[Federal Register Volume 64, Number 167 (Monday, August 30, 1999)]
[Notices]
[Pages 47214-47218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22426]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41776; File No. SR-Phlx-99-07]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Amendment Nos. 1
and 2 and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 3 to the Proposed Rule Change Requiring Off-Floor Traders
for which the Phlx is the Designated Examining Authority to
Successfully Complete the General Securities Representative Examination
Series 7
August 20, 1999.
On March 15, 1999, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'' or
``Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed rule change
would amend Phlx Rule 604, Registration and Termination of Registered
Representatives, to require successful completion of the General
Securities Representative Examination Series 7 (``Series 7 Exam'') by
persons who are associated with members or participant organizations
\3\ for which the Exchange is the Designated Examining Authority
(``DEA'') \4\ and who trade off the floor of the Exchange (``off-floor
traders'').\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The term ``participant organizations'' refers to foreign
currency options participant organizations, which includes foreign
currency options participants firms and foreign currency options
participant corporations. Phlx Rules 13-16.
\4\ Pursuant to Section 17(d) of the Exchange Act, 15 U.S.C.
78q(d), the Commission may ``allocate among self-regulatory
organizations the authority to adopt rules with respect to matters
as to which, in the absence of such allocations, such self-
regulatory organizations share authority under this title.'' The DEA
is the self-regulatory organization (``SRO'') that has the
responsibility for examining a broker or dealer member for
compliance with the federal securities laws and the rules of the
SRO.
\5\ Under the proposed rule change, Phlx Rule 604 would be
retitled as Registration and Termination of Registered Persons.
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On April 6, 1999, the Exchange filed Amendment No. 1 with the
Commission, removing a description of professional traders from the
filing.\6\ On April 12, 1999, the Exchange filed Amendment No. 2 with
the Commission, making technical changes to the proposed rule.\7\ On
August 18, 1999, the Exchange filed Amendment No. 3 with the
Commission, which revised the rule language.\8\ Notice of the proposed
rule change, as amended, together with the substance of the proposal,
was published in the Federal Register.\9\ The Commission received 22
comment letters from 21 commenters on the filing.\10\ This order
approves the proposed rule change, as amended.
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\6\ See Letter from Richard S. Rudolph, Legal Counsel, Phlx, to
Karl Varner, Special Counsel, Division of Market Regulation
(``Division''), SEC (April 6, 1999).
\7\ See Letter from Richard S. Rudolph, Legal Counsel, Phlx, to
Karl Varner, Special Counsel, Division, SEC (April 12, 1999).
\8\ See Letter from Richard S. Rudolph, Legal Counsel, Phlx, to
Karl Varner, Special Counsel, Division, SEC (Aug. 18, 1999).
Amendment No. 3 revised the proposed rule language for paragraph (e)
of Phlx Rule 604. (Amendment No. 3 was inadvertently designated as
Amendment No. 2 by the Phlx).
