pass the new examination, as applicable, no later than August
12, 2011.
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\11\ Associated persons of CBOE TPHs include both individuals
and non-natural persons.
\12\ CBOE has represented that it is developing a principal
examination tailored to sole proprietors, officers, partners, and
directors, individual TPHs or individual associated persons who are
engaged in the supervision or monitoring of proprietary trading,
market-making, or brokerage activities, and/or anyone who is engaged
in the supervision or training of those engaged in proprietary
trading, market-making or brokerage activities. Until this
examination is complete and filed with the Commission, these
associated persons must pass the General Securities Principal
examination (``Series 24'').
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Rule 3.6A(c) will require that each TPH and TPH organization
designate on Schedule A of Form BD a Chief Compliance Officer (``CCO'')
\13\ who must register with CBOE using Form U4 and pass the Compliance
Official examination (``Series 14'').\14\ CBOE has represented to the
Commission that it has asked FINRA to enable this category of
registration for CBOE and to make the Series 14 examination available
to CCOs of CBOE and CBSX TPHs. CBOE is also proposing to allow a
limited exemption from the requirement to pass the Series 14.\15\
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\13\ CBOE indicated that it did not want to use the term
``principal'' in Rule 3.6A to denote associated persons of a member
who are actively engaged in the management of the member's
investment banking or securities business, including supervision,
solicitation, conduct of business or the training of persons
associated with a member for any of these functions.
Under CBOE's proposed rules anyone functioning as a principal
must register as such with the Exchange via a Form U4 through
FINRA's WebCRD. CBOE did not want to use the term principal in Rule
3.6A to refer to these associated persons because it wanted to avoid
creating confusion for its TPHs that have Registered Options
Principals. Through this filing, CBOE is essentially extending the
Registered Options Principal category and requirements (though not
the same examinations) to those associated persons in a supervisory
function whose firms do not conduct business with the public.
Ultimately, the Commission expects CBOE to eliminate the distinction
in its rules relating to doing business with the public.
Hereinafter, the Commission will refer to such persons as
principals.
\14\ See NASD Rule 1022(a)(1)(c).
\15\ See proposed Rule 3.6A(c).
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Furthermore, the Exchange is proposing to add Interpretations and
Policies .07 to Rule 3.6A requiring the registration and the successful
completion of a heightened qualification examination by every
individual acting in any of the following capacities: (i) Officer; (ii)
partner; (iii) director; (iv) supervisor of proprietary trading,
market-making or brokerage activities; and/or (v) supervisor of those
engaged in proprietary trading, market-making or brokerage activities
with respect to those activities. Thus, all individuals who engage in
supervisory functions at the TPH organization's securities business, or
who oversee associated persons of TPHs, must register and pass the
relevant principal examination.\16\ The rule also requires each TPH
organization to have at least two of the above listed individuals
registered as principals and subject to the relevant principal
examination requirement. The Exchange may waive the requirement to have
two principals registered if a TPH organization conclusively
demonstrates that only one principal should be required to register
(such as a single member liability company).\17\
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\16\ The Commission understands that this will be either an
appropriate examination developed by CBOE and filed with the
Commission or the Series 24.
\17\ The Commission expects this waiver to be used in very
limited circumstances.
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A TPH organization that is involved solely in proprietary trading
\18\ and has 25 or fewer associated persons would only be required to
have one principal registered and subject to a heightened qualification
examination under this section.\19\
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\18\ Interpretations and Policies .07 to Rule 3.6A defines
proprietary trading.
\19\ See proposed Interpretations and Policies .07 to Rule 3.6A.
The Commission understands that this examination will be the Series
24 until CBOE has completed and filed with the Commission its own
examination for principals of proprietary trading firms. This
requirement is substantially similar to NASDAQ Rule 1021(e)(1).
