[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62728-62736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24551]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70597; File No. SR-CHX-2013-14]
Self Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Registration, Qualification, Supervision, and Continuing
Education of Individuals Associated with Participant Firms
October 2, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on September 24, 2013, the Chicago Stock Exchange, Inc. (``CHX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``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\ 15 U.S.C. 78a.
\3\ 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
CHX proposes to amend Exchange Rules relating to the registration
and qualification and continuing education of individuals associated
with CHX Participant Firms, and the supervision of registered persons
and firm activity. The text of this proposed rule change is available
on the Exchange's Web site at http://www.chx.com/rules/proposed_rules.htm, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
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 self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change
[[Page 62729]]
and discussed any comments it received on the proposed rule change. The
text of those statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the rules in Article 6 regarding the
qualification, registration, supervision and Continuing Education
(``CE'') of CHX Participant Firms and their associated persons \4\ to
be virtually consistent with the requirements of the Financial Industry
Regulatory Authority (``FINRA'').\5\ The Exchange believes that the
proposed amendments are also consistent with Exchange Act Rule 15b7-1,
which provides: ``[n]o registered broker or dealer shall effect any
transaction in . . . 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
. . . established by the rules of any national securities exchange.''
\6\
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\4\ Under Article 1, Rule 1(d) of the Exchange's rules, the term
``Associated Person'' has the meaning set forth in Section 3(a)(21)
of the Exchange Act. That section provides that ``[t]he term
`persons associated with a member' or `associated person of a
member' when used with respect to a member of a national securities
exchange or registered securities association means 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.''
For purposes of these provisions, a CHX Participant Firm is
considered a member of the Exchange.
\5\ Other self-regulatory organizations (``SROs'') have made
similar rule changes. See e.g., Securities Exchange Act Release Nos.
63314 (November 12, 2010), 75 FR 70957 (November 19, 2010) (SR-CBOE-
2010-084); 63843 (February 4, 2011), 76 FR 7884 (February 11, 2011)
(SR-ISE-2010-115); 64958 (July 25, 2011), 76 FR 45629 (July 29,
2011) (SR-NASDAQ-2011-095); 66453 (February 23, 2012), 77 FR 12345
(February 29, 2012) (SR-NYSEAMEX-2012-11); and 66452 (February 23,
2012), 77 FR 12347 (February 29, 2012) (SR-NYSEARCA-2012-15).
\6\ 17 CFR.240.15b7-1.
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i. Exchange Membership Overview
Exchange Participants are considered ``members'' of the Exchange
for purposes of the Exchange Act and are defined as Firms that hold a
valid Trading Permit and any person associated with a Participant Firm
who is registered with the Exchange under Articles 16 and 17 as a
Market Maker Trader or Institutional Broker Representative,
respectively.\7\ If a Participant is not a natural person, the
Participant may also be referred to as a ``Participant Firm,'' but
unless the context requires otherwise, the term Participant refers to
an individual Participant and/or a Participant Firm.\8\ The Exchange's
Participant Firms have varying business models. For example, some
conduct solely proprietary trading; others conduct solely agency
transactions, while still others conduct a mixture of both.
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\7\ Article 1, Rule 1(s).
\8\ Id.
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Participants may also elect to register under a Participant
subcategory such as the Institutional Broker category of Participants.
``Institutional Broker'' means a member of the Exchange who is
registered as an Institutional Broker pursuant to the provisions of
Article 17 and has satisfied all Exchange requirements to operate as an
Institutional Broker on the Exchange.\9\ Like those firms registered
solely as an Exchange Participant, firms that also elect to register as
Institutional Brokers also have varying business models ranging, for
example, from proprietary to agency trading or a mixture of both.
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\9\ Article 1, Rule 1(n).
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The rule changes proposed herein will apply to all Participant
Firms. Individual associated persons registered at Participant Firms,
including Participant Firms registered as Institutional Brokers will be
required to pass the appropriate examinations as defined in the
proposed rules. The appropriate examinations for associated persons at
all categories of Participant Firms will depend on the Firm's business,
size, and other factors as described below. The only varying
requirement regarding examinations between Participant Firms and
Institutional Broker firms is that individuals registered as
Institutional Broker Representatives at Institutional Broker firms are
required to pass the Exchange's internal Institutional Broker
Examination.\10\ The proposed rules clarify that Institutional Broker
Representatives will need to pass the internal Institutional Broker
Examination as under current requirements, and, like all Participant
Firms [sic], will be required to pass either the Series 7 or Series 56
examinations depending on the firm's business model.\11\
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\10\ Proposed Article 6, Rule 3(d).
\11\ Id.
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ii. Current Rules
Exchange rules currently require that persons associated with CHX
Participants meet the registration and qualification requirements in
Article 6, Rules 2 and 3. According to Article 6, Rule 2, all
Representatives of a Participant must be registered with the Exchange.
A Representative is defined as a person, who is engaged or will be
engaged in the securities business of a Participant.\12\ According to
Article 6, Rule 3, the Exchange may require the successful completion
of a training course or an examination, or both, in connection with the
registration of Participants and persons associated with a Participant,
and may charge fees for such registration and examination. CHX also
requires that a Participant shall not make application for the
registration of any person associated with the Participant where there
is no intent to employ such person in the securities business of the
Participant.\13\ This requirement thereby prohibits Participants from
``parking'' registrations. Notably, under the current rule structure,
the registration requirements apply only to Participant Firms for which
the Exchange is the Designated Examining Authority (``DEA'') \14\ and
to associated persons of other Participant Firms where the associated
persons act as Institutional Broker Representatives or Market Maker
Traders on the Exchange.\15\
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\12\ Article 6, Rule 2(b).