\9\ Securities Exchange Act Release No. 41306 (April 16, 1999),
64 FR 22665 (April 27, 1999).
\10\ See Letter from Donald M. Nisonoff, Senior Counsel,
Proskauer Rose LLP to Secretary, SEC (May 14, 1999) (``Nisonoff
Letter''); E-mail from Chris Pheil to Rule-Comments at OSI (May 3,
1999); E-mail from Victor Shakerchi to Rule-Comments at OSI (May 3,
1999); Letter from H.R. Roger Menear III to Secretary, SEC (May 7,
1999); Letter from Brian Dalinsky to Secretary, SEC (May 7, 1999);
Letter from Vladimir M. Slavinsky to Secretary, SEC (May 7, 1999);
Letter from Joseph H. Phoenix to Secretary, SEC (May 7, 1999);
Letter from Aleksandr E. Shapiro to Secretary, SEC (May 7, 1999);
Letter from Dan Dimitrigevic to Secretary, SEC (May 7, 1999); Letter
from Nelson R. Davis, Jr. to Secretary, SEC (May 10, 1999), E-mail
from Sean von Tagen to Rule-Comments at OSI (May 12, 1999); E-mail
from Dan Laycock to Rule-Comments at OSI (May 4, 1999; E-mail from
Barry Pozmantier to Rule-Comments at OSI (May 6, 1999) (``Pozmantier
E-mail''); E-mail from David Kolpak to Rule-Comments at OSI (May 18,
1999); E-mail from David Wacker to Rule-Comments at OSI (May 16,
1999); E-mail from Jerry Wickey to Rule-Comments at OSI (May 16,
1999); E-mail from John Hodges to Rule-Comments at OSI (May 16,
1999); E-mail from Alan Goldstein to Rule-Comments at OSI (May 16,
1999; E-mail from Peter Kulbokas to Rule-Comments at OSI (May 20,
1999); Letter from P.L. Blackburn, Office Manager, Bright Trading,
to Secretary, SEC (May 10, 1999) (``Blackburn Letter''); Letter from
Ron Owens to SEC (May 15, 1999); Memorandum to File No. SR-PHLX-99-
07 (June 1, 1999) (telephone conference with Donald Nisonoff and
Saul Cohen, Proskauer Rose, LLP).
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[[Page 47215]]
I. Background and Summary
Phlx Rule 604 specifies the qualification requirements for persons
conducting a public business or duties customarily performed by
registered representatives. Specifically, these associated persons are
required to register on Form U-4, Uniform Application for Securities
Industry Registration or Transfer, and to pass the Series 7 Exam and
maintain an effective Series 7 Full Registration/General Securities
Representative registration.\11\ In addition, Phlx Rule 604 specifies
the qualification requirements for associated persons of a member or
participant organization for which the Exchange is the DEA when these
persons are not registered representatives, but are compensated
directly or indirectly for trading securities for the firm's
account.\12\ Currently, this class of associated persons, which
includes the Phlx off-floor traders who are the subject of the proposed
rule change, are only required to file a Form U-4.
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\11\ See Phlx Rule 604(a).
\12\ Phlx Rule 604(d) specifies that every person who is
compensated directly or indirectly by a member or participant
organization for which the Exchange is the DEA for the solicitation
or handling of business in securities, including trading securities
for the account of the member or participant organization, whether
such securities are those dealt in on the Exchange or those dealt in
over-the-counter, who is not otherwise required to register with the
Exchange, must file Form U-4, Uniform Application for Securities
Industry Registration or Transfer, with the Exchange, See also
Securities Exchange Act Release No. 36515 (November 27, 1995), 60 FR
62119 (December 4, 1995) (File No. SR-Phlx-95-58) (order approving
addition of paragraph (d) to Phlx Rule 604 to require associated
persons to file Form U-4.).
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The Exchange proposes to amend Phlx Rule 604 to require successful
completion of the Series 7 Exam by persons who are associated with
members or participant organizations for which the Exchange is the DEA
and who trade off the floor of the Exchange. The Exchange believes
those persons to whom the new examination requirement would apply
primarily are associated with limited liability companies (``LLC'') for
the purpose of trading securities off the floor of the Exchange for the
firm's account. According to the Exchange, these off-floor traders
generally become members of an LLC to avail themselves of good faith
margin \13\ provided through the LLC's Joint Back Office \14\ agreement
with its clearing agent.
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\13\ Good faith margin is the amount of margin which a creditor
would require in exercising sound credit judgment. See 12 CFR 220.2
(``Regulation T'').
\14\ See 12 CFR 220.7(c) (noting that in a broker-dealer credit
account, a creditor may finance transactions of any of its owners if
the creditor is a clearing and servicing broker or dealer owned
jointly or individually by other creditors).
