[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]
[Notices]
[Pages 7884-7888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3032]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63843; File No. SR-ISE-2010-115]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Approving Proposed Rule Change Regarding Registration,
Qualification, and Continuing Education Requirements for Members and
Associated Persons
February 4, 2011.
I. Introduction
On December 1, 2010, the International Securities Exchange, LLC
(``Exchange'' or ``ISE'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to extend registration,
qualification, and continuing education requirements to all associated
persons of its members. The proposed rule change was published for
comment in the Federal Register on December 21, 2010.\3\ The Commission
received one comment letter 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. 63554 (December 15,
2010), 75 FR 80091 (``Notice'').
\4\ See Letter from James McHale, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, to Elizabeth M. Murphy, Secretary, Commission (dated
January 19, 2011) (``SIFMA Letter'').
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II. Background
The ISE's rules governing registration, examination, and continuing
education requirements for associated persons of ISE members \5\
currently apply to
[[Page 7885]]
associated persons who conduct a public customer business. They are
subject to Chapter 6 of the ISE's rules, Doing Business with the
Public. Associated persons of member 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 (``Web CRD''), and must pass the General Securities
Representative examination (``Series 7'') to function as
representatives if accepting orders from non-member customers.\6\
Options principals engaged in the supervision of options sales
practices, must also pass the Registered Options Principal examination
(``Series 4'') or the General Securities Sales Supervisor examination
(``Series 9/10'').\7\ Rule 604, Continuing Education for Registered
Persons, sets out the continuing education requirements for associated
persons of members that conduct business with the public.
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\5\ Under ISE Rule 100(a)(3), the term ``associated person'' or
``person associated with a member'' means any partner, officer,
director or branch manager of a member (or any person occupying a
similar status or performing similar functions), any person directly
or indirectly controlling, controlled by, or under common control
with a member or any employee of a member. ISE noted that an
organization could fall within the scope of this definition, but the
Exchange is not intending to require registration by an
organization. See Notice, p. 13; 75 FR 80091, at 80094.
\6\ See ISE Rule 602.
\7\ See ISE Rule 601.
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III. Description of the Proposal
ISE proposes to amend its rules regarding registration,
examination, and continuing education of associated persons to make
them substantially similar to the registration, examination, and
continuing education requirements of FINRA. Specifically, ISE proposes
to require all associated persons of members, regardless of whether
they conduct a public customer or proprietary securities business, to
register, qualify and comply with continuing education requirements.
Proposed Rule 313 establishes the qualification and registration
requirements for associated persons of members, including registration
requirements for the Chief Compliance Officer (``CCO'') of each member
and for the Financial/Operations Principal (``FINOP'') of each member
subject to Rule 15c3-1 of the Exchange Act.\8\ Proposed Rule 313 cross-
references the existing registration, qualification and continuing
education requirements set forth in Chapter 6,\9\ as well as the forms
that must be filed to register or terminate the registration of an
associated person.\10\
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\8\ 17 CFR 240.15c3-1.
\9\ See rules 601-603.
\10\ See proposed Rule 313(d) and Supplementary Material to Rule
313.03.
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Proposed Rule 313(a)(1) will require registration and qualification
by associated persons engaged or to be engaged in the securities
business of a member.\11\ The associated persons must be registered
with the Exchange in the category of registration appropriate to the
function to be performed as prescribed by the Exchange. Under proposed
Rule 313 all associated persons that are not already registered in Web
CRD must register (i.e., complete a Form U4) \12\ and pass a
qualification examination.\13\
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\11\ An associated person is engaged in the securities business
of a member if (i) the associated person conducts proprietary
trading, acts as a market-maker, effects transactions on behalf of a
broker-dealer account, supervises or monitors proprietary trading,
market-making or brokerage activities on behalf of the broker-
dealer, supervises or conducts training for those engaged in
proprietary trading, market-making or brokerage activities on behalf
of a broker-dealer account; or (ii) the associated person engages in
the management of any associated person identified as an officer,
partner or director. See proposed Supplementary Material to Rule
313.06.