\13\ Article 6, Rule 2(d).
\14\ NYSE Arca, Inc. (``NYSE Arca'') historically limited its
Options registrations requirements to traders of member
organizations for which NYSE Arca was the DEA but removed the
limitation in a 2012 rule change. See SR-NYSEARCA-2012-15, NYSE Arca
Options Rule 2.
\15\ Article 6, Rule 2, Interpretations and Policies .03.
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Current Exchange rules recognize four qualification examinations
for registration with the Exchange.\16\ Those examinations are (1) the
Series 7 qualification examination administered by FINRA to conduct a
public business, (2) the Series 7A examination historically
administered by NYSE to conduct a public business limited to accepting
orders from professional customers for execution on the Exchange, (3)
the Institutional Broker Exam administered by CHX to conduct business
on behalf of an Institutional Broker, and (4) the Market Maker Trader
Exam administered by CHX to qualify as a Market Maker Trader.\17\
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\16\ Article 6, Rule 3, Interpretations and Policies .01.
\17\ Id.
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Current Exchange rules also require that members that are Joint
Back Office
[[Page 62730]]
(``JBO'') Participants designate a Financial Operations Principal
(``FINOP'') who must pass the Series 27 Exam administered by FINRA. The
Exchange also currently requires all Participant Firms for which the
Exchange is the DEA to designate a person or persons responsible for
supervision and compliance at the firm.\18\
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\18\ Article 6, Rule 5.
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Through this filing, the Exchange proposes to require that all
persons that function as Representatives of a Participant under Article
6, Rule 2(b) register, pass appropriate examinations and participate in
CE requirements. In this regard, the Exchange proposes to make a number
of amendments to its registration and qualification standards including
(1) expanding its registration requirements to all Participant Firms
rather than solely Firms for which CHX is the DEA, (2) recognizing the
Proprietary Traders Qualification Examination (Series 56) as one of the
applicable qualification examinations,\19\ and (3) requiring each
Participant Firm to register at least two officers or partners as
principals with respect to each aspect of the Participant's securities
business.\20\ According to the proposed rules, Principals are persons
associated with a Participant who are actively engaged in the
management of the Participants' securities business, including
supervision, solicitation, conduct of business or the training of
persons associated with a member for any of these functions are
designated as Principals.\21\
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\19\ According to proposed Article 6, Rule 3(a)(ii), a
proprietary trader is a person who does not handle or execute
transactions for customers and only enters or executes orders on
behalf of the Participant.
\20\ Proposed Article 6, Rule 2(c)(v).
\21\ Proposed Article 6, Rule 2(c)(i).
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iii. Registration of Representatives
First, CHX proposes to amend Article 6, Rule 2 to require that all
persons associated with a Participant who are engaged or will be
engaged in the securities business of a Participant register as a [sic]
Representative.\22\ This will ensure that all associated persons who
conduct business at the Exchange must be registered, including
proprietary traders and their supervisors, and will ensure that all are
appropriately qualified and supervised.\23\
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\22\ The Exchange is also proposing to change the term
``registered person(s)'' as used throughout Article 6 and in Article
7, Rule 3A to ``Representative(s)'' as part of this filing.
\23\ Notably, persons engaged in the supervision of a
Participant's securities business will also be required to register
as Principals under the provisions of Article 6, Rule 2(c).
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iv. Registration of Principals
To strengthen the supervisory systems of Participant Firms and
thereby enhance investor protection, the Exchange proposes to require
each Participant Firm to have at least two officers or partners who are
registered as Principals with respect to each aspect of the
Participant's securities business.\24\ In addition to the two
registered Principals, Participants shall also have at least one person
registered as a Limited Principal FINOP. Thus, each individual
supervising the securities businesses and associated persons of
Participant Firms must qualify for registration as a Principal by
passing the relevant Principal examination as listed in Article 6, Rule
3.
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\24\ Proposed Article 6, Rule 2(c)(i). These categories include
Sole Proprietors; Officers; Partners; Branch office managers; and
Directors. This proposed requirement is also consistent with the
registration requirements set forth in other SRO rules such as NASD
Rule 1021(e) and BATS Rule 2.5 Interpretations and Policies .01(d).
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Notably, the proposed rules allow the Exchange to waive the two-
principal requirement and only require Participant Firms to have one
Principal under certain enumerated circumstances. Such circumstances
include when a Participant demonstrates conclusively, upon written
application, that only one individual should be required to register.
Also, a Participant that conducts a proprietary trading business only
and has 25 or fewer Representatives shall only be required to have one
officer or partner who is registered as a Principal. According to
proposed Article 6 Rule 2(c)(vi), a Participant shall be considered to
conduct only proprietary trading if the Participant has the following
characteristics: (1) The Participant is not required by Section
15(b)(8) of the Exchange Act to become a FINRA member; (2) All funds
used or proposed to be used by the Participant are the Participant's
own capital, traded through the Participant's own accounts; (3) The
Participant does not, and will not, have customers; and (4) All persons
registered on behalf of the Participant acting or to be acting in the
capacity of a trader must be owners of, employees of, or contractors to
the Participant. According to proposed Article 6, Rule 3(a)(ii), a
proprietary trader is a person who only enters or executes orders on
behalf of the Participant and does not handle or execute transactions
for customers. The Exchange notes that these provisions are similar to
the registration requirements of other exchanges and believes that they
are appropriate given the limited size and scope of activities of such
firms.\25\
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\25\ See NASD Rule 1021(e) and Chicago Board Options Exchange
(``CBOE'') Rule 3.6A, Interpretations and Policies .07.