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The proposal would require all currently registered associated
persons who trade off the floor of the Exchange to register to take the
Series 7 Exam within 30 days of the Exchange's notice to its membership
of this requirement, and to successfully complete the Series 7 Exam
within six months of the date of notice by the Exchange.\15\ Those
associated persons covered by the rule change will be required to
notify the Exchange promptly that they have registered to take the
Series 7 Exam. Persons who become associated with member organizations
or participant organizations after the date of notice of this
requirement must successfully complete the Series 7 Exam prior to
conducting securities trading activities for which the examination is
mandated.
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\15\ According to the Exchange, as of June 30, 1999, the
proposal would affect approximately 1,777 persons associated with
about 15 firms out of a total of 8,240 firms that have the ability
to direct orders to the Phlx by using floor broker members to
expedite trades. Telephone conversation between Richard S. Rudolph,
Legal Counsel, Phlx, and Joseph Morra, Attorney, Division, SEC (July
28, 1999).
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II. Summary of Comments and the Exchange's Response
All 21 commenters expressed concerns about the proposal. Twenty
commenters stated that, if the Exchange were to require an examination
for off-floor traders, the Limited Representative-Equity Trader
Examination (``Series 55 Exam''), which qualifies individuals to trade
equity and convertible debt securities on a principal or agency basis,
or another unspecified examination, would be more appropriate for those
traders.\16\ Some of these commenters argued that the Series 55 Exam is
more relevant for off-floor traders. Two commenters added that the
proposal will discourage trading off the floor of the Exchange without
any regulatory benefit, because the Series 7 Exam covers a wide range
of products and activities that typically are not engaged in by off-
floor traders.\17\ One of these commenters also objected to the
proposal because in his view: (1) Off-floor traders associated with
LLCs have limited interaction with traders at other firms and no
contact with customers; (2) adequate controls exist now to limit any
possible impact of trading off the floor of the Exchange;\18\ and (3)
the proposal is an indirect attempt to regulate credit used by the off-
floor traders.\19\ Another commenter stated that the proposal
discriminates in favor of certain parties and against others because
the Series 7 Exam is not required of floor traders and others
conducting similar businesses.\20\
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\16\ See, e.g., Nisonoff Letter, Pozmantier E-mail.
\17\ See Nisonoff Letter at 2 and Blackburn Letter.
\18\ See Nisonoff Letter at 2.
\19\ See supra n.10, Nisonoff Telephone Conference.
\20\ See Pozmantier E-mail.
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The Phlx in its response letter stated that the Series 7 Exam,
rather than the Series 55 Exam, is appropriate for a logistical reason:
To qualify to take the Series 55 Exam, an individual must first pass
either the Series 7 Exam or the Corporate Securities Limited
Representative Qualification Examination (``Series 62 Exam'').\21\ The
Phlx believes that it is more practical to require the Series 7 Exam
only, rather than both the Series 7 Exam and the Series 55 Exam. The
Phlx also responded that the Series 55 Exam is not suitable because it
is used to qualify individuals to trade equity and convertible debt
securities on a principal or agency basis, with an emphasis on Nasdaq
market maker activities and obligations. Moreover, the Exchange noted
that the Series 55 Exam was designed with the assumption that the
participant will already have been thoroughly tested on the critical
areas in the Series 7 Exam (such as compliance with federal and state
laws and industry regulations, characteristics of different investment
products, investment risks, and principal factors affecting securities
markets and prices for individual securities).
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\21\ See Letter from Richard S. Rudolph, Legal Counsel, Phlx, to
Karl Varner, Esquire, Division, SEC (June 9, 1999). The Series 55
Exam was developed by the National Association of Securities
Dealers, Inc. (``NASD'') in response to problems identified in
connection with the administrative proceeding against the NASD,
National Association of Securities Dealers, Inc., Securities
Exchange Act Release No. 37538 (Aug. 8, 1996), 62 S.E.C. Docket 1346
(Order Instituting Public Proceedings Pursuant To Section 19(h)(1)
of the Securities Exchange Act of 1934, Making Findings and Imposing
Remedial Sanctions). NASD rules generally require a person to have
successfully completed the Series 7 Exam before taking the Series
55. See Securities Exchange Act Release No. 39516 (January 2, 1998),
63 FR 1520 (January 9, 1998) (order approving Series 55 Exam).
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[[Page 47216]]
The Phlx also stated that other SROs such as the New York Stock
Exchange, Inc. (``NYSE''), the American Stock Exchange, Inc.