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Rule 3.6A(a)(1) provides that a TPH or TPH organization shall not
maintain a registration with the Exchange for any person: (1) Who is no
longer active in the TPH or TPH organization's securities business; (2)
who is no longer functioning in the registered capacity; or (3) where
the sole purpose is to avoid an examination requirement. A TPH or TPH
organization cannot register any person where there is no intent to
employ that person in the TPH or TPH organization's securities
business. However, a TPH or TPH organization may maintain or make
application for
[[Page 70959]]
the registration of an individual who performs legal, compliance,
internal audit, back-office-operations, or similar responsibilities for
the TPH or TPH organization, or a person who performs administrative
support functions for registered personnel, or a person engaged in the
securities business of a foreign securities affiliate or subsidiary of
the TPH or TPH organization.\20\
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\20\ This rule is substantially similar to NASD Rule 1021(a).
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The Exchange is also proposing to add Rule 3.6A(a)(2) to identify
several categories of individual TPHs and individual associated persons
who are exempt from the new registration requirements. The categories
are: (i) Individual associated persons functioning solely and
exclusively in a clerical or ministerial capacity; (ii) individual TPHs
and individual associated persons who are not actively engaged in the
securities business, (iii) individual TPHs and individual associated
persons functioning solely and exclusively to meet a TPH or TPH
organization's need for nominal corporate officers or for capital
participation; and (iv) individual associated persons whose functions
are solely and exclusively related to transactions in commodities,
transactions in security futures and/or effecting transactions on the
floor of another national securities exchange and who are registered as
floor members with such exchange. \21\
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\21\ This rule is substantially similar to NASD Rule 1060.
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Rule 3.6A(e) addresses lapses in registration \22\ and
Interpretation and Policies .05 thereto would permit CBOE to waive the
examination requirement in limited circumstances.\23\ In addition, the
Exchange is making certain technical and non-substantive changes to its
rules.\24\
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\22\ This rule is substantially similar to NASD rules 1021(c)
and 1031(c) regarding lapses.
\23\ This rule is substantially similar to NASD Rule 1070
regarding waivers.
\24\ See Notice at pp. 8-9.
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The Exchange states that individual associated persons, including
Registered Options Principals and Registered Representatives, continue
to be subject to the registration, examination and continuing education
requirements of Chapter IX of CBOE's rules, which apply to firms
conducting a public customer business.\25\ Additionally, any TPH or TPH
organization that ends the employment of an individual required to
register under Rule 3.6A must comply with the requirements in Chapter
IX of CBOE's rules.
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\25\ See supra note 8.
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The Exchange proposes to require individual TPHs and individual
associated persons whose activities are limited solely to the
transaction of business on the floor with TPHs or registered broker-
dealers to fulfill continuing education requirements.\26\
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\26\ Interpretations and Policies .01 to Rule 9.3A currently
excludes these persons from the continuing education requirements
set forth in Rule 9.3A. Proposed Interpretations and Policies .04 to
Rule 3.6A states that all persons required to register are subject
to CBOE's continuing education requirements.
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IV. Comment Letters
The Commission received two comment letters on the proposed rule
change.\27\ One commenter, XR Securities, stated that the examination
proposed to be developed by CBOE for associated persons was redundant
for associated persons currently registered with another exchange who
have passed the Series 7. The commenter stated that the new examination
would impose an unfair burden on firms registered at CBOE and
elsewhere, and argued that it would be better to allow associated
persons registered at more than one exchange to take the Series 7
instead of the proposed CBOE examination. The commenter also stated
that the Series 24 is generally accepted by all exchanges as the CCO
examination, whereas the Series 14 is available for FINRA/NYSE members
to elect to take instead of the Series 24. The commenter believes that
requiring a CCO who currently is Series 24 registered to pass the
Series 14 would be unreasonable.
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\27\ See supra note 4.
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The second commenter, Cutler, is supportive of the proposed rule
change requiring all traders to register with CBOE and pass a relevant
trading examination; however, it also expressed concern over the
proposed examination requirements and timeframe for completing a
required examination. In short, Cutler believes no new examination
requirement should be imposed on traders currently properly registered
with CBOE. It suggested creating a new continuing education module for
CBOE traders, to the extent the existing examinations do not cover
relevant material that would be included in the new examination. For
persons to be qualified on CBOE in the near future, Cutler supports
CBOE's plan to create an examination specific and relevant to
professional traders in lieu of the Series 7, which it considers too
broad. Cutler echoed XR Securities' concerns regarding the Series 14
examination for CCOs, stating that the Series 24 is the accepted
examination for CCOs and should be adopted by CBOE instead, and,
similarly, encouraged CBOE to create an exam to succeed the Series 24
for supervisors whose functions are limited to the supervision of
traders.