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a. Financial and Operations Principals
The Exchange proposes that all CHX Participant Firms designate at
least one individual as a FINOP who must maintain the appropriate
registration status.\26\ The designated FINOP must pass the Series
27.\27\ The Exchange currently requires FINOPs associated with
Participant Firms that maintain a JBO to maintain a Series 27
license.\28\ However, as the Exchange sees no compelling reason to
limit the registration of FINOPs to JBO firms, the Exchange is
proposing to broaden the registration requirement for FINOPs to all
Participant Firms. The Exchange also proposes to add a basic
description of the responsibilities of a person registered as a FINOP,
as well as the related notices which the Participant Firm must make to
the Exchange.\29\
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\26\ Proposed Article 6, Rule 3(c). See also, CBOE Rule 3.6A(b),
NASD Rule 1021(e) for examples of similar requirements.
\27\ The Exchange proposes to delete the existing requirement
that only FINOPs for JBO firms pass the Series 27 examination.
\28\ Article 6, Rule 3, Interpretation and Policy .01(e). JBO
arrangements and the obligations related thereto are described in
Article 7, Rule 3A, which provides that ``[a]n arrangement may be
established between two or more registered broker-dealers pursuant
to Regulation T Section 220.7 to form a JBO arrangement for carrying
and clearing accounts of participating broker-dealers.'' Section
220.7(c) of Regulation T authorizes the creation of JBO arrangements
which permit a creditor to effect or 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 (12 CFR
220.7(c)). Under CHX Article 7, Rule 3A(a), each JBO Participant is
required to (1) be registered as a broker-dealer pursuant to Section
15 of the Securities Exchange Act of 1934, (2) be subject to the
capital requirements prescribed by Rule 15c3-1 therein, and shall
not be eligible to operate under the provisions of SEC Rule 15c3-
1(b)(i), (3) meet and maintain a minimum account equity requirement
of $1,000,000 with each clearing broker-dealer where an account of
the JBO Participant is carried, (4) meet and maintain the ownership
standards established by the carrying broker-dealer and (5)
designate one registered person associated with such Participant as
a financial and operations principal (Series 27).
\29\ Proposed Article 6, Rule 2(c)(iii). The duties of a FINOP
shall include taking appropriate actions to assure that the
Participant Firm complies with applicable financial and operational
requirements under the Rules of the Exchange and the Exchange Act,
including but not limited to those requirements relating to the
submission of financial reports and the maintenance of books and
records. A FINOP may be a full-time employee, a part-time employee
or independent contractor of the Participant Firm. Participant Firms
for which CHX is the Designated Examining Authority (``DEA'') must
provide prompt written notice to the Exchange's Member Regulation
Department for each person designated as a FINOP. The Exchange
utilizes such information as part of its examination process.
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[[Page 62731]]
b. Chief Compliance Officers
In accordance with other SROs, the Exchange proposes to require
Participant Firms to designate a Chief Compliance Officer
(``CCO'').\30\ The CCO must pass the Series 24 examination unless the
Participant Firm with which the CCO is associated meets the
requirements to take, in the alternative, the Compliance Officer Exam
(Series 14).\31\
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\30\ See FINRA Rule 3130 and ISE Rule 313(c).
\31\ Proposed Article 6, Rules 2(c)(iv) and 3(b). Participant
Firms that conduct solely proprietary trading and otherwise meet the
two-principal requirement may allow their Compliance Officer to take
the less broad Series 14 examination rather than the comprehensive
Series 24 examination for General Securities Principals.
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A Compliance Officer at such Participant Firm would qualify for the
alternate exam if the firm, (1) engages solely in proprietary trading,
(2) otherwise meets the registration requirements for Principals as
defined in Article 6, Rule 2(c), and (3) meets the supervisory
requirements in Rule 3(b). The Compliance Officer Exam is intended to
ensure that the individuals who have compliance responsibilities for
their respective firms or who supervise ten or more people engaged in
compliance activities have the knowledge necessary to carry out their
job responsibilities. Therefore, the Series 14 measures the knowledge
and skills related to the position of a compliance official.
Accordingly, compliance officials at Participant Firms that meet the
above requirements would be permitted to take the compliance-focused
Series 14 examination rather than the broader Series 24 examination.
Notably, if the CCO passed the Series 24 examination, they [sic] would
qualify as one of the two registered Principals as outlined in Article
6, Rule 2(v). A CCO that does not also pass the Series 24 would not
qualify as a Principal for purposes of the two principal requirement in
Article 6, Rule 2(c)(v). The Exchange believes that it is important
that CCOs demonstrate heightened knowledge with respect to compliance
responsibilities for their respective firms.
v. Exemption From Registration
The Exchange proposes to enumerate in its rules the list of persons
exempt from any registration requirements to include such persons not
actively engaged in the securities business or, in some circumstances,
individuals who are already registered at other exchanges.\32\ The
proposed list includes those individuals whose functions are related
solely and exclusively to the Participant's need for nominal corporate
officers or for capital participation, or whose functions are related
solely and exclusively to transactions in commodities, security
futures; and/or who effect transactions on the floor of another
national securities exchange. In the latter case, such individuals
would already be registered as members with the other national
securities exchange. The Exchange believes the registration exemption
for individuals registered on another national securities exchange is
appropriate to avoid the burden of dual registration. The Exchange also
believes that incorporating these exemptions into the rule provides
additional clarity for individual Participants and associated persons
as to who will be required to register under the proposed rule.\33\
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\32\ Proposed Article 6, Rule 2(d).
\33\ The Exchange notes that its proposed changes are similar to
the rules of FINRA, NASD Rule 1060.