(``Amex''), and the Chicago Stock Exchange, Inc. (``CHX'') require that
securities traders pass the Series 7 Exam.\22\ The Phlx noted that an
associated person of a Phlx member would be required to take the Series
7 Exam if the firm or that associated person decided to become a member
of another SRO.
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\22\ See NYSE Rule 345; Amex Rule 341; NASD Conduct Rule 1030;
CHX Article VI, Rule 3.
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III. Discussion
Under Section 19(b) of the Act,\23\ the Commission is required to
approve a proposed rule change if it finds that the proposal is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to the SRO. Under the Act, SROs are
assigned rulemaking and enforcement responsibilities for regulating the
securities industry for the protection of investors and for related
purposes. A key requirement for SROs is to assure that associated
persons \24\ of their members satisfy prescribed standards of training,
experience, and competence as a condition to membership.\25\ The
Commission finds that the Exchange's proposal requiring those off-floor
traders of Phlx members or participant organizations for which the Phlx
is the DEA to successfully complete the Series 7 Exam is consistent
with the requirements of the Section 6 of Act, and particularly
Sections 6(b)(5)\26\ and 6(c)(3) (A) and (B)\27\ thereunder, for the
reasons discussed below.
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\23\ 15 U.S.C. 78s(b)(2).
\24\ As defined in Section 3(a)(21) of the Act, an associated
person of a member is ``any partner, officer, director, or branch
manager of such member (or any person occupying a similar status or
performing similar functions), any person directly or indirectly
controlling, controlled by, or under common control with such
member, or any employee of such member.'' 15 U.S.C. 78c(a)(21). The
off-floor traders covered by the Exchange's proposed rule change are
associated persons of the member firm.
\25\ See 15 U.S.C. 78f(c)(3)(B).
\26\ 15 U.S.C. 78f(b)(5).
\27\ 15 U.S.C. 78f(c)(3) (A) and (B).
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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.\28\ Moreover, Section 15(b)(7)(C) of the
Act \29\ provides that the Commission may rely on the registered
securities associations and national securities exchanges to ``require
registered brokers an dealers and persons associated with such brokers
and dealers to pass tests administered by or on behalf of any such
association or exchange.'' To effectuate the goals of Section 15(b)(7)
of the Act,\30\ the Commission in 1993 adopted Rule 15b7-1, which
prohibits registered broker-dealers from effecting any transaction in,
or inducing the purpose or sale of, any security unless any natural
person associated with such broker or dealer who effects or is involved
in effecting such transaction is registered or approved in accordance
with the standards of training, experience, competence, and other
qualification standards (including but not limited to submitting and
maintaining all required forms, paying all required fees and passing
any required examinations) established by the rules of any national
securities exchange of which such broker or dealer is a member.\31\
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\28\ See Section 15(b)(7) of the Act, 15 U.S.C. 78o(b)(7).
\29\ 15 U.S.C. 78o(b)(7)(C).
\30\ 15 U.S.C. 78o(b)(7).
\31\ 17 CFR 240.15b7-1.
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In addition, Section 6(c)(3)(A) of the Act \32\ provides that a
national securities exchange may deny membership to, or condition the
membership of, a registered broker-dealer if any natural persons
associated with such broker or dealer do not meet such standards of
training, experience and competence as are prescribed by the rules of
the exchange.\33\ Also, under Section 6(c)(3)(B) of the Act,\34\ a
National securities exchange may bar a natural person from becoming
associated with a member if the person does not meet the exchange's
standards of training, experience, or competence, or if the person has
engaged and there is a reasonable likelihood the person will engage
again in acts or practices inconsistent with just and equitable
principles of trade. Under these statutory provisions, the various
national securities exchanges, including the Phlx, are empowered to
implement rules establishing the prerequisites to qualify and approve
persons associated with members to engage in securities activities.