An individual with an indirect ownership interest in a member
that is engaged in the securities business of such member is
required to register under proposed Rule 313.
\12\ See proposed Supplementary Material to Rule 313.01.
\13\ ISE is working with other options self-regulatory
organizations (``SROs'') to develop an examination for associated
persons who previously have not been required to register under SRO
rules (e.g., proprietary traders). See Notice, p. 16; 75 FR 80091,
at 80095. See also Securities Exchange Act Release No. 63314
(November 12, 2010), 75 FR 70957 (November 19, 2010) (``CBOE
Registration Order'').
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Proposed Rule 313(b) requires the designation of a FINOP \14\ by
each member that is subject to Exchange Act Rule 15c3-1,\15\ and
proposed Rule 313(c) requires the designation of a CCO by each member.
The FINOP and CCO are required to register and pass an appropriate
qualification examination.\16\ The Exchange proposes to include a
limited exemption from the requirement to pass the CCO qualification
examination.\17\
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\14\ The duties of a FINOP include assuring that the member
complies with applicable financial and operational requirements
under SRO rules and the Exchange Act.
\15\ 17 CFR 240.15c3-1.
\16\ Proposed Rule 313(b) establishes the Series 27 examination
as the qualification examination for a FINOP. The qualification
examination for a CCO is the Series 14 examination. See proposed
Rule 313(c) and Notice, p. 18; 75 FR 80091, at 80095.
\17\ See proposed Rule 313(c).
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Each member must register with ISE every associated person acting
in the capacity of a sole proprietor, officer, partner, director,
FINOP, or CCO.\18\ These associated persons must register as a
principal on a Form U4 and pass principal qualification examinations.
In addition, an associated person who is engaged in the supervision or
monitoring of proprietary trading, market-making or brokerage
activities and/or who is engaged in the supervision or training of
those engaged in proprietary trading, market-making or brokerage
activities will need to register and pass a principal qualification
examination.\19\ Thus, all individuals who supervise the securities
business of a member, or who oversee associated persons of the member,
must register and pass a principal qualification examination.\20\
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\18\ See proposed Supplementary Material to Rule 313.07. This
requirement is consistent with FINRA's registration requirement for
Principals (NASD Rule 1021). Under ISE's proposed rules, anyone
functioning as a principal must register as such with the Exchange
via a Form U4 through FINRA's Web CRD. (Generally, all principals
must qualify as representatives before qualifying as principals.)
ISE did not use the term ``Principal'' in the proposed rules to
avoid confusion with existing terms, such as ``Options Principal.''
In this order the Commission refers to such persons as principals.
\19\ Id.
\20\ If an ISE rule does not specify the examination that will
qualify an associated person for a particular category of
registration, once the ISE has determined the appropriate
examination for that category, the ISE will file a proposed rule
change indicating the appropriate examination.
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In addition, the Exchange requires each member to have at least two
individuals registered as principals who qualify as such by passing the
relevant principal examination.\21\ Proposed Supplementary Material to
Rule 313.07 exempts members that are sole proprietors from this
requirement. The Exchange may waive the requirement to have two
principals if the member conclusively demonstrates that only one
officer, partner or director is required.\22\ The ability to waive this
registration requirement is consistent with similar FINRA rules
regarding principal registration.\23\ ISE is also proposing to allow a
member that conducts only proprietary trading \24\ and has 25 or fewer
registered persons to have only
[[Page 7886]]
one officer or partner registered and subject to a principal
examination.\25\ Proposed Rule 313(a)(1) states that a member shall not
maintain a registration with the ISE for any person (1) who is no
longer active in the member'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 member cannot register any
person where there is no intent to employ that person in the member's
securities business. However, a member may maintain or make application
for the registration of an individual who performs legal, compliance,
internal audit, back-office operations, or similar functions for the
member, 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 member.
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\21\ This requirement is consistent with the registration
requirement set forth in NASD Rule 1021. See proposed Supplementary
Material to Rule 313.07.
\22\ The Commission expects this waiver to be used in very
limited circumstances.
\23\ See NASD Rule 1021(e).
