[Federal Register Volume 64, Number 185 (Friday, September 24, 1999)]
[Notices]
[Pages 51822-51824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24917]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41881; File No. SR-PCX-99-16]
Self-Regulatory Organizations; Pacific Exchange, Inc. (``PCX'');
Order Approving Proposed Rule Change and Notice of Filing and Order
granting Accelerated Approval of Amendment No. 1 to the Proposed Rule
Change Requiring Qualified Off-Floor Traders for Which PCX Is the
Designated Examining Authority To Successfully Complete the General
Securities Registered Representative Examination, Test Series 7
September 17, 1999.
On June 1, 1999, the Pacific Exchange, Inc. (``PCX'' 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 PCX Rule 1.7(b)(9), Denial of and Conditions to Membership,
to require off-floor traders \3\ of member organizations for which the
Exchange is the Designated Examining Authority (``DEA'') to
successfully complete the General Securities Registered Representative
Examination, Test Series 7 (``Series 7 Exam''), if the primary business
of the member organization involves the trading of securities that is
unrelated to the performance of the functions of a registered
specialist, a registered market maker or a registered floor broker.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ According to the Exchange, the proposed rule change is
intended to cover persons who are trading from off the trading floor
and who are not exempt from having to pass the Series 7 examination
under the proposed rule. See Letter from Michael D. Pierson,
Director, Regulatory Policy, PCX, to Nancy Sanow, Assistant
Director, Division of Market Regulation (``Division''), SEC (Sept.
15, 1999) (``Amendment No. 1'').
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Notice of the proposed rule change was published in the Federal
Register on July 2, 1999.\4\ The Commission received no comment letters
on the proposal. On September 16, 1999, the Exchange filed Amendment
No. 1 with the Commission, which revised the rule text and made
technical changes to the proposal.\5\ This order approves the proposed
rule change, as amended.
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\4\ Securities Exchange Act Release No. 41555 (June 24, 1999),
64 FR 36063.
\5\ See supra n. 3, Amendment No. 1.
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I. Background and Summary
PCX Rule 1.7(b)(9) currently provides that the Exchange may deny
(or may condition) membership, or may prevent a natural person from
becoming associated (or may condition an association) with a member,
when an applicant, directly or indirectly, 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. The Exchange proposes to amend PCX Rule 1.7(b)(9) to expressly
require off-floor traders to successfully complete the Series 7 Exam.
Specifically, the proposal provides that traders of member
organizations for which the Exchange is the DEA must successfully
complete the Series 7 Exam if the primary business of the member
organization involves the trading of securities which is unrelated to
the performance of the functions of a registered specialist, a
registered market maker or a registered floor broker. The proposal
further provides that the following are exempt from the requirement to
successfully complete the Series 7 Exam: Exchange members who perform
the function of a registered specialist, registered market maker, or
registered floor broker (pursuant to PCX Rules 5.27(a), 6.33 or 6.44,
respectively), and associated persons of member firms who facilitate
the execution of stock transactions for the accounts of options market
makers.\6\
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\6\ The Exchange has represented that no person may perform the
function of a registered specialist, registered market maker or
registered floor broker on the Exchange trading floors without first
passing a specified examination. Specifically, Equity floor members
must pass the Equity Member Test and Options floor members must pass
the Options Floor Qualification Examination. There are two Equity
Member Tests, one for specialists and one for floor brokers. While
there is only one Options Floor Qualification Examination, there are
separate sections of the exam: one for floor brokers, one for market
makers, and one for both floor brokers and market makers. See supra
n. 3, Amendment No. 1. According to the Exchange, there are a small
number of off-floor traders, primarily associated with Options floor
members, who will be exempt from the examination requirement.
Telephone conversation among Michael D. Pierson, Director,
Regulatory Policy, PCX, Nancy Sanow, Senior Special Counsel,
Division, SEC and Joseph Morra, Attorney, Division, SEC, September
15, 1999.
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For purposes of PCX Rule 1.7(b)(9), the term ``trader'' is defined
as a person who is directly or indirectly compensated by an Exchange
member organization or who is any other associated person of an
Exchange member organization, and who trades, makes trading decisions
with respect to, or otherwise engages in the proprietary or agency
trading of securities.\7\ In addition, the term ``primary business'' is
defined as greater than 50% of the member organization's business.
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\7\ Id.
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The proposed rule change further provides that each member
organization for which the Exchange is the DEA must complete on an
annual basis and on a form prescribed by the Exchange a written
attestation as to whether the member organization's primary business is
performing the function of a registered specialist, a registered market
maker, or a registered floor broker (pursuant to PCX Rules 5.27(a),
6.33 or 6.47, respectively).
The proposed rule change also states that the requirement to
complete the Series 7 Exam will apply to current traders of member
organizations that meet the specified criteria as well as to future
traders of member organizations that meet the specified criteria at a
later date. It further provides that traders of member organizations
that meet the specified criteria at the time of the Commission's
approval of the proposed rule must successfully complete the Series 7
Exam within six months of the date of notification by the Exchange.
