[Federal Register Volume 64, Number 167 (Monday, August 30, 1999)]
[Notices]
[Pages 47214-47218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22426]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41776; File No. SR-Phlx-99-07]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Amendment Nos. 1 
and 2 and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 3 to the Proposed Rule Change Requiring Off-Floor Traders 
for which the Phlx is the Designated Examining Authority to 
Successfully Complete the General Securities Representative Examination 
Series 7

August 20, 1999.
    On March 15, 1999, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'' or 
``Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed rule change 
would amend Phlx Rule 604, Registration and Termination of Registered 
Representatives, to require successful completion of the General 
Securities Representative Examination Series 7 (``Series 7 Exam'') by 
persons who are associated with members or participant organizations 
\3\ for which the Exchange is the Designated Examining Authority 
(``DEA'') \4\ and who trade off the floor of the Exchange (``off-floor 
traders'').\5\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``participant organizations'' refers to foreign 
currency options participant organizations, which includes foreign 
currency options participants firms and foreign currency options 
participant corporations. Phlx Rules 13-16.
    \4\ Pursuant to Section 17(d) of the Exchange Act, 15 U.S.C. 
78q(d), the Commission may ``allocate among self-regulatory 
organizations the authority to adopt rules with respect to matters 
as to which, in the absence of such allocations, such self-
regulatory organizations share authority under this title.'' The DEA 
is the self-regulatory organization (``SRO'') that has the 
responsibility for examining a broker or dealer member for 
compliance with the federal securities laws and the rules of the 
SRO.
    \5\ Under the proposed rule change, Phlx Rule 604 would be 
retitled as Registration and Termination of Registered Persons.
---------------------------------------------------------------------------

    On April 6, 1999, the Exchange filed Amendment No. 1 with the 
Commission, removing a description of professional traders from the 
filing.\6\ On April 12, 1999, the Exchange filed Amendment No. 2 with 
the Commission, making technical changes to the proposed rule.\7\ On 
August 18, 1999, the Exchange filed Amendment No. 3 with the 
Commission, which revised the rule language.\8\ Notice of the proposed 
rule change, as amended, together with the substance of the proposal, 
was published in the Federal Register.\9\ The Commission received 22 
comment letters from 21 commenters on the filing.\10\ This order 
approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \6\ See Letter from Richard S. Rudolph, Legal Counsel, Phlx, to 
Karl Varner, Special Counsel, Division of Market Regulation 
(``Division''), SEC (April 6, 1999).
    \7\ See Letter from Richard S. Rudolph, Legal Counsel, Phlx, to 
Karl Varner, Special Counsel, Division, SEC (April 12, 1999).
    \8\ See Letter from Richard S. Rudolph, Legal Counsel, Phlx, to 
Karl Varner, Special Counsel, Division, SEC (Aug. 18, 1999). 
Amendment No. 3 revised the proposed rule language for paragraph (e) 
of Phlx Rule 604. (Amendment No. 3 was inadvertently designated as 
Amendment No. 2 by the Phlx).
    \9\ Securities Exchange Act Release No. 41306 (April 16, 1999), 
64 FR 22665 (April 27, 1999).
    \10\ See Letter from Donald M. Nisonoff, Senior Counsel, 
Proskauer Rose LLP to Secretary, SEC (May 14, 1999) (``Nisonoff 
Letter''); E-mail from Chris Pheil to Rule-Comments at OSI (May 3, 
1999); E-mail from Victor Shakerchi to Rule-Comments at OSI (May 3, 
1999); Letter from H.R. Roger Menear III to Secretary, SEC (May 7, 
1999); Letter from Brian Dalinsky to Secretary, SEC (May 7, 1999); 
Letter from Vladimir M. Slavinsky to Secretary, SEC (May 7, 1999); 
Letter from Joseph H. Phoenix to Secretary, SEC (May 7, 1999); 
Letter from Aleksandr E. Shapiro to Secretary, SEC (May 7, 1999); 
Letter from Dan Dimitrigevic to Secretary, SEC (May 7, 1999); Letter 
from Nelson R. Davis, Jr. to Secretary, SEC (May 10, 1999), E-mail 
from Sean von Tagen to Rule-Comments at OSI (May 12, 1999); E-mail 
from Dan Laycock to Rule-Comments at OSI (May 4, 1999; E-mail from 
Barry Pozmantier to Rule-Comments at OSI (May 6, 1999) (``Pozmantier 
E-mail''); E-mail from David Kolpak to Rule-Comments at OSI (May 18, 
1999); E-mail from David Wacker to Rule-Comments at OSI (May 16, 
1999); E-mail from Jerry Wickey to Rule-Comments at OSI (May 16, 
1999); E-mail from John Hodges to Rule-Comments at OSI (May 16, 
1999); E-mail from Alan Goldstein to Rule-Comments at OSI (May 16, 
1999; E-mail from Peter Kulbokas to Rule-Comments at OSI (May 20, 
1999); Letter from P.L. Blackburn, Office Manager, Bright Trading, 
to Secretary, SEC (May 10, 1999) (``Blackburn Letter''); Letter from 
Ron Owens to SEC (May 15, 1999); Memorandum to File No. SR-PHLX-99-
07 (June 1, 1999) (telephone conference with Donald Nisonoff and 
Saul Cohen, Proskauer Rose, LLP).