\24\ For purposes of this requirement, a member is considered to
conduct only proprietary trading if it has the following
characteristics: (i) The member is not required by Section 15(b)(8)
of the Exchange Act to become a FINRA member and is a member of
another registered securities exchange not registered solely under
Section 6(g) of the Exchange Act; (ii) all funds used or proposed to
be used by the member are the member's own capital, traded through
the member's own accounts; (iii) the member does not, and will not,
have customers; and (iv) all persons registered on behalf of the
member acting or to be acting in the capacity of a trader must be
owners of, employees of, or contractors to the member. See proposed
Supplementary Material to Rule 313.07.
\25\ See proposed Supplementary Material to Rule 313.07. This
requirement is substantially similar to NASDAQ Rule 1021(e)(1).
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Proposed Rule 313(a)(2) identifies several categories of associated
persons that are exempt from these additional registration
requirements, which include (i) associated persons functioning solely
and exclusively in a clerical or ministerial capacity; (ii) associated
persons that are not actively engaged in the securities business; (iii)
associated persons functioning solely and exclusively to meet a need
for nominal corporate officers or for capital participation; and (iv)
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.\26\
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\26\ This rule is substantially similar to NASD Rule 1060.
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Proposed Rule 313(e) sets forth the requirements for examinations
where there is a lapse in registration.\27\ Specifically, an associated
person is required to pass the appropriate qualification examination
for the category of registration if the associated person's
registration has been revoked by the Exchange as a disciplinary
sanction or if his most recent registration has been terminated for a
period of two or more years.
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\27\ This rule is substantially similar to NASD rules 1021(c)
and 1031(c).
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Proposed Supplementary Material to Rule 313.05 permits the Exchange
to waive the qualification examination requirement in exceptional
circumstances where good cause is shown.\28\
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\28\ See NASD Rule 1070 (Qualification Examinations and Waiver
of Requirements) and NYSE Rule 345 (Employees--Registration,
Approval, Records).
In determining whether a waiver shall be granted, the Exchange
considers, among other things, previous industry employment,
training and/or the successful completion of similar qualification
examinations of other self-regulatory organizations. The Commission
believes this waiver authority should be used sparingly and expects
ISE to maintain records of waivers granted and to utilize careful
judgment in granting waivers. Under the proposed Rule, associated
persons whose activities are limited solely to the transaction of
business on the floor of another exchange will be subject to the
continuing education requirements set forth in Rule 604 or any other
continuing education requirements prescribed by the Exchange.
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Proposed Supplementary Material to Rule 313.03 requires any member
that discharges or terminates the employment or retention of an
individual required to register under proposed Rule 313 to comply with
the termination requirements, including the filing of a Form U5, set
forth in Rule 601(c) and Rule 603.
Proposed Supplementary Material to Rule 313.04 requires associated
persons required to register under proposed Rule 313 to satisfy the
continuing education requirements set forth in Rule 604, or any other
applicable continuing education requirements as prescribed by ISE.\29\
The Exchange is adding a provision detailing the procedures required
for in-house delivery of the regulatory element. The required
procedures address responsibility for the continuing education program,
site, technology, and supervision requirements, and administration of
the program. Members are required to file a letter of attestation
signed by a senior officer or partner with their Designated Examining
Authority, confirming the establishment of the required procedures, and
must annually represent that all required procedures have been
continuously maintained. These modifications will conform ISE's
continuing education requirements to those of other SROs.\30\
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\29\ If the ISE prescribes different or additional continuing
education requirements it must file a proposed rule change.
\30\ E.g., NASD Rule 1120; CBOE Rule 9.3A. See CBOE Registration
Order, supra note 13. Also, while the Exchange does not have a
floor, for consistency with other SRO rules, the Exchange also
proposes to delete language that excludes those people whose
activities are limited solely to the transaction of business on a
floor from the definition of ``registered person'' for purposes of
Rule 604.
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Finally, ISE proposes to make non-substantive changes to ISE Rule
601 (Registration of Options Principals), Rule 602 (Registration of
Representatives) and Rule 603 (Termination of Registered Persons) to
define and reference certain terms consistently within these rules and
with proposed Rule 313.\31\
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\31\ See Notice, p. 21; 75 FR 80091, at 80096.