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vi. Other Registration Requirements
The Exchange also proposes to clarify the circumstances under which
a Participant is prohibited from seeking registration for an individual
person. In addition to the existing limitations precluding a
Participant from applying for registration for an associated person
where there is no intent to employ the individual in the Participant's
securities business, the amendments would preclude a Participant Firm
from maintaining a registration with the Exchange of a person, (1) who
is no longer active in the Participant'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. The Exchange
believes that these provisions appropriately prohibit Participant Firms
from ``warehousing'' registrations for persons who are not actively
engaged in the securities business.
A Participant may, however, maintain or make application for
registration of an individual who performs legal, compliance, internal
audit, back-office operations, or similar responsibilities for the
Participant. The rule will also allow application for registration for
a person who performs administrative support functions for registered
personnel, as well as a person engaged in the securities business of a
foreign securities affiliate or subsidiary of the Participant. The
Exchange believes that in allowing persons who perform legal,
compliance, audit or similar functions to apply for registration, such
persons will receive additional training and expertise to better
perform their functions.
vii. Lapse and Waivers of Registration
After an individual's registration lapses, the amended rules will
require the individual to pass an appropriate qualification
examination. A lapse in registration occurs when the registration has
been revoked by the Exchange or when an individual's registration has
been terminated for a period of two or more years. The Exchange
believes that these provisions reasonably permit an individual to
transfer his or her registrations when changing firms or looking for
employment if the individual is also within the two-year time period.
Such individual will still meet the requirement of active involvement
in the securities industry.
The proposed amendments provide that the Exchange may, in
exceptional cases and where good cause is shown, waive the applicable
qualification examination and accept other standards as evidence of an
applicant's qualification for registration. Advanced age or physical
infirmity will not individually of themselves constitute sufficient
grounds to waive a qualification examination. Experience in fields
ancillary to the securities business may constitute sufficient grounds
to waive a qualification examination.\34\ The Exchange notes that other
exchanges and SROs have the same waiver provisions in their
registration rules.\35\ The Exchange will keep documentation related to
all waiver requests whether granted or not.
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\34\ This rule is substantially similar to NASD Rule 1070 and
CBOE Rule 3.6A(e) Interpretation and Policies .05.
\35\ Id.
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viii. Training and Examination of Registrants
a. General Securities Representatives and Proprietary Traders
Persons associated with a CHX Participant who meet the definition
of a Representative must pass the Series 7 General Securities
Representative Qualification Examination unless such individuals meet
the definition of Proprietary Trader.\36\ A Representative will qualify
for the Proprietary Trader category if the Representative's activities
are confined to making trading decisions regarding, or otherwise
engaging in, proprietary trading for the broker-dealer with which he or
she is associated. Proprietary Traders may satisfy the qualification
requirements by passing either the Series 7 or the Series 56
Proprietary Traders Qualification
[[Page 62732]]
Examination.\37\ The proposed rule change is not intended to replace
the Series 7 requirement for all traders,\38\ but simply to offer an
alternative to that requirement for those qualified individuals who
solely conduct a business in proprietary trading and have shown their
proficiency by passing the Series 56.
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\36\ Proposed Article 6, Rule 3(a).
\37\ The Exchange's current rules require that associated
persons of Participant Firms for which CHX acts as the DEA and who
enter orders or make trading decisions, whether or not such orders
are in a principal or proprietary capacity, must maintain a Series 7
registration. See, Interpretations and Policies .02 of Article 6,
Rule 3. This requirement is being moved to Rule 3(a). Pursuant to
this proposal, a proprietary trader could satisfy the testing and
examination requirements by successfully completing either the
Series 7 or Series 56 exam to align with the requirements of other
exchanges. The limitation of this requirement to Participant Firms
for which the Exchange acts as the DEA is being eliminated as part
of this filing. Given these changes, the Exchange is also deleting
as unnecessary the references to a ``public business examination''
in Article 6, Rule 3(c), Interpretation and Policy .01(c).
\38\ Currently, some associated persons of CHX-registered
Institutional Broker firms may not have to pass the Series 7
examination if they do not engage in a customer business and would
instead pass the Series 56. The Exchange is proposing to add a
definition of the term ``customer'' to its rules. Customer shall
mean any person or entity other than a broker or dealer registered
with the Commission. Proposed Article 1, Rule 1(hh).
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The Exchange also proposes to delete the references to the Series
7A examination in the new exam requirements of Rule 3. The Series 7A
examination is obsolete with the retirement of the CHX trading
``floor'' and is therefore no longer appropriate for Participants.
b. Supervisory Requirements
As part of this proposal, the Exchange will require all supervisors
at all Participant Firms to pass the Series 24 examination for General
Securities Principals.\39\ The Exchange currently requires only
Participant Firms for which the Exchange is the DEA to designate a
person or persons responsible for supervision and compliance at the
firm.\40\ This current limitation would be eliminated and the
requirement would be extended to all Participant Firms. Extending the
requirement will provide for uniformity among supervisors at
Participant Firms and, as all supervisors will be subject to a
heightened standard under the new rules [sic]. The Exchange believes
that the new standard will benefit the industry as a whole as well as
the public.
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\39\ Proposed Article 6, Rule 3(b).
\40\ Article 6, Rule 5.
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c. Compliance Date
Proposed Article 6, Rule 3(e) provides that all Participants shall
be in compliance with the examination qualification language by no
later than four months after the Effective Date of these provisions for
associated persons who only need to take one exam.\41\ For associated
persons who need to take more than one exam, the Rule would allow a
period of six months to come into compliance with the registration
requirements.\42\ The Exchange believes that these periods should
afford Participants adequate time to ensure that their designated
Principals pass the appropriate qualifications exams.