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

[[Page 47215]]

I. Background and Summary

    Phlx Rule 604 specifies the qualification requirements for persons 
conducting a public business or duties customarily performed by 
registered representatives. Specifically, these associated persons are 
required to register on Form U-4, Uniform Application for Securities 
Industry Registration or Transfer, and to pass the Series 7 Exam and 
maintain an effective Series 7 Full Registration/General Securities 
Representative registration.\11\ In addition, Phlx Rule 604 specifies 
the qualification requirements for associated persons of a member or 
participant organization for which the Exchange is the DEA when these 
persons are not registered representatives, but are compensated 
directly or indirectly for trading securities for the firm's 
account.\12\ Currently, this class of associated persons, which 
includes the Phlx off-floor traders who are the subject of the proposed 
rule change, are only required to file a Form U-4.
---------------------------------------------------------------------------

    \11\ See Phlx Rule 604(a).
    \12\ Phlx Rule 604(d) specifies that every person who is 
compensated directly or indirectly by a member or participant 
organization for which the Exchange is the DEA for the solicitation 
or handling of business in securities, including trading securities 
for the account of the member or participant organization, whether 
such securities are those dealt in on the Exchange or those dealt in 
over-the-counter, who is not otherwise required to register with the 
Exchange, must file Form U-4, Uniform Application for Securities 
Industry Registration or Transfer, with the Exchange, See also 
Securities Exchange Act Release No. 36515 (November 27, 1995), 60 FR 
62119 (December 4, 1995) (File No. SR-Phlx-95-58) (order approving 
addition of paragraph (d) to Phlx Rule 604 to require associated 
persons to file Form U-4.).
---------------------------------------------------------------------------

    The Exchange proposes to amend Phlx Rule 604 to require successful 
completion of the Series 7 Exam by persons who are associated with 
members or participant organizations for which the Exchange is the DEA 
and who trade off the floor of the Exchange. The Exchange believes 
those persons to whom the new examination requirement would apply 
primarily are associated with limited liability companies (``LLC'') for 
the purpose of trading securities off the floor of the Exchange for the 
firm's account. According to the Exchange, these off-floor traders 
generally become members of an LLC to avail themselves of good faith 
margin \13\ provided through the LLC's Joint Back Office \14\ agreement 
with its clearing agent.
---------------------------------------------------------------------------

    \13\ Good faith margin is the amount of margin which a creditor 
would require in exercising sound credit judgment. See 12 CFR 220.2 
(``Regulation T'').
    \14\ See 12 CFR 220.7(c) (noting that in a broker-dealer credit 
account, a creditor may finance transactions of any of its owners if 
the creditor is a clearing and servicing broker or dealer owned 
jointly or individually by other creditors).
---------------------------------------------------------------------------

    The proposal would require all currently registered associated 
persons who trade off the floor of the Exchange to register to take the 
Series 7 Exam within 30 days of the Exchange's notice to its membership 
of this requirement, and to successfully complete the Series 7 Exam 
within six months of the date of notice by the Exchange.\15\ Those 
associated persons covered by the rule change will be required to 
notify the Exchange promptly that they have registered to take the 
Series 7 Exam. Persons who become associated with member organizations 
or participant organizations after the date of notice of this 
requirement must successfully complete the Series 7 Exam prior to 
conducting securities trading activities for which the examination is 
mandated.
---------------------------------------------------------------------------