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IV. Comment Letter
The Commission received one comment letter on the proposed rule
change.\32\ The commenter asserts that the proposed rule change is
overly broad in that it appears to impose registration, examination and
continuing education requirements on associated persons in addition to
those solely engaged in proprietary trading. The commenter also
requested interpretive guidance and suggested several exemptions for
associated persons from the new examination requirements.
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\32\ See supra note 4.
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The commenter requested confirmation that principals who are
engaged in or supervise aspects of a member's securities business,
other than proprietary trading, are not required to comply with the new
registration, examination and continuing education requirements. These
principals are already registered and qualified as general securities
principals under ISE's rules. The ISE rules require associated persons
to be registered in the category of registration appropriate to the
function they perform, as prescribed by the Exchange. The intent of the
proposed rule change is to ensure that all persons engaged in the
securities business of member firms are subject to registration,
examination and continuing education requirements. If the persons
described by the commenter are already registered as general securities
principals, then the Commission expects that they would not have to
register under the new registration category as they are already
qualified pursuant to ISE rules. Similarly, Series 7 licensed persons
who conduct a retail business and are subject to continuing education
requirements, would not need to register in the new registration
category.\33\
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\33\ The commenter also raised certain questions solely
pertinent to CBOE's filing and requested guidance regarding whether
``risk managers'' would be required to register under that SRO's new
requirements. Although this comment is outside of the scope of this
proposal, the Commission notes that CBOE rules exempt certain
associated persons engaged in delineated activities from the new
registration, examination and continuing education requirements.
Unless a risk manager or associated person who has access to an
exchange is specifically exempted from registering, those persons
must register, pass an appropriate examination, and comply with
continuing education requirements.
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Additionally, the commenter proposed that the ISE accept the Series
[[Page 7887]]
24 examination as an alternative to the Series 14 examination for Chief
Compliance Officers, and that the ISE should exempt from the Series 14
requirement Chief Compliance Officers with a current Series 24 license
who have held the Series 24 license for a minimum of three years and
have no regulatory history. The commenter also suggested that
individuals with no regulatory history who currently hold the Series 24
and either the Series 9/10 or the Series 4 for a minimum of three years
should not have to take a new trading examination, and that the same
should apply to individuals with no regulatory history who are
currently Series 7 as well as Series 9/10 or Series 4 licensed for a
minimum of three years. The commenter also asked whether ISE will view
the examination for proprietary traders being developed as a
prerequisite to the Series 24 and the Series 9/10.
The Commission notes that ISE has the authority to waive the
applicable qualification examination requirement and accept other
standards as evidence of an applicant's qualifications for
registration, if the applicant demonstrates good cause. The Commission
understands that the new examination will serve as a prerequisite to
the Series 24 and the Series 9/10 examinations for principals who are
engaged solely in proprietary trading.
Finally, the commenter is concerned that ISE members will not have
the opportunity to comment on the new examination. The Commission notes
that any new examination created will be subject to the filing
requirements of Section 19(b) of the Act and, as such, will be
published in the Federal Register for comment.
V. Discussion and Commission Findings
In order to meet its obligations under Section 6 of the Act \34\ to
enforce compliance by member firms \35\ and their associated persons
with the Act, the rules thereunder, and the Exchange's own rules, an
exchange must have baseline registration and examination requirements
for all persons conducting business on an exchange, as well as for
those supervising the activity. In addition, an exchange should have
continuing education requirements for registered persons to help ensure
that members and persons associated with their members are up to date
on amendments to the Exchange's rules and the securities laws, rules,
and regulations that govern their activities. Furthermore, the Exchange
must have the information necessary to know if an associated person of
a member firm is subject to a statutory disqualification.\36\ This
information is elicited by the Form U4, which is used by most SROs to
register associated persons.
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\34\ Section 6 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.
\35\ Brokers and dealers are required to supervise the
activities of their associated persons. See Section 15(b)(4)(E) of
the Act.