V. Discussion
The Commission is sympathetic to the concerns raised by the two
commenters regarding associated persons who are currently Series 7
qualified who do not want to have to take the proposed CBOE proprietary
trading exam, as well as associated persons who have already qualified
as CCOs. The Commission expects that such persons may be eligible for a
waiver of the exam requirement if they are able to demonstrate to the
CBOE's satisfaction that they are appropriately qualified to do
business on the CBOE. However, the Commission believes that this
proposed rule change is an important step towards harmonizing the
registration, qualification and continuing education requirements
across the SROs. In order to meet its obligations under Section 6(b)(1)
of the Act to enforce compliance by member firms \28\ and their
associated persons with the Act, the rules thereunder, and the
exchange's own rules,\29\ an exchange must have baseline registration
and qualification requirements for all persons conducting business on
an exchange, as well as for those supervising such activity. Further to
those provisions, the Commission believes an exchange should require
continuing education for registered persons to help ensure that members
and persons associated with members are up to date on changes to
exchange rules and the securities laws, rules, and regulations that
govern their activities. In addition, an exchange must know if an
associated person of a member firm is subject to a statutory
disqualification. This information is elicited by the Form U4, which is
used by most exchanges and FINRA to register associated persons. The
Commission believes that it is important to ensure that information,
such as whether an associated person is subject to a statutory
disqualification, is available to exchanges and other regulators,
including the Commission and the state securities regulators, through
WebCRD, as well as members of the public
[[Page 70960]]
through BrokerCheck, which derives its information from WebCRD.\30\
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\28\ Brokers and dealers are required to supervise the
activities of their associated persons. See 15 U.S.C. 78o(b)(4)(E).
\29\ Section 6(b)(1) requires exchanges to have the ability to
enforce compliance by their members and associated persons with the
federal securities laws and with their own rules. 15 U.S.C.
78f(b)(1).
\30\ See Section 6(c)(2) of the Act, 15 U.S.C. 78f(c)(2); and
Rule 19h-1 under the Act, 17 CFR 240.19h-1.
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The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange,\31\ and, in
particular with Section 6(b)(5) of the Act,\32\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to, and perfect the mechanism of, a free and open market and a national
market system and, in general, to protect investors and the public
interest. The Commission believes that the proposed rule change is also
consistent with Section 6(c)(3)(B) of the Act,\33\ which authorizes
exchanges to prescribe standards of training, experience and competence
for persons associated with exchange members, and gives exchanges the
authority to bar a natural person from becoming a member or a person
associated with a member, if the person does not meet the standards of
training, experience and competence prescribed in the rules of the
exchange.
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\31\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\32\ 15 U.S.C. 78f(b)(5).
\33\ 15 U.S.C. 78f(c)(3)(B).
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CBOE's proposed rule change requires all associated persons of TPHs
engaged in a securities business on CBOE or on CBSX, as well as those
who supervise, train or otherwise oversee those who do, to register
with the Exchange via the Form U4, qualify by passing an appropriate
examination, and be subject to continuing education requirements.\34\
The Commission believes the restrictions on registration that bar a TPH
from maintaining a registration with CBOE for (1) persons no longer
active in the TPH's securities business, (2) persons no longer
functioning in the registered capacity, or (3) for avoidance of an
examination requirement, are appropriate. These limitations should help
ensure that only persons qualified for their category of registration
who are engaged in a securities business are able to transact business
on CBOE and CBSX.
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\34\ CBOE's proposed rule change expands its continuing
education requirements to associated persons whose activities are
limited to the transaction of business on CBOE's floor.