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\41\ These provisions are the requirements for Representatives
to pass and maintain the Series 7 or Series 56, or for Supervisors
to pass the Series 24 examination or Series 14 and, finally, for
FINOPs to pass and maintain the Series 27 examination.
\42\ Some CHX Institutional Broker firms that handle no public
customer business have no Representatives with a Series 7
Qualification. To designate a Principal under proposed Article 6,
Rule 2(h), a Representative at those firms will have to pass both
the Series 7 and Series 24 examinations. The Exchange believes that
six months is necessary to afford those persons a reasonable
opportunity to pass both those examinations.
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ix. Supervision of Representatives
The Exchange further proposes to amend its existing supervision
rule (Article 6, Rule 5) to include a basic declaration that CHX
Participants are responsible for adherence with the federal securities
laws and Exchange rules, and that they must reasonably supervise their
operations and associated persons to prevent violations thereof. These
obligations already exist under Section 15 of the Exchange Act and
Article 8, Rule 1 of the CHX rules, but the Exchange believes that the
inclusion of the proposed additions will provide direction to
Participant Firms designing their supervisory systems and reinforce the
importance of having adequate supervisory programs. Such reinforcement
will be beneficial to Participants and the marketplace in general.
The Exchange believes that the imposition of the additional
registration, examination, training and CE requirements implicit in
Series 24 and 27 registrations will strengthen existing supervisory and
compliance structures and help to assure that its Participants are
conducting their businesses in compliance with all applicable rules and
regulations.
x. Continuing Education
The Exchange is also proposing to amend Article 6, Rule 11 (``Rule
11'') to specify the different CE requirements for registered persons
based upon their registration with the Exchange. This change will
authorize the Exchange to administer different CE programs to
differently registered individuals while bringing clarity to Exchange
Participants about what CE requirement they must fulfill. More
specifically, the Exchange is proposing to: (1) enumerate the required
Regulatory Element programs, (2) add language to Rule 11 that would
outline which program Exchange registered persons engaging in
proprietary trading must take, and (3) add language to Rule 11(b)
specifying that registered persons with a Series 56 registration must
complete the Firm Element of the CE requirement.
Background
Currently, Exchange Rule 11 states that ``[n]o member or member
organization shall permit any registered person to continue to, and no
registered person shall continue to, perform duties as a registered
person, unless such person has complied with the continuing education
requirements of Section (a) of this Rule.'' \43\ Exchange Rule 11(a)
specifies the CE requirements for registered persons subsequent to
their initial qualification and registration with the Exchange. The
requirements consist of a Regulatory Element and a Firm Element.\44\
The Regulatory Element is a computer-based education program
administered by FINRA to help ensure that registered persons are kept
up to date on regulatory, compliance and sales practice matters in the
industry. Currently, there are two Regulatory Element programs: the
S201 Supervisor Program for registered principals and supervisors and
the S101 General Program for Series 7 and all other registered
persons.\45\ The Exchange is proposing to enumerate these programs in
the Exchange Rulebook along with adding the S501 Series 56 Proprietary
Trader Continuing Education Program for Series 56 registered persons.
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\43\ Rule 11(a).
\44\ Currently, the Firm Element of the CE Program applies to
any person registered with a Participant who has direct contact with
customers in the conduct of the Participant's securities sales,
trading and investment banking activities, and to the immediate
supervisors of such persons (collectively called ``covered
registered persons''). The requirement stipulates that each
Participant must maintain a continuing education program for its
covered registered persons to enhance their securities knowledge,
skill and professionalism. Each Participant has the requirement to
annually conduct a training needs analysis, develop a written
training plan, and implement the plan.
\45\ FINRA also offers the S106 Series 6 Program for Series 6
registered persons. However, as the Exchange does not currently
enumerate the Series 6 exam in its rules, the S106 is inapplicable.
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[[Page 62733]]
Introduction of the Proprietary Trading Continuing Education Program
The Exchange is proposing to introduce a new CE Program for
proprietary traders registered with the Exchange who have passed the
Series 56 and who have no other registrations. As discussed above,
proposed Article 6, Rule 3 outlines the registration and qualification
requirements (including prerequisite examinations) for Participants
conducting proprietary trading, market-making and/or effecting
transactions on behalf of other broker dealers. According to proposed
Article 6 Rule 3(a)(ii), if the activities of the registered person are
confined to making trading decisions regarding, or otherwise engaging
in, proprietary trading for the broker-dealer with which he or she is
associated, however, he or she may register with the Exchange as a
Proprietary Trader and shall pass the Series 56 Proprietary Trader exam
before such registration may become effective. The Proprietary Trader
Continuing Education Program (S501) is a computer-based education
program developed by many of the SROs \46\ and administered by FINRA to
ensure that registered persons are kept current on regulatory,
compliance and trading practice matters in the industry. Unlike the
other offered CE Programs, the Proprietary Trader Continuing Education
Program is not part of the Uniform Continuing Education Program, which
is developed and maintained by the Securities Industry Regulatory
Council on Continuing Education.
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\46\ The Participating SROs that have assisted with the
development of, and plan to administer, the S501 are the Exchange,
C2 Options Exchange, Incorporated (``C2''), the Chicago Board
Options Exchange, Inc. (``CBOE''), the New York Stock Exchange, LLC
(``NYSE''), NYSE Arca, Inc. (``Arca''), NYSE Amex, LLC (``Amex''),
the NASDAQ Stock Market LLC (``NASDAQ''), the National Stock
Exchange, Inc. (``NSX''), NASDAQ OMX BX, Inc. (``BX''), NASDAQ OMX
PHLX, LLC. (``PHLX''), BATS YExchange, Inc.(``BATS Y''), BATS
Exchange, Inc. (``BATS''), EDGA Exchange, Inc. (``EDGA''), EDGX
Exchange, Inc. (``EDGX''), International Securities Exchange, LLC
(``ISE''), and BOX Options Exchange, LLC (``BOX'').