\36\ See Section 6(c)(2) of the Act and Rule 19h-1 under the
Act. The Commission believes that it is important that certain
registration information, such as whether an associated person is
subject to a statutory disqualification, be available to exchanges
and other regulators, including the Commission and the State
securities regulators, through WebCRD as well as members of the
public through BrokerCheck, which derives information from WebCRD.
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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.\37\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\38\ 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,\39\ 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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\37\ 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).
\38\ 15 U.S.C. 78f(b)(5).
\39\ 15 U.S.C. 78f(c)(3)(B).
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ISE's proposed rule change requires all associated persons of
member organizations engaged in a securities business on ISE, 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 comply with continuing education
requirements. The Commission believes that ISE's requirements help
ensure that all associated persons who transact business on ISE,
including those engaged in proprietary trading, are subject to
appropriate registration, qualification, and continuing education
requirements and is consistent with the Act. These requirements bolster
the integrity of the Exchange by helping to ensure that all associated
persons engaged in a securities business are, and will continue to be,
properly trained and qualified to perform their functions, will be
supervised, and can be identified by regulators.
The Commission understands that the ISE is working with the other
options exchanges to develop an exam for proprietary traders. The
Commission expects the exam to be filed with the Commission no later
than May 12, 2011.\40\ If the exam is not filed by that time, the
Commission expects ISE to require all associated persons engaged in the
securities business of a member to promptly take and pass the Series 7
examination.
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\40\ Associated persons of ISE members will have 90 days from
the date the examination becomes available to take and pass the
examination.
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The requirement for each member 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.
Additionally, the Commission believes that the requirement that all
principals register through WebCRD and pass principal exams
appropriately reflects the enhanced responsibility entrusted to
principals. The requirement that members have at least two principals
responsible for oversight of member organization activity on ISE, who
must be registered as such and pass a principal exam, should help ISE
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 Commission also believes ISE's proposed exceptions from the
above-discussed general requirements are appropriate. Any member
seeking an exception from the two principal requirements 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
[[Page 7888]]
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 the exchange as well as the Federal securities laws. In
addition, ISE may waive the qualification examination requirement in
exceptional cases where the applicant has demonstrated that good cause
exists to grant the waiver. The Commission also 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.\41\
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\41\ See, e.g., FINRA Rule 1070(d) and NASDAQ Rule 1070(d).
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The Commission believes the restrictions on registration that bar a
member from maintaining a registration with ISE (1) persons no longer
active in the member's securities business, (2) persons no longer
functioning in the registered capacity, or (3) 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 the ISE.
The Commission notes that ISE has exempted several categories of
associated persons from the new registration requirements. These
persons 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 ISE.\42\ The
Commission understands that ISE's proposed rule change applies to all
associated persons conducting a securities business, on a proprietary
or agency basis, on ISE.
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\42\ See Notice, p. 17; 75 FR 80095. Such persons must comply
with Section 15(b)(8) of the Exchange Act.
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The Commission believes ISE'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.\43\
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\43\ Additionally, the Commission believes that the proposed
revisions to Rules 601 (Registration of Options Principals) 602
(Registration of Representatives), and 603 (Termination of
Registered Persons) to update certain references pertaining to
registration and termination forms, as well as to WebCRD and FINRA,
will provide clarity to ISE's rules, enabling regulators, members,
and the general public to better understand the rules.
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ISE's proposed rule change will help ensure that all associated
persons of members transacting business on ISE, as well as those who
supervise, train or otherwise oversee those who do, will be registered
with, and qualified by, the Exchange and will be subject to continuing
education requirements. The proposal will enhance ISE's ability to
ensure an effective supervisory structure for those conducting business
on ISE. 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 ISE to its rules will
strengthen the regulatory structure of the Exchange and should enhance
the ability of its members 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 change will promote uniformity of regulation across markets, thus
reducing opportunities for regulatory arbitrage. ISE's proposed rule
change helps ensure that all persons conducting a securities business
through ISE are appropriately supervised, as is required under the
Exchange Act.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule change (SR-ISE-2010-115), be, and
hereby is, approved.
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\44\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-3032 Filed 2-10-11; 8:45 am]
BILLING CODE 8011-01-P