[Federal Register Volume 77, Number 33 (Friday, February 17, 2012)]
[Notices]
[Pages 9714-9717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3707]



[[Page 9714]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66383; File No. SR-EDGX-2012-04]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
EDGX Rule 1.5(q)

February 10, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 1, 2012, the EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission (the 
``SEC'' or the ``Commission'') the proposed rule change as described in 
Items I and II below, which items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    EDGX Exchange, Inc. (``EDGX'' or the ``Exchange''), proposes to 
amend its rules regarding registration, qualification and continuing 
education requirements for Authorized Traders of Members that engage 
solely in proprietary trading. EDGX proposes to amend Rules 2.3 and 
11.4 and the Interpretations to Rule 2.5 to recognize a new category of 
limited representative registration for proprietary traders. The 
Exchange proposes to expand its registration requirements to include 
the Proprietary Traders Qualification Examination (``Series 56'') as 
one of the applicable qualification examinations as determined by the 
Exchange. The Exchange also proposes to permit Authorized Traders of 
Members who engage solely in proprietary trading to obtain the Series 
56 license in order to effect transactions on the Exchange. In 
addition, the Exchange proposes to amend Rule 2.3 to make it 
substantially similar to the rules of the Financial Industry Regulatory 
Authority (``FINRA'') and other Self-Regulatory Organizations 
(``SROs'') to require Members to register two registered Principals.\3\ 
The text of the proposed Proprietary Traders Qualification Examination 
Content Outline is attached as Exhibit 3 and the text of the proposed 
rule changes is attached as Exhibit 5.\4\ These documents are available 
on the Exchange's Web site at www.directedge.com, at the Exchange's 
principal office, and at the Public Reference Room of the Commission.
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    \3\ The Exchange notes that it will continue to require per 
Exchange Rule 2.3(c) that all Authorized Traders who are to function 
as Principals on the Exchange to [sic] be registered consistent with 
amended paragraph (c)(2) of Rule 2.3.
    \4\ The Commission notes that the Outline and the text of the 
proposed rule change are attached to the filing, not to this Notice.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    In July 2011, NASDAQ filed a proposed rule change with the 
Commission to recognize a new category of limited representative 
registration for proprietary traders.\5\ In addition, in August 2011, 
NASDAQ filed a related proposed rule change to use the content outline 
for the Series 56 examination that would be applicable to proprietary 
traders.\6\
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    \5\ See Securities Exchange [sic] Release No. 64958 (July 25, 
2011), 76 FR 45629 (July 29, 2011) (SR-NASDAQ-2011-095). See also 
Securities Exchange [sic] Release No. 65041 (August 5, 2011), 76 FR 
49822 (August 11, 2011) (SR-NASDAQ-2011-107).
    \6\ See Securities Exchange [sic] Release No. 65040 (August 5, 
2011), 76 FR 49809 (August 11, 2011) (SR-NASDAQ-2011-108).
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    For the purposes of this category of limited representative 
registration, NASDAQ Rule 1011(o) defines a proprietary trading firm as 
a firm that embodies the following characteristics: The Member is not 
required by Section 15(b)(8) of the Exchange Act (the ``Act'') to 
become a FINRA member but is a member of another registered securities 
exchange not registered solely under Section 6(g) of the Act; all funds 
used or proposed to be used by the Member for trading are the Member's 
own capital, traded through the Member's own accounts; the Member does 
not, and will not have ``customers''; \7\ all Principals and Authorized 
Traders 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. 
In addition, NASDAQ Rule 1032(c) defines a proprietary trader as an 
Authorized Trader whose activities in the investment banking or 
securities business are limited solely to proprietary trading; passes 
an appropriate qualification examination; and is an associated person 
of a proprietary trading firm as defined in NASDAQ Rule 1011(o). NASDAQ 
Rule 1032(c) identifies the Series 56 as the appropriate qualification 
examination for proprietary traders' limited representative 
registration. Furthermore, NASDAQ's proposed category of limited 
representative registration expressly excludes those associated persons 
that deal with the public and states those associated persons should 
continue to register as General Securities Representatives after 
obtaining the Series 7 license.
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    \7\ NASDAQ Rule 0120(g) states, ``the term customer shall not 
include a broker or dealer.''
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    NASDAQ worked with FINRA and certain other exchanges, many of which 
have recently enhanced their registration requirements to require the 
registration of associated persons,\8\ to develop the content outline 
and qualification examination for proprietary traders. The Series 56 
examination program is shared by NASDAQ and the following SROs: Boston 
Options Exchange, C2 Options Exchange, Incorporated; Chicago Board 
Options Exchange, Incorporated (``CBOE''); Chicago Stock Exchange, 
Incorporated; International Securities Exchange, LLC (``ISE''); NASDAQ 
OMX BX, Inc.; NASDAQ OMX PHLX LLC; National Stock Exchange, 
Incorporated; New York Stock Exchange, LLC (``NYSE''); NYSE AMEX, 
Incorporated; and NYSE ARCA, Incorporated. Members of FINRA, NASDAQ and 
the SROs referenced above developed criteria for the Series 56 
examination program, which CBOE filed with the SEC on June 17, 2011.\9\
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    \8\ See Securities Exchange Act Release Nos. 63843 (February 4, 
2011), 76 FR 7884 (February 11, 2011) (SR-ISE-2011-155); and 63314 
(November 12, 2010), 75 FR 70957 (November 9, 2010) (SR-CBOE-2010-
084).
    \9\ See supra note 3. [sic] See also Securities Exchange Act 
Release No. 64699 (June 17, 2011), 76 FR 36945 (June 23, 2011) (SR-
CBOE-2011-056).
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Adoption of Series 56 by the Exchange
    The Exchange believes the Series 56 will assist the Exchange in 
ensuring it has proper registration, qualification and continuing 
education requirements