II. Discussion
Under Section 19(b)(2) of the Act,\8\ 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 self-regulatory organization
(``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 \9\ of their members satisfy
prescribed standards of
[[Page 51823]]
training, experience, and competence as a condition to membership.\10\
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\8\ 15 U.S.C. 78s(b)(2).
\9\ 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 persons 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.
\10\ See 15 U.S.C. 78f(c)(3)(B).
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The Commission finds that the Exchange's proposal is consistent
with the requirements of Section 6 of Act, and particularly Sections
6(b)(5) \11\ and 6(c)(3) (A) and (B) \12\ thereunder, for the reasons
discussed below.
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\11\ 15 U.S.C. 78f(b)(5).
\12\ 15 U.S.C. 78f(c)(3) (A) and (B).
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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.\13\
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\13\ See Section 15(b)(7) of the Act, 15 U.S.C. 78o(b)(7).
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Moreover, Section 15(b)(7)(C) of the Act \14\ provides that the
Commission may rely on the registered securities associations and
national securities exchanges to ``require registered brokers and
dealers and persons associated with such brokers and dealers to pass
tests administered by or on behalf of any such association or
exchange.'' To further the goals of Section 15(b)(7) of the Act,\15\
the Commission in 1993 adopted Rule 15b7-1, which prohibits registered
broker-dealers from effecting any transaction in, or inducing the
purchase 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.\16\
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\14\ 15 U.S.C. 78o(b)(7)(C).
\15\ 15 U.S.C. 78o(b)(7).
\16\ 17 CFR 240.15b7-1.
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In addition, Section 6(c)(3)(A) of the Act \17\ 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.\18\
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\17\ 15U.S.C. 78f(c)(3)(A).
\18\ 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).
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Also, under Section 6(c)(3)(B) of the Act,\19\ 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 PCX, are empowered to implement rules establishing
the prerequisites to qualify and approve persons associated with member
organizations to engage in securities activities.
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\19\ 15 U.S.C. 78f(c)(3)(B).
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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.'' \20\ 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.'' \21\ The Senate Report emphasized the
importance of screening the integrity and competence of those persons
involved in the securities industry.\22\
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\20\ S. Rep. No. 379, 88th Cong. 1st Sess. 1 (1963) (``Senate
Report'').
\21\ Id. at 38.
\22\ 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.
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The Commission finds that the Exchange's proposal 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 member organizations of the PCX are
participants in the securities industry. As associated persons of
members of PCX, 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. Requiring these off-floor traders to
pass the Series 7 Exam will further the objectives of Sections
6(c)(3)(A) and (B) \23\ 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.
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\23\ 15 U.S.C. 78f(c)(3)(A) and (B).
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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. 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) \24\ 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 test 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 that are improper under the
federal securities laws and regulations
[[Page 51824]]
or rules of the SROs. In the Commission's opinion, the proposed rule
revision satisfies the objectives of Section 6(b)(5) \25\ of the Act
because, by satisfactorily completing the Series 7 Exam, off-floor
traders will gain a greater understanding of the regulations,
procedures and principles governing the securities industry.
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\24\ 15 U.S.C. 78f(b)(5).
\25\ Id.
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The Commission also 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 who are not covered by the current qualification requirements
for traders on the floor of the Exchange.\26\ The Series 7 Exam was
adopted as an industry-wide qualification examination in 1974. Other
securities exchanges currently require traders off the floor of the
exchange to pass the Series 7 Exam.\27\ The examination requirement for
off-floor traders at PCX will enhance the consistency of exam
requirements across the exchanges and prevent traders off the floor of
the Exchange from associating with members of PCX solely to avoid the
examination requirements of other SROs.
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\26\ The Exchange notes that no person may perform the function
of a registered specialist, registered market maker or registered
floor broker on the PCX trading floors without first passing a
specified examination. See supra n. 3, Amendment No. 1.
\27\See New York Stock Exchange Rule 345; American Stock
Exchange Rule 341; Chicago Stock Exchange Article VI, Rule 3; and
Philadelphia Stock Exchange Rule 604.
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The Commission also finds good cause for approving proposed
Amendment No. 1 prior to the thirtieth day after the date of
publication of notice of filing in the Federal Register. Amendment No.
1 conforms the proposal to similar rules of other self-regulatory
organizations.\28\ For these reasons, the Commission finds good cause
for accelerating approval of the proposed rule change, as amended.
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\28\ Id.
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III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1, 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, N.W., Washington,
D.C. 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. 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 PCX. All submissions should refer to File No.
SR-PCX-99-16 and should be submitted by October 15, 1999.
IV. Conclusion
The Commission finds that the proposed rule change, as amended, is
consistent with the Act, and in particular, with Sections 6(b)(5) and
6(c)(3)(A) and (B).\29\
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\29\ 15 U.S.C. 78f(b)(5), 15 U.S.C. 78f(c)(3)(A) and (B).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\30\ that the proposal, SR-PCX-99-16, as amended, be and hereby is
approved.\31\
\30\ 15 U.S.C. 78s(b)(2).
\31\ In approving the proposal, the Commission has considered
the rule's impact on efficiency, competition, and capital formation.
15 U.S.C. 78c(f).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24917 Filed 9-23-99; 8:45 am]
BILLING CODE 8010-01-M