    \15\ According to the Exchange, as of June 30, 1999, the 
proposal would affect approximately 1,777 persons associated with 
about 15 firms out of a total of 8,240 firms that have the ability 
to direct orders to the Phlx by using floor broker members to 
expedite trades. Telephone conversation between Richard S. Rudolph, 
Legal Counsel, Phlx, and Joseph Morra, Attorney, Division, SEC (July 
28, 1999).
---------------------------------------------------------------------------

II. Summary of Comments and the Exchange's Response

    All 21 commenters expressed concerns about the proposal. Twenty 
commenters stated that, if the Exchange were to require an examination 
for off-floor traders, the Limited Representative-Equity Trader 
Examination (``Series 55 Exam''), which qualifies individuals to trade 
equity and convertible debt securities on a principal or agency basis, 
or another unspecified examination, would be more appropriate for those 
traders.\16\ Some of these commenters argued that the Series 55 Exam is 
more relevant for off-floor traders. Two commenters added that the 
proposal will discourage trading off the floor of the Exchange without 
any regulatory benefit, because the Series 7 Exam covers a wide range 
of products and activities that typically are not engaged in by off-
floor traders.\17\ One of these commenters also objected to the 
proposal because in his view: (1) Off-floor traders associated with 
LLCs have limited interaction with traders at other firms and no 
contact with customers; (2) adequate controls exist now to limit any 
possible impact of trading off the floor of the Exchange;\18\ and (3) 
the proposal is an indirect attempt to regulate credit used by the off-
floor traders.\19\ Another commenter stated that the proposal 
discriminates in favor of certain parties and against others because 
the Series 7 Exam is not required of floor traders and others 
conducting similar businesses.\20\
---------------------------------------------------------------------------

    \16\ See, e.g., Nisonoff Letter, Pozmantier E-mail.
    \17\ See Nisonoff Letter at 2 and Blackburn Letter.
    \18\ See Nisonoff Letter at 2.
    \19\ See supra n.10, Nisonoff Telephone Conference.
    \20\ See Pozmantier E-mail.
---------------------------------------------------------------------------

    The Phlx in its response letter stated that the Series 7 Exam, 
rather than the Series 55 Exam, is appropriate for a logistical reason: 
To qualify to take the Series 55 Exam, an individual must first pass 
either the Series 7 Exam or the Corporate Securities Limited 
Representative Qualification Examination (``Series 62 Exam'').\21\ The 
Phlx believes that it is more practical to require the Series 7 Exam 
only, rather than both the Series 7 Exam and the Series 55 Exam. The 
Phlx also responded that the Series 55 Exam is not suitable because it 
is used to qualify individuals to trade equity and convertible debt 
securities on a principal or agency basis, with an emphasis on Nasdaq 
market maker activities and obligations. Moreover, the Exchange noted 
that the Series 55 Exam was designed with the assumption that the 
participant will already have been thoroughly tested on the critical 
areas in the Series 7 Exam (such as compliance with federal and state 
laws and industry regulations, characteristics of different investment 
products, investment risks, and principal factors affecting securities 
markets and prices for individual securities).
---------------------------------------------------------------------------

    \21\ See Letter from Richard S. Rudolph, Legal Counsel, Phlx, to 
Karl Varner, Esquire, Division, SEC (June 9, 1999). The Series 55 
Exam was developed by the National Association of Securities 
Dealers, Inc. (``NASD'') in response to problems identified in 
connection with the administrative proceeding against the NASD, 
National Association of Securities Dealers, Inc., Securities 
Exchange Act Release No. 37538 (Aug. 8, 1996), 62 S.E.C. Docket 1346 
(Order Instituting Public Proceedings Pursuant To Section 19(h)(1) 
of the Securities Exchange Act of 1934, Making Findings and Imposing 
Remedial Sanctions). NASD rules generally require a person to have 
successfully completed the Series 7 Exam before taking the Series 
55. See Securities Exchange Act Release No. 39516 (January 2, 1998), 
63 FR 1520 (January 9, 1998) (order approving Series 55 Exam).