[[Page 9715]]

for associated persons of Members because the Series 56 examination was 
designed to test a candidate's knowledge of proprietary trading in 
general and the industry rules applicable to trading of equity 
securities and listed options contracts. The Series 56 examination 
covers, among other things, recordkeeping and recording requirements, 
types and characteristics of securities and investments, trading 
practices and display execution and trading systems. While the Series 
56 examination is primarily dedicated to topics related to proprietary 
trading, the Series 56 examination also covers some general concepts 
relating to customers.
    The qualification examination consists of 100 multiple choice 
questions. Candidates have 150 minutes to complete the exam. The 
content outline, which the Exchange attached as Exhibit 3,\10\ 
describes the following topical sections comprising the examination: 
Personnel, Business Conduct and Recordkeeping and Reporting 
Requirements, 9 questions; Markets, Market Participants, Exchanges and 
SROs, 8 questions; Types and Characteristics of Securities and 
Investments, 20 questions; Trading Practices and Prohibited Acts, 50 
questions; and Display, Execution, and Trading Systems, 13 questions. 
Representatives from the SROs mentioned above also intend to meet on a 
periodic basis to evaluate and update, as necessary, the Series 56 
examination program.
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    \10\ See note 4.
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    In addition, NASDAQ and some other SROs have filed or will file 
similar proposals with the Commission to amend current rules to 
recognize a new category of limited representative registration for 
proprietary traders and to permit members engaged solely in proprietary 
trading to obtain the Series 56 license in order to effect trades on 
the applicable exchanges.\11\ The Exchange proposes to implement the 
Series 56 examination program upon availability in FINRA's Web 
CRD[supreg] system,\12\ notification to its Members and subject to the 
satisfaction of applicable continuing education requirements, as 
described in Interpretations .04 and .05 to Rule 2.5.
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    \11\ See supra notes 2, 3, 6 and 7.
    \12\ See www.finra.org/Industry/Compliance/Registration/CRD/
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    The Exchange believes that acceptance of the Series 56 
qualification examination will benefit both the Exchange and the 
applicable proprietary traders affected by the proposal. Accordingly, 
pursuant to the amended rules, as proposed, the Exchange would 
recognize a new category of limited representative registration for 
proprietary traders. In addition, the Exchange would expand its 
registration, qualification and continuing education requirements to 
include the Series 56 examination as one of the applicable 
qualification examinations as determined by the Exchange. The Exchange 
would also permit Authorized Traders of Members who engage solely in 
proprietary trading to obtain the Series 56 license in order to effect 
transactions on the Exchange. The Exchange proposes to add 
Interpretation .06 to Rule 2.5 to incorporate the Series 56 
qualification examination as a limited representative registration for 
proprietary traders, and proposes to identify the characteristics 
required to satisfy the Exchange's definition of a proprietary trading 
firm and a proprietary trader, which are modeled after NASDAQ's rules, 
as discussed above.
    In addition, the Exchange proposes to amend Rule 2.3(c)(2) to make 
it substantially similar to the rules of FINRA and other SROs to 
require Members to register at least two registered Principals.\13\ The 
proposed amendment applies to firms seeking admission as Members and 
