[Federal Register Volume 76, Number 8 (Wednesday, January 12, 2011)]
[Notices]
[Pages 2180-2182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-435]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63647; File No. SR-Phlx-2010-148]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Granting Approval of a Proposed Rule Change Relating to Certain
Membership Rules Including Affiliations and Lapse of Membership
Applications
January 5, 2011.
I. Introduction
On November 5, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
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
relating to certain membership rules. The proposed rule change was
published for comment in the Federal Register on November 22, 2010.\3\
The Commission received no comment letters on the proposal. 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\ Securities Exchange Act Release No. 63318 (November 16,
2010), 75 FR 71155 (``Notice'').
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II. Description of the Proposed Rule Change
A. Affiliations
Currently, Phlx Rule 793 (``Affiliations--Dual or Multiple'')
allows a person that holds a Phlx trading permit to associate or
affiliate with one or more Phlx members or a non-member that is engaged
in the securities business if such affiliation is approved in writing
by the member and disclosed to the Exchange.\4\ However, no member may
use his or her trading permit to qualify more than one member
organization. Further, the rule provides that the Exchange could
disapprove multiple affiliations that the Exchange believed were
``inconsistent with Exchange standards of financial responsibility,
operational capability, or compliance responsibility.''
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\4\ Specifically, the rule provides that ``[n]o person shall at
the same time be a partner, * * * officer, director, stockholder, or
associated person of more than one member or participant
organization, nor shall he be affiliated in any manner with a non-
member or non-participant organization which is engaged in the
securities business, unless such affiliation has been disclosed to
and approved in writing by the member and/or participant
organizations and such approval has been filed with the Office of
the Secretary.''
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Among other things, Rule 793 allows a broker-dealer to seek an
affiliation in order to obtain membership status without the need to
secure a membership seat (or, subsequent to the Exchange's
demutualization, a trading permit). Such an arrangement would have been
appropriate, for example, where a broker-dealer sought only electronic
access to the Exchange, since the Exchange only requires one permit to
qualify a member organization. Another example would be applicable in
the case of access to the Phlx trading floor. Because Phlx requires
each person associated with a member organization on the trading floor
who functions in a trading capacity to have a permit, and every trader
on the floor must possess a Series A-1 permit,\5\ affiliation could
allow floor traders to affiliate with another member organization to
satisfy certain trading or staffing requirements.
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\5\ For example, a Series A-1 permit holder is required to
display a badge when on the trading floor that identifies the member
organization on whose behalf the trader is trading that day. A
Series A-1 permit holder may not trade for more than one member
organization on the same day.
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The Exchange now proposes to eliminate Rule 793. In its place, the
Exchange proposes to amend existing Rule 908 (``Rights and Privileges
of A-1 Permits'') to add a new paragraph (b)(i) to allow a trading
permit holder on the Exchange's floor to affiliate with up to two
member organizations that are under common ownership. Specifically, the
proposed rule provides that: ``[n]otwithstanding applicable By-Laws and
Rules conditioning membership, a Series A-1 permit holder on the
Exchange's trading floor may be affiliated with up to two (2) member
organizations (a primary and a secondary member organization) that are
under common ownership * * *.'' The proposed rule would define ``common
ownership'' to be at least 75% common ownership between the member
organizations. Further, both the primary and secondary member
organizations would need to notify the Phlx Membership Department of
the affiliation, and such notification must include an attestation of
common ownership, the names of the individuals responsible for
supervision of the permit holder, and the Exchange account numbers for
billing purposes. Under the proposed rule, a Series A-1 permit holder
would have the ability to engage in trading activity on the Exchange's
floor on behalf of either the primary or secondary member organization
that the permit is affiliated with per Rule 908(b)(i).\6\
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\6\ A Series A-1 permit holder may not trade for more than one
member organization on the same day.