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

[[Page 47216]]

    The Phlx also stated that other SROs such as the New York Stock 
Exchange, Inc. (``NYSE''), the American Stock Exchange, Inc. 
(``Amex''), and the Chicago Stock Exchange, Inc. (``CHX'') require that 
securities traders pass the Series 7 Exam.\22\ The Phlx noted that an 
associated person of a Phlx member would be required to take the Series 
7 Exam if the firm or that associated person decided to become a member 
of another SRO.
---------------------------------------------------------------------------

    \22\ See NYSE Rule 345; Amex Rule 341; NASD Conduct Rule 1030; 
CHX Article VI, Rule 3.
---------------------------------------------------------------------------

III. Discussion

    Under Section 19(b) of the Act,\23\ the Commission is required to 
approve a proposed rule change if it finds that the proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the SRO. Under the Act, SROs are 
assigned rulemaking and enforcement responsibilities for regulating the 
securities industry for the protection of investors and for related 
purposes. A key requirement for SROs is to assure that associated 
persons \24\ of their members satisfy prescribed standards of training, 
experience, and competence as a condition to membership.\25\ The 
Commission finds that the Exchange's proposal requiring those off-floor 
traders of Phlx members or participant organizations for which the Phlx 
is the DEA to successfully complete the Series 7 Exam is consistent 
with the requirements of the Section 6 of Act, and particularly 
Sections 6(b)(5)\26\ and 6(c)(3) (A) and (B)\27\ thereunder, for the 
reasons discussed below.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(2).
    \24\ As defined in Section 3(a)(21) of the Act, an associated 
person of a member is ``any partner, officer, director, or branch 
manager of such 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 such 
member, or any employee of such member.'' 15 U.S.C. 78c(a)(21). The 
off-floor traders covered by the Exchange's proposed rule change are 
associated persons of the member firm.
    \25\ See 15 U.S.C. 78f(c)(3)(B).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ 15 U.S.C. 78f(c)(3) (A) and (B).
---------------------------------------------------------------------------

    A review of the Act and its legislative history, as well as 
subsequent amendments, reveals that one of the Act's most important 
objectives is to maintain the integrity and competency of securities 
industry personnel. To this end, Congress has authorized the Commission 
to comprehensively regulate the securities activities of member firms 
and their associated persons by, among other things, ensuring that all 
natural persons associated with a broker-dealer meet such standards of 
training, experience, competence, and such other qualifications as the 
Commission finds necessary or appropriate in the public interest or for 
the protection of investors.\28\ Moreover, Section 15(b)(7)(C) of the 
Act \29\ provides that the Commission may rely on the registered 
securities associations and national securities exchanges to ``require 
registered brokers an dealers and persons associated with such brokers 
and dealers to pass tests administered by or on behalf of any such 
association or exchange.'' To effectuate the goals of Section 15(b)(7) 
of the Act,\30\ the Commission in 1993 adopted Rule 15b7-1, which 
prohibits registered broker-dealers from effecting any transaction in, 
or inducing the purpose or sale of, any security unless any natural 
person associated with such broker or dealer who effects or is involved 
in effecting such transaction is registered or approved in accordance 
with the standards of training, experience, competence, and other 
qualification standards (including but not limited to submitting and 
maintaining all required forms, paying all required fees and passing 
any required examinations) established by the rules of any national 
securities exchange of which such broker or dealer is a member.\31\
---------------------------------------------------------------------------

    \28\ See Section 15(b)(7) of the Act, 15 U.S.C. 78o(b)(7).
    \29\ 15 U.S.C. 78o(b)(7)(C).
    \30\ 15 U.S.C. 78o(b)(7).
    \31\ 17 CFR 240.15b7-1.
---------------------------------------------------------------------------

    In addition, Section 6(c)(3)(A) of the Act \32\ provides that a 
national securities exchange may deny membership to, or condition the 
membership of, a registered broker-dealer if any natural persons 
associated with such broker or dealer do not meet such standards of 
training, experience and competence as are prescribed by the rules of 
the exchange.\33\ Also, under Section 6(c)(3)(B) of the Act,\34\ a 
National securities exchange may bar a natural person from becoming 
associated with a member if the person does not meet the exchange's 
standards of training, experience, or competence, or if the person has 
engaged and there is a reasonable likelihood the person will engage 
again in acts or practices inconsistent with just and equitable 
principles of trade. Under these statutory provisions, the various 
national securities exchanges, including the Phlx, are empowered to 
implement rules establishing the prerequisites to qualify and approve 
persons associated with members to engage in securities activities.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78f(c)(3)(B).
    \33\ Under Section 15(b)(8) of the Act, all registered brokers 
or dealers must be members of an SRO--either a securities 
association or a national securities exchange. 15 U.S.C. 78o(b)(8).
    \34\ 15 U.S.C. 78f(c)(3)(B).
---------------------------------------------------------------------------