existing Members, and states that each Member, except a sole 
proprietorship or a proprietary trading firm with 25 or fewer 
Authorized Traders (``Limited Size Proprietary Firm''),\14\ shall have 
at least two officers or partners who are registered as Principals with 
respect to the Member's equities securities business and, at a minimum, 
one such Principal shall be the Member's Chief Compliance Officer 
(``CCO'').\15\
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    \13\ The Exchange proposes to communicate this amendment to 
Members by publishing an Information Circular on the Exchange's Web 
site. Existing Members shall receive additional time to satisfy this 
requirement.
    \14\ The Exchange proposes to create an exception to Rule 
2.3(c)(2) where a Limited Size Proprietary Firm must register at 
least one Principal with the Exchange. In addition, the Exchange may 
waive the two Principal requirement in situations that indicate 
conclusively that only one Principal associated with the Member 
should be required.
    \15\ The Commission notes that EDGX is an equities exchange.
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    The Exchange proposes additional amendments to Rule 2.3(c)(3) and 
(4) to require Members to register a CCO and a Financial/Operations 
Principal (``FINOP'') in order to make the Exchange's rules 
substantially similar to the rules of FINRA and other SROs. In 
addition, this more accurately reflects the heightened level of 
accountability inherent in the duty of overseeing compliance by a 
Member of the Exchange, and in the oversight and preparation of 
financial reports and the oversight of those employed in financial and 
operational capacities at each Member firm. The proposed amendments 
state each Member shall designate a CCO on the Schedule A of Form BD, 
and requires [sic] the individual designated as a CCO to register with 
the Exchange and pass the General Securities Principal Examination 
(Series 24). Similarly, the proposed amendments to Rule 2.3 require 
each Member subject to Rule 15c3-1 of the Act to designate a FINOP, and 
requires [sic] the individual designated as a FINOP to successfully 
complete the Financial and Operations Principal Examination (Series 
27), and register in that capacity with the Exchange as prescribed by 
the Exchange.
    The Exchange proposes to make other ministerial amendments to Rule 
2.3 to accommodate the placement of the proposed amendments outlined in 
this rule filing.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of Section 
6(c)(3)(B) of the Act.\17\ Under that section, it is the Exchange's 
responsibility to prescribe standards of training, experience, and 
competence for Exchange Members and their associated persons, in 
particular, by offering an alternative qualification examination for 
proprietary traders that more closely reflects the practical knowledge 
that is a pre-requisite to proprietary trading. Pursuant to this 
statutory obligation, the Exchange requests to recognize a new category 
of limited representative registration for proprietary traders and to 
permit Authorized Traders of Members who engage solely in proprietary 
trading to obtain the Series 56 license. The Exchange believes the 
Series 56 examination establishes that Authorized Traders of Members 
have attained specified levels of competence and knowledge generally 
applicable to proprietary trading.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(c)(3)(B).
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    The Exchange believes that the requirement that persons functioning 
in certain supervisory capacities, including CCO and a FINOP, be 
registered through the WebCRD[supreg] system 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 Members must have a minimum of two Principals 
responsible

[[Page 9716]]