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Despite the ability to affiliate with up to two member
organizations, the
[[Page 2181]]
proposal provides that a Series A-1 permit holder would be required to
comply with all current membership By-Laws and Rules. Further, both the
permit holder and the affiliated member organizations also must comply
with all applicable trading, registration, qualification, examination,
and other membership requirements. In particular, the Series A-1 permit
holder is required to obtain and maintain all necessary qualifications
(including examinations) and registrations. In addition, the Series A-1
permit holder would be required to disclose to the Exchange the
individuals at each member organization (both the primary and secondary
member organization) that are responsible for supervising the Series A-
1 permit holder.
As a consequence of the proposal, any Series A-1 permit holder that
currently affiliates with an unrelated party would not be permitted to
continue to qualify that member organization. In addition, a permit
holder would not be permitted to maintain an affiliation with more than
two member organizations, and both organizations must be under common
ownership.
In recognition of the proposed deletion of Rule 793 and new Rule
908(b)(i), the Exchange also proposed to make conforming changes to
other rules that reference affiliation. In particular, the Exchange
proposed to amend Option Floor Procedure Advice (``OFPA'') F-9 to
conform to new Rule 908(b)(i).\7\ In addition, the Exchange would
remove references to ``dual affiliation'' in OFPA F-11 and Regulation 3
in favor of a reference simply to ``affiliation,'' and would replace a
reference to Rule 793 with Rule 908 in OFPA F-11. The Exchange further
would amend Rule 908(h) to add an ``or'' to the text of the rule to
make clear that a permit may be transferred either intra-firm or to an
inactive nominee registered with the Exchange.
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\7\ In particular, the Exchange proposed in F-9 to remove
references to ``dual'' so that the rule simply refers to
affiliations; to require reports of affiliations to be sent to the
Membership Department instead of the Exchange's Office of the
Secretary to conform with the text of amended Rule 908; replace the
reference to Rule 793, which is being deleted, with a reference to
Rule 908; amend the language in OFPA F-9 to remove the requirements
to explain compensation since affiliations would only be permitted
for organizations that are under common ownership; and add a
sentence indicating that floor members must adhere to the
requirements in renamed (a) and (b), and to reference Exchange Rule
1020 for the newly named F-9(ii)(a).
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B. Lapsed Applications
In addition, the Exchange proposes to amend Rule 900.2 to address
lapsed membership applications. Pursuant to Exchange Rule 900.2,
applicants desiring membership in the Exchange are required to submit
information in a form prescribed by the Membership Department.\8\
According to the Exchange, after a 90 calendar day period has elapsed,
the information provided by the applicant is stale and no longer
provides a reliable or reasonable basis for the Exchange to make a
determination on admitting a person for membership.\9\ The Exchange
represented that the Membership Department expends a considerable
amount of resources requesting updates from members and researching
information to make a reasonable determination when an application is
outdated.\10\
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\8\ The Membership Department posts the requisite forms on the
Exchange's Web site at http://www.nasdaqomxtrader.com/Trader.aspx?id=membership_phlx. The Membership Department updates
the forms from time to time and makes them available on this Web
site.
\9\ See Notice, supra note 3, at 71157.
\10\ See id.
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To address this situation, the Exchange proposed to amend Exchange
Rule 900.2 \11\ to require persons seeking membership to the Exchange
to provide all information and respond to subsequent requests from the
Membership Department for information within a 90 calendar day period.
Any failure to respond in the prescribed period would result in the
application lapsing. If an application lapses, the person would be
required to submit a new application if it wants to continue with its
application.\12\ Upon a showing of good cause, the Exchange may extend
the timeframe.\13\ The Exchange would not refund the fee associated
with submitting an application and the applicant would be required to
pay a new fee to resubmit the application if it chooses to proceed with
its application for membership.\14\
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\11\ The Commission notes that the Exchange proposed to renumber
Rule 900.2(e) as 900.2(f) due to the new proposed Rule 900.2(e).
\12\ The purpose of the new application would be to update all
information to provide the Membership Department with current
information on which to base a decision to accept the applicant for
membership. The Exchange expressed its intent to file a proposal
with the Commission to amend its Fee Schedule to reflect the lapsed
application fee.