    The Act's legislative history also demonstrates the strong concerns 
of Congress regarding the expertise and competency of persons 
associated with the brokerage industry. One of the primary objectives 
of Congress in amending the Act in 1964 was ``to strengthen the 
standards of entrance into the securities business, enlarge the scope 
of self-regulation, and strengthen Commission disciplinary controls 
over brokers, dealers, and their employees.'' \35\ The Senate Report 
further noted that ``[o]ne of the basic purposes of the Securities 
Exchange Act of 1934 is to regulate the conduct of broker-dealers and 
persons associated with them, both through direct Commission controls 
and through self-regulation by industry groups, with appropriate 
Commission oversight.'' \36\ The Senate Report emphasized the 
importance of screening the integrity and competence of those persons 
involved in the securities industry.\37\
---------------------------------------------------------------------------

    \35\ S. Rep. No. 379, 88th Cong., 1st Sess. 1 (1963) (``Senate 
Report'').
    \36\ Id. at 38.
    \37\ The Senate Report noted the following:
    The findings of the Special Study show that--because of the 
complex nature of the securities markets, the reliance which the 
investing public necessarily places upon the competence and 
character of professionals in those markets, and the 
responsibilities which are assumed--the existing ease of entry for 
inexperienced and unqualified persons subjects the investing public 
to undue hazards and unnecessarily complicates the task of 
regulation.
    Id. at 43-44. In this regard, the national securities exchanges 
and associations were specifically charged to enhance their 
regulation of associated persons: ``Development and administration 
of such standards is a matter which is peculiarly appropriate for 
self-regulation under Commission supervision; and the establishment 
of such requirements, in conjunction with the requirement of 
membership in a regulatory body, should significantly simplify 
regulation and improve investor protection.'' Id. at 44.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposal to require 
associated persons of members to pass the Series 7 Exam is a well-
established and accepted practice in the securities industry and is 
directly related to one of the most important objectives of the 
Exchange Act--maintaining the integrity and competency of securities 
industry personnel.
    Off-floor traders of the Phlx are participants in the securities 
industry. The persons who will be subject to the new rule are 
associated persons of the member firm.\38\ They effect their trading 
activities in the firm's proprietary account. As associated persons of

[[Page 47217]]

members of the Phlx, they are required to comply with the Commission's 
and the Exchange's rules pertaining to broker-dealers and their 
associated personnel, including qualification requirements established 
to assure that they maintain the degree of integrity and competency 
expected of securities industry personnel. The off-floor traders are 
already subject to registration requirements, including the requirement 
to file a Form U-4. Requiring these off-floor traders to pass the 
Series 7 Exam will further the objectives of Sections 6(c)(3) (A) and 
(B)\39\ of the Act, which are intended to assure that associated 
persons are sufficiently familiar with Commission and SRO requirements 
and procedures when they are closely connected to the securities 
industry.
---------------------------------------------------------------------------

    \38\ See supra n. 24.
    \39\ 15 U.S.C. 78f(c)(3) (A) and (B).
---------------------------------------------------------------------------

    The proper education of securities industry personnel is but one 
component of a carefully considered statutory and regulatory framework 
designed to promote the integrity of securities markets and protect 
investors. According to the Exchange, these off-floor traders generally 
become members of an LLC to avail themselves of benefits available to 
associated persons, e.g., Joint Back Office agreements, and not to 
others. The off-floor traders' benefits of associated person status and 
the ability to trade in the firm's account also entail obligations 
under the securities laws. By successfully completing the Series 7 
Exam, these off-floor traders should develop a greater understanding of 
securities products, risks, and regulations appropriate for associated 
persons.
    Moreover, the proposed rule change is consistent with the 
provisions of Section 6(b)(5) \40\ of the Act requiring, among other 
things, that the rules of an exchange be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade and, in general, to protect investors and the 
public interest. The Series 7 Exam tests for proficiency in a broad 
range of securities matters, including anti-fraud and anti-manipulation 
regulation. Without proper training, these associated persons may 
inadvertently engage in transactions in the firm's account that are 
improper under the federal securities laws and regulations or rules of 
the SROs. In the Commission's opinion, the proposed rule revision 
satisfies the objectives of Section 6(b)(5) \41\ of the Act because, by 
satisfactorily completing the Series 7 Exam, these off-floor traders 
who trade on a proprietary basis will gain a greater understanding of 
the regulations, procedures and principles governing the securities 
industry.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78f(b)(5).
    \41\ Id.
---------------------------------------------------------------------------