for oversight of Member organization activity, who must be registered 
as such and pass a principal exam, should help the Exchange 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. In addition, the requirement for each Member to have a CCO 
who must register and pass the Series 24 exam and a FINOP who must 
register and pass the Series 27 exam is appropriate based on the 
heightened level of accountability inherent in the duty of overseeing 
compliance by a Member of the Exchange, and in the oversight and 
preparation of financial reports and the oversight of those employed in 
financial and operational capacities at each Member firm.
    The Exchange believes that this proposal will enhance its ability 
to ensure an effective supervisory structure for those conducting 
business on the Exchange. 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 Exchange believes that the changes proposed to its rules 
will strengthen its regulatory structure and should enhance the ability 
of its Authorized Traders and Members to comply with the Exchange's 
rules as well as with the federal securities laws.
    In addition, the Exchange believes that the proposed rule change is 
consistent with the principles of Section 11A(a)(1)(C)(ii) of the Act 
in that it seeks to assure fair competition among brokers and dealers 
and among exchange markets. The Exchange believes that the proposed 
rule will promote uniformity of regulation across markets, thus 
reducing opportunities for regulatory arbitrage. EDGX's proposed rule 
change helps ensure that all persons conducting a securities business 
through EDGX are appropriately supervised, as the Commission expects of 
all SROs.
    The proposed changes are also consistent with Section 6(b)(5) of 
the Act,\18\ because they would promote just and equitable principles 
of trade, remove impediments to, and perfect the mechanism of, a free 
and open market and a national market system, and, in general, protect 
investors and the public interest, by enabling such persons to qualify 
for registration with the Exchange by offering an alternative 
qualification examination that specifically addresses industry topics 
that establish the foundation for the regulatory and procedural 
knowledge necessary for such persons electing to register as 
Proprietary Traders. Similarly, including new requirements for Members 
to maintain at least two Principals, a CCO and a FINOP, harmonizes the 
Exchange's rules with substantially similar rules of FINRA and other 
SROs. Accordingly, the modifications to EDGX Rules 2.3 and 11.4 and the 
Interpretations to Rule 2.5 promote just and equitable principles of 
trade, remove impediments to, and perfect the mechanism of, a free and 
open market and a national market system.
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    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) of the Act \19\ and paragraph (f)(6) of Rule 
19b-4 thereunder.\20\ The Exchange asserts that the proposed rule 
changes: (1) Will not significantly affect the protection of investors 
or the public interest; (2) will not impose any significant burden on 
competition; (3) and will not become operative for 30 days from the 
date on which it was filed, or such shorter time as the Commission may 
designate. In addition, the Exchange provided the Commission with 
written notice of its intent to file the proposed rule changes, along 
with a brief description and text of the proposed rule changes, at 
least five business days prior to the date of filing.\21\ For the 
foregoing reasons, this rule filing qualifies for immediate 
effectiveness as a ``noncontroversial'' rule change under paragraph 
(f)(6) of Rule 19b-4 because the Series 56 qualification examination 
has been adopted or will be adopted for use by NASDAQ and other SROs. 
The Series 56 examination also reflects a collaborative effort to adopt 
an appropriate qualification examination for a new registration 
category. In addition, the Exchange's proposal to include new 
requirements for Members to maintain at least two Principals, a CCO and 
a FINOP, harmonizes the Exchange's rules with substantially similar 
rules of FINRA and other SROs.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4.
    \21\ 17 CFR 240.19b-4(f)(6).
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    The rule changes as proposed will allow the Exchange to recognize a 
new category of limited representative registration for proprietary 
traders. The Exchange believes that Authorized Traders of Members who 
engage solely in proprietary trading, obtain the Series 56 license, and 
wish to register with EDGA would be disadvantaged by having to wait for 
the proposed rule changes to become operative. Accordingly, because the 
Exchange believes that implementation of the standards proposed in this 
filing is important to its maintenance of a fair and orderly market and 
is non-controversial, the Exchange requested that the Commission waive 
the 30-day pre-operative waiting period contained in Rule 19b-
4(f)(6)(iii) under the Act.\22\ Waiver of this requirement will allow 
the Exchange to make the examination available as soon as possible to 
coincide with its availability on other exchanges. The Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest because the 
proposal makes the registration, qualification and continuing education 
requirements of EDGX comparable to those of the other exchanges and 
will enable EDGX to recognize the Series 56 exam as a valid 
qualification for proprietary traders.\23\ Therefore, the Commission 
designates the proposal operative upon filing.
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    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.

[[Page 9717]]

Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form http://www.sec.gov/rules/sro.shtml; or
     Send an email to [email protected]. Please include 
File No. SR-EDGX-2012-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-EDGX-2012-04. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet Web site http://www.sec.gov/rules/sro.shtml. 
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. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549 on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of the Exchange. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-EDGX-2012-04 and should be submitted by 
March 9, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3707 Filed 2-16-12; 8:45 am]
BILLING CODE 8011-01-P