\13\ See Notice, supra note 3, at 71157. The Exchange also may
extend the time period when it makes a request for additional
information relatively close to the 90-day deadline. See id.
\14\ The Exchange's Application Fee can be found on the Fee
Schedule located on the Exchange's Web site at http://www.nasdaqomxtrader.com/content/marketregulation/membership/phlx/feesched.pdf.
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III. Discussion
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,\15\ and, in
particular, the requirements of Section 6(b) of the Act \16\ and the
rules and regulations thereunder. Specifically, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\17\ in
that the proposal promotes just and equitable principles of trade,
prevents fraudulent and manipulative acts, removes impediments to and
perfects the mechanism of a free and open market and a national market
system, and, in general, protects investors and the public interest.
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\15\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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The Commission believes the proposal, which limits the ability of a
Series A-1 permit holder to qualify other organizations for Exchange
membership is reasonable, as it will continue to allow flexibility in
permitting a permit holder to qualify up to one other member
organization (the ``secondary member organization'') for Exchange
membership that is under common ownership with the primary member
organization with which the permit holder is associated. While the
Commission notes that based on the proposal, a Series A-1 permit holder
who currently affiliates with an unrelated member organization (not
under common ownership) to qualify the member organization for
electronic access or access to the trading floor would not be permitted
to continue to qualify that member organization, the Commission
believes that the proposal is a reasonable alternative that may assist
firms in addressing staffing issues for entities under a common
ownership that conduct a floor-based trading business.
The Exchange's proposal recognizes the changed environment in terms
of the means by which persons obtain access to the Exchange. Current
Rule 793 was adopted when the Exchange was a membership organization
and access was obtained through ownership of a limited number of seats
on the Exchange. Rule 793 allows persons to access and trade on the
Exchange that might not have otherwise been able to purchase or obtain
a membership seat. However, since it demutualized, the Exchange now
offers access via an unlimited number of trading permits, which can be
more readily obtained by qualified individuals compared to former
membership seats. In this respect, the Exchange's proposal
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modernizes the affiliation provision in recognition of the transition
of the Exchange from a mutual to a demutualized organization.
Furthermore, the Commission notes that the Exchange represented in
its proposal, as described above, that the Exchange would continue to
have access to information on an affiliation necessary to carry out its
regulatory responsibility with respect to the member organizations and
their affiliated persons. Further, an affiliation would not excuse a
person from any of the Exchange's By-Laws and rules governing
membership. Notably, both the permit holder and the affiliated member
organizations must comply with all applicable registration,
qualification, examination, and other membership requirements, and the
permit holder must continue to obtain and maintain all necessary
qualifications (including examinations) and registrations. Further, the
Series A-1 permit holder must disclose to the Exchange the individuals
at each member organization (both the primary and secondary member
organization) that are responsible for supervising the Series A-1
permit holder. The Commission believes that these provisions are
designed to ensure compliance with applicable membership rules and
should assure the Exchange's oversight of any affiliation.
In addition, the Commission believes that the Exchange's proposed
conforming changes to OFPA F-9, F-11, and Regulation 3 appropriately
reflect the proposed deletion of Rule 793 and the new provision in Rule
908(b)(i). Separately, the Commission believes that the proposal to
amend the language in Rule 908(h) should provide Exchange members with
clarity as to the transfer of permits.
Finally, the Commission believes that requiring applicants for Phlx
membership to respond to requests for documentation or additional
information within a 90 calendar day period, absent a showing of good
cause, is reasonable and should provide the Exchange's Membership
Department up-to-date information that it can utilize to make decisions
concerning membership applications. The 90-day response period and
subsequent lapse of an application for non-response should encourage
prompt replies by applicants to Exchange requests for information and
documentation and should assure that the Exchange has reliable and
current information on which to base membership decisions.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-Phlx-2010-148) be, and
hereby is, approved.
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\18\ 15 U.S.C. 78s(b)(2).
\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-435 Filed 1-11-11; 8:45 am]
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