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The Proprietary Trader Continuing Education Program will
logistically operate as the currently offered CE Programs do.
Specifically, registered persons will be required, through CRD, to
complete the Regulatory Element of the CE on the second anniversary of
the base date and then every three years thereafter. While creating the
S501, the Participating SROs \47\ believe that the current procedures
of the other CE programs work well. The Securities Industry Regulatory
Council on Continuing Education has tailored the process of the other
CE Programs since its inception to a process that has been successful.
Thus, as proposed, the S501 will work in the same manner. In addition,
consistency between the different programs will avoid creating
confusion amongst the registered persons and FINRA.
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\47\ Id.
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The Proprietary Trader Continuing Education Program (S501) is
required for those registrants who registered as Proprietary Traders
and do not maintain any other registration through CRD.\48\ Individuals
that are registered under any other registration are required to
maintain the CE obligations associated with those registrations. For
example, an individual that is registered as a Proprietary Trader with
the Exchange and has a Series 7 registration will be required to
continue taking the Series 7 Continuing Education Program (S101).\49\
Though such individual may be engaging in the same capacity as one
registered as a Proprietary Trader, because the Series 7 examination is
a more comprehensive exam, the Exchange believes that this individual
continuing to maintain a Series 7 registration should complete a CE
that covers all aspects of his or her registration.
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\48\ Any registered person who receives a waiver of the Series
56 under Exchange Article 6, Rule 3, Interpretations and Policies
.02 and does not maintain any other registrations in CRD, will be
required to complete the Proprietary Trader Continuing Education
Program (S501). Such individuals will also be required to complete
the Firm Element which is currently described in Exchange Rule
9.3A(b).
\49\ If a registered person has received a Series 56 waiver
under Exchange Article 6, Rule 3, Interpretations and Policies .02
but continues to maintain a Series 7 registration (that predates the
introduction of the Series 56 on the Exchange) that registered
individual will only be required to continue taking the Series 7 CE
Program (S101). Through CRD, FINRA will recognize the Series 56 as
waived while still requiring the Series 7 CE completion.
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As part of the new Proprietary Trader CE, registered persons will
also be required to complete the Firm Element outlined in Exchange Rule
9.3A(c). Though proprietary traders with a Series 56 registration do
not interact with the public, the Exchange believes this requirement is
appropriate as it ensures these registered persons continue to enhance
their securities knowledge, skill and professionalism. As stated in
Exchange Rule 11(b)(2)(ii), the program should be tailored to fit the
business of the Participant. Thus, the Exchange believes it is
appropriate that these individuals also complete the Firm Element.
The introduction of the Proprietary Trader Continuing Education
Program allows the Exchange to tailor its CE requirements more closely
to those registered individuals who are registered as Series 56. More
specifically, the Exchange believes allowing individuals engaging in
proprietary trading and registered under the Series 56 to complete a
separate CE Program than those maintaining a Series 7 registration is
appropriate as all individuals have the option of taking either test.
In comparison to the Series 7, the Series 56 Examination is more
closely tailored to the practice of proprietary trading while the
Series 7 is more comprehensive. As such, the Exchange believes a Series
56 CE Program should be tailored as well. At the same time, if an
individual would like to remain registered as a Series 7, the Exchange
believes it is appropriate they [sic] continue to be required to
complete the broader CE program. As stated above, though an individual
maintaining a Series 7 registration may be engaging in the same
capacity as one registered as a Proprietary Trader, because the Series
7 examination is a more comprehensive exam, the Exchange believes that
such individual that continues to maintain a Series 7 registration
should complete a CE that covers all aspects of his or her
registration.
xi. Fee Changes
The Exchange proposes to amend Section J.5 of the Fee Schedule to
include the registration fees for the Series 14 and Series 56
exams.\50\ Specifically, the Exchange proposes to insert the following
information:
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\50\ See CHX Article 6, Rules 3(b)(i); See also CHX Article 6,
Rule 3(a)(ii); and CHX Article 6, Rule 11(a)(3).
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$335 registration fee for the Series 14 Examination;\51\
and
---------------------------------------------------------------------------
\51\ See Section 4(c) of Schedule A to the FINRA By-Laws.
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$195 registration fee for the Series 56 Examination.\52\
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\52\ See FINRA, FINRA Administered Qualification Examinations,
available at http://www.finra.org/Industry/Compliance/Registration/QualificationsExams/Qualifications/p011096.
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CHX also proposes to adopt a fee applicable to Proprietary Trader
Regulatory Element. Currently, the applicable fee for the Regulatory
Element (S101 and S201) is $100. CHX proposes to adopt a $60 fee for
the S501. FINRA administers these programs on behalf of the exchanges
and therefore the fees are payable directly to FINRA.\53\
[[Page 62734]]
The $60 fee will only be used for the administration of the S501 versus
the S101 which utilizes the $100 fee for both development and
administration. The costs associated with the development of the S501
are included in the examination fee. The Exchange notes that the
proposed changes are not otherwise intended to address any other issues
surrounding regulatory fees and that the Exchange is not aware of any
problems that Participants would have in complying with the proposed
changes.
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\53\ The S501 was established for those registrants who have
passed the Series 56 Qualification Exam as reflected in WebCRD.