    Most commenters suggested that the Phlx instead should require off-
floor traders to pass the Series 55 Exam or another examination 
specifically tailored to the activities of these off-floor traders, 
rather than the Series 7 Exam. The Commission believes that, although 
the Series 7 Exam does not focus on trading off the floor of the 
Exchange, the exam covers a reasonably broad range of applicable laws, 
rules, regulations, and industry practices that are pertinent to most 
associated persons. In essence, the Series 7 Exam is the industry 
standard for persons who want to be affiliated with a broker-dealer and 
trade securities. In addition, typically a person must pass the Series 
7 Exam to qualify to take the Series 55 Exam, which is a specialized 
registration category.\42\ The Series 55 Exam focuses on activities, 
automated execution and trading systems, and trade reporting 
obligations geared toward the Nasdaq market maker.\43\ In contrast, the 
Series 7 Exam is broader in scope, used principally to qualify persons 
seeking registration as general securities representatives. It tests 
for appropriate levels of knowledge and expertise regarding securities 
laws and regulations, characteristics of different investment products, 
investment risk, and principal factors affecting securities markets and 
prices for individual securities. The Commission agrees with the Phlx 
that the Series 7 Exam is the more appropriate test for off-floor 
traders.
---------------------------------------------------------------------------

    \42\ Securities Exchange Act Release No. 39516 (January 2, 
1998), 63 FR 1520 (January 9, 1998) (order approving Series 55 
Examination).
    \43\ See Letter from Richard S. Rudolph, Counsel, Phlx, to Karl 
Varner, Esquire, Division, SEC, at pp. 1-2 (June 9, 1999).
---------------------------------------------------------------------------

    One commenter remarked that the proposal discriminates against off-
floor traders because traders on the floor of the Phlx do not have to 
take the Series 7 Exam. The Commission, however, finds that the 
proposal does not unfairly discriminate against off-floor traders 
because traders on the floor of the Exchange must pass the Series 7 
Exam, the Series 7A examination,\44\ or an options proficiency 
examination for Registered Options Traders (``ROT'') administered by 
the Phlx Department of Regulatory Services.\45\ Another commenter 
suggested that the Exchange's proposal would not apply to firms engaged 
in proprietary trading, even though such firms' employees are routinely 
permitted to trade large firm proprietary positions far exceeding the 
position that an LLC member would take using his or her own capital. 
The Commission finds that the proposal, however, is intended to apply 
to all off-floor traders of members or participant organizations who 
trade for the member firm's proprietary account when the Phlx is the 
DEA, and not just those associated with LLCs.\46\ In addition, as noted 
above, all traders on the floor of the Exchange who trade for the 
member firm's proprietary account must successfully complete the Series 
7 Exam, the Series 7A examination, or a Phlx options proficiency 
examination, depending on which is applicable.
---------------------------------------------------------------------------

    \44\ See Phlx Rule 604. The Series 7A examination is a module of 
the Series 7 Exam developed to test the knowledge of the relevant 
securities laws and Exchange Rules required of a member who conducts 
a public business that is limited to accepting orders from 
professional customers for execution on the trading floor.
    \45\ See Telephone conversation between Richard S. Rudolph, 
Legal Counsel, Phlx, and Karl Varner, Attorney, Division, SEC (Aug. 
17, 1999). An ROT is a regular member or a foreign currency options 
participant of the Exchange located on the trading floor who has 
received permission from the Exchange to trade options for his own 
account. See Phlx Rule 1014(b). See also Phlx Rule 901(c)(1), which 
specifies that the Exchange may bar a person from becoming 
associated with a member or condition the association of a person 
with a member organization if the person does not successfully 
complete such written proficiency examinations as required by the 
Exchange to enable it to examine and verify the applicant's 
qualifications to function in one or more of the capacities applied 
for.
    \46\ See Telephone conversation between Richard S. Rudolph, 
Legal Counsel, Phlx, and Karl Varner, Attorney, Division, SEC (Aug. 
9, 1999).
---------------------------------------------------------------------------