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The Commission notes that CBOE has exempted several categories of
associated persons from the new registration requirements. These
persons fall outside of CBOE's proposed definition of ``engaged in a
securities business.'' CBOE explained that the people excluded would
not be considered to be actively engaged in a securities business
unless they are registered on the floor of another exchange, in which
case they would not have to register with CBOE.\35\ The Commission
understands that CBOE's proposed rule change applies to all associated
persons conducting a securities business, on a proprietary or agency
basis, on CBOE and CBSX.
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\35\ See Notice, p. 6; 75 FR 59775. Such persons must comply
with Section 15(b)(8) of the Act.
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The Commission expects that CBOE, consistent with its
representation, will have developed and filed with the Commission the
appropriate examination for its representatives engaged in a
proprietary securities business no later than May 12, 2011. If CBOE
fails to do so, the Commission expects CBOE to require all associated
persons engaged in the securities business of a TPH to promptly take
and pass an appropriate existing examination.
The Commission believes that the requirement that all persons
functioning in certain supervisory capacities be registered through
WebCRD and be subject to higher qualification standards appropriately
reflects the enhanced responsibility of their roles and is consistent
with the Act. The general requirement that TPHs must have a minimum of
two principals responsible for oversight of member organization
activity on CBOE, who must be registered as such and pass a principal
exam, should help CBOE strengthen the regulation of its member firms,
and prepare those individuals for their responsibilities. The nature of
the firm, however, may dictate that more than two principals are needed
to provide appropriate supervision.
The requirement for each TPH organization to have a CCO who must
register and pass the Series 14 and a FINOP who must register and pass
the Series 27 is appropriate based on the heightened level of
accountability inherent in the duty of overseeing compliance by an
Exchange member, and in the oversight and preparation of financial
reports, and the oversight of those employed in financial and
operational capacities at each firm.
The Commission believes CBOE's proposed provision requiring any
person whose registration has been revoked by the Exchange as a
disciplinary sanction, or whose most recent registration as a principal
or representative has been terminated for a period of two or more years
immediately preceding the date of receipt by the Exchange of a new
application, to pass the qualification examination appropriate to such
person's category of registration is appropriate. This requirement
should help to ensure that an associated person's qualifications are
current.
The Commission also believes CBOE's proposed exceptions from the
above-discussed general requirements are appropriate. Any TPH seeking
an exception from the two principal minimum must provide evidence that
conclusively indicates to the Exchange that only one principal is
necessary. The Commission expects this authority to be used sparingly,
because such persons oversee the operations of member firms and provide
the first line of defense in ensuring that member firms are complying
with the rules of an exchange as well as the federal securities laws.
In addition, CBOE may waive the qualification examination requirement
in exceptional cases where the applicant has demonstrated that good
cause exists. The Commission expects this authority to be used
sparingly. Finally, the Commission notes that these exceptions are
substantively the same as exceptions provided in similar rules at other
SROs.\36\
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\36\ See, e.g., FINRA Rule 1070(d) and NASDAQ Rule 1070(d)
regarding the examination waiver.
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The Commission believes that the proposal will enhance CBOE's
ability to ensure an effective supervisory structure for those
conducting business on CBOE. The requirements apply broadly and are
intended to help close a regulatory gap which has resulted in varying
registration, qualification, and supervision requirements across
markets. The Commission believes that the changes proposed by CBOE to
its rules will strengthen the regulatory structure of the Exchange and
should enhance the ability of its individual TPHs and TPH organizations
to comply with the Exchange's rules as well as with the federal
securities laws.
Additionally, the Commission believes that the proposed rule change
is consistent with the principles of Section 11A(a)(1)(22) of the Act
in that it seeks to assure fair competition among brokers and dealers
and among exchange markets. The Commission believes that the proposed
rule will promote uniformity of regulation across markets, thus
reducing opportunities for regulatory arbitrage. CBOE's proposed rule
change helps ensure that all persons conducting a securities business
through CBOE are appropriately
[[Page 70961]]
supervised, as the Commission expects of all SROs.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\37\ that the proposed rule change (SR-CBOE-2010-084), be, and
hereby is, approved.
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\37\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29160 Filed 11-18-10; 8:45 am]
BILLING CODE 8011-01-P