WebCRD is the central licensing and registration system for the U.S.
securities industry. The CRD system enables individuals and firms
seeking registration with multiple states and self-regulatory
organizations to do so by submitting a single form, fingerprint card
and a combined payment of fees to FINRA. Through the CRD system,
FINRA maintains the qualification, employment and disciplinary
histories of registered associated persons of broker-dealers.
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2. Statutory Basis
The Exchange has proposed the above rule changes for the purpose of
requiring certain persons associated with CHX Participants to maintain
appropriate licenses and registrations. These changes will help to
assure competency of Representatives and provide for more effective
supervision and oversight of the Participant's activities.
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \54\ in general, and furthers the
objectives of Sections 6(b)(5) of the Act in particular to aid in
preventing ``fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, 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; and [to] not permit unfair
discrimination between customers, issuers, brokers, or dealers'' by
ensuring individuals are properly registered and supervised.\55\
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\54\ 15 U.S.C. 78f(b).
\55\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed amendment requiring that
all persons associated with a Participant and who are engaged or will
be engaged in the securities business register as a Representative will
continue to promote the development and maintenance of adequate
training and supervisory programs by CHX Participants.\56\ This change
in Representative registration will ensure that such persons are
appropriately qualified and supervised to aid in preventing fraudulent
and manipulative practices, further just and equitable principles of
trade and protect investors and the public interest in general.\57\
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\56\ The Exchange is also proposing to change the term
``registered person(s)'' as used throughout Article 6 and in Article
7, Rule 3A to ``Representative(s)'' as part of this filing.
\57\ Notably, persons engaged in the supervision of a
Participant's securities business will also be required to register
as Principals under the provisions of Article 6, Rule 2(c).
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The Exchange also believes that adding the Proprietary Trader
(Series 56) examination to its list of qualifying exams will allow
individuals who solely conduct a business in proprietary trading to
demonstrate their proficiency in that area. In offering an alternative
to the Series 7 examination, CHX will permit proprietary traders who
pass the Series 56 to trade on a proprietary basis. As stated above,
Representatives will qualify for the Proprietary Trader category at CHX
if the Representative is a person who does not handle or execute
transactions for customers and only enters or executes orders on behalf
of the Participant. Further, and as noted above, other SROs have
similarly recognized the Proprietary Trader registration category and
the Series 56 exam.\58\
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\58\ See e.g., Securities Exchange Act Release Nos. 63314
(November 12, 2010), 75 FR 70957 (November 19, 2010) (SR-CBOE-2010-
084); 63843 (February 4, 2011), 76 FR 7884 (February 11, 2011) (SR-
ISE-2010-115); 66453 (February 23, 2012), 77 FR 12345 (February 29,
2012) (SR-NYSEAMEX-2012-11); and 66452 (February 23, 2012), 77 FR
12347 (February 29, 2012) (SR-NYSEARCA-2012-15).
---------------------------------------------------------------------------
As the Exchange is continuing to strengthen the supervisory systems
of Participant Firms and thereby contribute to greater investor
protection through the proposed changes, the Exchange has proposed to
require each Participant Firm to register as representatives with the
Exchange at least two Principals in specified categories as described
above. In addition to the requirement of two registered Principals,
each Participant would also be required to register an additional
associated person as a FINOP. Further, the Exchange proposes to require
Participant Firms to designate a CCO.\59\ To qualify for registration,
the CCO must pass the Series 24 examination unless the Participant Firm
met the requirements to take, in the alternative, the Compliance
Officer Exam (Series 14).\60\ A Compliance Officer at such Participant
Firm would qualify for the alternative examination if the firm engaged
solely in proprietary trading; and it otherwise meets the applicable
registration and supervisory requirements for Principals. Thus, all
individuals supervising the securities businesses and associated
persons of Participant Firms must qualify for registration as
Principals by passing the relevant Principal examination as listed in
Article 6, Rule 3. The Exchange believes that adding the proposed rules
related to firm supervision helps prevent fraudulent and manipulative
acts and protect investors and the public interest in general, and
notes that CHX's proposed provisions are similar to those of other
SROs.\61\
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\59\ See FINRA Rule 3130 and International Stock Exchange
(``ISE'') Rule 313(c) for similar requirements.
\60\ Proposed Article 6, Rules 2(c)(iv) and 3(b). Participant
Firms that conduct solely proprietary trading and otherwise meet the
two-principal requirement may allow their Compliance Officer to take
the less broad Series 14 examination rather than the comprehensive
Series 24 examination for General Securities Principals.
\61\ See, for example, NASD Rule 1021(e) and BATS Rule 2.5
Interpretations and Policies .01(d).
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In addition, the Exchange believes that the proposed amendments are
consistent with Section 6(c) of the Exchange Act,\62\ in general, and
furthers [sic] the objectives of Section 6(c)(3) of the Exchange
Act,\63\ which allows the Exchange to stipulate qualification,
training, experience and competence standards for persons associated
with Exchange Participants. This filing proposes to amend and clarify
the registration and qualification requirements to ensure that industry
standards are met.
---------------------------------------------------------------------------
\62\ 15 U.S.C. 78f(c).
\63\ 15 U.S.C. 78f(c)(3).
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The Exchange also believes that the proposed changes are not
unfairly discriminatory as CHX is not only conforming to the rules set
forth by other SROs, but the proposed changes will be applied to all
associated persons of all CHX Participants.\64\ Under current rules,
only CHX Participants for which CHX is the DEA are subject to the rules
regarding registration and qualification. By applying the registration
and qualification rules to all CHX Participants, the rules will not
unfairly discriminate against any Participant class.