    With respect to one commenter's statement that adequate controls 
exist to limit any possible impact of trading off the floor of the 
Exchange, the Commission finds that the proposal will properly 
supplement existing controls to ensure that off-floor traders and other 
associated persons of members are appropriately qualified to become 
associated with a member. By successfully completing the Series 7 Exam, 
off-floor traders of the Phlx should hve a sufficient level of 
knowledge of securities laws and regulations, as well as investment 
products and risks, that is suitable to their role as associated 
persons of a member organization and who trade on a proprietary basis 
in the firm's account.
    In one commenter's view, the proposal is an indirect attempt to 
regulate credit used by off-floor traders. The Commission does not 
consider the proposal to be an indirect attempt to impose greater 
credit restrictions on off-floor traders, but an effort to assure a 
level of understanding and competency regarding securities matters by

[[Page 47218]]

associated persons of broker-dealers. In fact, the Phlx rule change may 
benefit a member firm because its off-floor traders will be 
comprehensively trained and tested on fundamental securities matters.
    Finally, the Commission finds that the proposal will bring the 
Exchange's qualification requirements in line with those of other 
securities exchanges by adding testing requirements for off-floor 
traders and other associated persons of members who are not covered by 
the current qualification requirements for floor traders. The Series 7 
Exam was adopted as an industry-wide qualification examination in 1974. 
In addition to mandating the exam for general securities 
representatives, other securities exchanges currently require off-floor 
traders to pass the Series 7 Exam.\47\ The Commission notes that other 
SROs such as the NYSE, Amex, and CHX already require securities traders 
who do not conduct a public business to pass the Series 7 Exam.\48\ For 
example, NYSE Rule 345 requires ``securities traders'' engaged in the 
purchase or sale of securities for the account of their employer and 
who do not transact business with the public to pass the Series 7 Exam. 
Amex Rule 341 parallels this rule. In addition, Interpretation and 
Policy .02 to CHX Rule 3 establishes a Series 7 examination requirement 
for associated persons who execute, make trading decisions, or 
otherwise engage in proprietary or agency trading off the floor of the 
exchange. The examination requirement for off-floor traders at the Phlx 
will enhance the consistency of exam requirements across the exchanges 
and prevent off-floor traders from associating with members of the Phlx 
solely to avoid the examination requirements of other SROs.
---------------------------------------------------------------------------

    \47\ See NYSE Rule 345; Amex Rule 341; NASD Conduct Rule 1030; 
CHX Article VI, Rule 3. On June 1, 1999, the Pacific Exchange, Inc. 
(``PCX'') filed a similar proposed rule change with the Commission 
to require that qualified off-floor traders for which the PCX is the 
designated examining authority successfully complete the Series 7 
Exam. See Securities Exchange Act Release No. 41555 (June 24, 1999), 
64 FR 36063 (July 2, 1999) (SR-PCX-99-16).
    \48\ Id.
---------------------------------------------------------------------------

    The Commission also finds good cause for approving proposed 
Amendment No. 3 prior to the thirtieth day after the date of 
publication of notice of filing in the Federal Register. Amendment No. 
3 conforms the proposal to similar rules of other self regulatory 
organizations.\49\ For these reasons, the Commission finds good cause 
for accelerating approval of the proposed rule change, as amended.
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3, including whether the proposed 
rule change is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. Sec. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of the filing 
will also be available for inspection and copying at the principal 
offices of the Phlx. All submissions should refer to File No. SR-Phlx-
99-07 and should be submitted by September 20, 1999.

V. Conclusion

    The Commission finds that the proposed rule change is consistent 
with the Act, and in particular, with Sections 6(b)(5) and 6(c)(3) (A) 
and (B).\50\
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78f(b)(5), 15 U.S.C. 78f(c)(3) (A) and (B).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\51\ that the proposal, SR-Phlx-99-07, as amended, be and hereby is 
approved.\52\

    \51\ 15 U.S.C. 78s(b)(2).
    \52\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\53\
---------------------------------------------------------------------------

    \53\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22426 Filed 8-27-99; 8:45 am]
BILLING CODE 8010-01-M