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\64\ To comply with the proposed Exchange rules, the number and
types of examinations taken by individuals at Participant Firms will
likely vary between Participant Firms depending on each Participant
Firm's business model.
---------------------------------------------------------------------------
The proposed rule also introduces a new CE program for the Series
56 registered persons as described above. We believe the content of the
501 education is tailored to the job the proprietary trader performs.
The Exchange believes the proposed changes are reasonable and set forth
the appropriate CE requirements for an individual Participant or
individual associated person who is required to
[[Page 62735]]
register under Exchange Article 6, Rule 2.
The Exchange believes that the proposed registration fees for the
CE and Series 14 and Series 56 exams are consistent with Section 6(b)
of the Act \65\ in general, and, in particular, furthers [sic] the
objectives of Section 6(b)(4) of the Act,\66\ in that it [sic] provides
for the equitable allocation of reasonable dues, fees and other charges
among its members. As discussed above, the Exchange believes that the
fee changes are reasonable because the proposed fees are identical to
those adopted by FINRA for its members and that the proposed fees are
equitably allocated because they apply to all similarly situated Non-
FINRA Participants. As discussed above, the CE programs and the Series
14 and 56 exams are used across the industry. Further, the new $60 fee
is applicable to persons registered as a Proprietary Trader, which is a
limited registration under CHX rules. Accordingly, the proposed S501
Regulatory Element specifically correlates to the rules and obligations
applicable to Proprietary Traders, which are fewer than those
applicable to persons registered in other categories. Thus, the S501 is
a more limited form of continuing education. Further, as discussed
above, the $60 fee will only be used for the administration of the S501
versus the S101 which utilizes the $100 fee for both development and
administration. The costs associated with the development of the S501
are included in the examination fee. Therefore, CHX believes that the
lower fee ($60 rather than $100) is reasonable. The proposed fee is
equitable, because it applies equally to all persons registered solely
as Proprietary Traders.
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\65\ 15 U.S.C. 78f(b).
\66\ 15 U.S.C. 78f(b)(4).
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Finally, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues. In such an environment, the Exchange must continually
review, and consider adjusting, its rules to remain competitive with
other exchanges. The Exchange notes that the rule change is reasonable
in comparison to similar rule changes by certain other SROs. For the
reasons described above, the Exchange believes that the proposed rule
change reflects this competitive environment.
B. Self-Regulatory Organization's Statement of Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The rule change is designed
to amend its current registration and qualification rules to require
that persons associated with CHX Participants maintain appropriate
licenses and registrations. These rule changes will help to assure
competency and provide for more effective supervision and oversight of
a CHX Participant's activities and will not impose any burden on
competition.
The Exchange also does not believe the administrative changes being
made nor the introduction of the Proprietary Trader Continuing
Education Program (S501) will affect intermarket competition as the
Exchange believes all Exchanges offering the same CE requirements will
file similar rules addressing those CE Programs. In addition, the
Exchange does not believe the proposed changes will affect intramarket
competition because all similarly situated registered persons, e.g.
registered persons maintaining the same registrations, are required to
complete the same CE requirements. For example, all individuals
maintaining a Series 7 registration will be required to complete the
Series 7 CE while all individuals maintaining a Series 56 registration
(and no other registrations) will be required to complete the new
Series 56 CE.
The Exchange believes that the fee changes proposed herein will not
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Specifically, the Exchange
believes that the proposed change will result in the same Series 14 and
Series 56 registration fees being charged to all FINRA and Non-FINRA
firms.
In addition, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues. In such an environment, the Exchange must continually
review, and consider adjusting, its rules to remain competitive with
other exchanges. As noted above, many SROs have adopted similar rules
relating to the registrations and qualifications of their members.\67\
Therefore, and for the reasons described above, the Exchange believes
that the proposed rule change aligns CHX rules with the rules of other
SROs and promotes a competitive environment.
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\67\ See supra footnote 6 [sic].
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule does not affect a change that
(A) significantly affects the protection of investors or the public
interest; (B) impose any significant burden on competition; and (C) by
its terms, becomes operative for 30 days after the date of the filing,
or such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest; provided that the
self-regulatory organization has given the Commission written notice of
its intent to file the proposed rule change, along with a brief
description and text of the proposed rule change, at least five
business days prior to the date of filing of the proposed rule change,
or such shorter time as designated by the Commission, the proposed rule
change will become effective pursuant to Section 19(b)(3)(A) of the Act
\68\ and Rule 19b-4(f)(6) \69\ thereunder.
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\68\ 15 U.S.C. 78s(b)(3)(A).
\69\ 17 CFR 240.19b-4(f)(6).
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The Exchange has given the Commission written notice of its intent
to file the proposed rule change, along with a brief description and
text of the proposed rule change, at least five business days prior to
the date of filing of the proposed rule change, or such shorter time as
designated by the Commission. The Exchange respectfully requests that
the Commission waive the 30-day operative delay period after which a
proposed rule change under Rule 19b-4(f)(6) becomes operative. The
Commission believes that the proposed rule change described herein will
strengthen existing supervisory and compliance structures and align
CHX's registration, qualification, and CE rules with those of other
SROs. Waiving the 30-day operative delay will enable CHX to implement
the changes without delay. Therefore, the Commission designates the
proposal operative upon filing.\70\
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\70\ 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 this proposed rule
change, the Commission summarily may
[[Page 62736]]
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. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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. 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 Number SR-CHX-2013-14 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-CHX-2013-14. 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. Copies of the filing will also be available for Web site
viewing and printing at the CHX's principal office and on its Internet
Web site at www.chx.com. 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-CHX-2013-14 and should be submitted on or before November 12, 2013.
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\71\
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\71\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24551 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P