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\32\ 15 U.S.C. 78f(c)(3)(B).
\33\ Under Section 15(b)(8) of the Act, all registered brokers
or dealers must be members of an SRO--either a securities
association or a national securities exchange. 15 U.S.C. 78o(b)(8).
\34\ 15 U.S.C. 78f(c)(3)(B).
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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.'' \35\ The Senate Report
further noted that ``[o]ne of the basic purposes of the Securities
Exchange Act of 1934 is to regulate the conduct of broker-dealers and
persons associated with them, both through direct Commission controls
and through self-regulation by industry groups, with appropriate
Commission oversight.'' \36\ The Senate Report emphasized the
importance of screening the integrity and competence of those persons
involved in the securities industry.\37\
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\35\ S. Rep. No. 379, 88th Cong., 1st Sess. 1 (1963) (``Senate
Report'').
\36\ Id. at 38.
\37\ The Senate Report noted the following:
The findings of the Special Study show that--because of the
complex nature of the securities markets, the reliance which the
investing public necessarily places upon the competence and
character of professionals in those markets, and the
responsibilities which are assumed--the existing ease of entry for
inexperienced and unqualified persons subjects the investing public
to undue hazards and unnecessarily complicates the task of
regulation.
Id. at 43-44. In this regard, the national securities exchanges
and associations were specifically charged to enhance their
regulation of associated persons: ``Development and administration
of such standards is a matter which is peculiarly appropriate for
self-regulation under Commission supervision; and the establishment
of such requirements, in conjunction with the requirement of
membership in a regulatory body, should significantly simplify
regulation and improve investor protection.'' Id. at 44.
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The Commission finds that the Exchange's proposal to require
associated persons of members to pass the Series 7 Exam is a well-
established and accepted practice in the securities industry and is
directly related to one of the most important objectives of the
Exchange Act--maintaining the integrity and competency of securities
industry personnel.
Off-floor traders of the Phlx are participants in the securities
industry. The persons who will be subject to the new rule are
associated persons of the member firm.\38\ They effect their trading
activities in the firm's proprietary account. As associated persons of
[[Page 47217]]
members of the Phlx, they are required to comply with the Commission's
and the Exchange's rules pertaining to broker-dealers and their
associated personnel, including qualification requirements established
to assure that they maintain the degree of integrity and competency
expected of securities industry personnel. The off-floor traders are
already subject to registration requirements, including the requirement
to file a Form U-4. Requiring these off-floor traders to pass the
Series 7 Exam will further the objectives of Sections 6(c)(3) (A) and
(B)\39\ of the Act, which are intended to assure that associated
persons are sufficiently familiar with Commission and SRO requirements
and procedures when they are closely connected to the securities
industry.
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\38\ See supra n. 24.
\39\ 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. According to the Exchange, these off-floor traders generally
become members of an LLC to avail themselves of benefits available to
associated persons, e.g., Joint Back Office agreements, and not to
others. The off-floor traders' benefits of associated person status and
the ability to trade in the firm's account also entail obligations
under the securities laws. By successfully completing the Series 7
Exam, these off-floor traders should develop a greater understanding of
securities products, risks, and regulations appropriate for associated
persons.
Moreover, the proposed rule change is consistent with the
provisions of Section 6(b)(5) \40\ of the Act requiring, among other
things, that the rules of an exchange be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade and, in general, to protect investors and the
public interest. The Series 7 Exam tests for proficiency in a broad
range of securities matters, including anti-fraud and anti-manipulation
regulation. Without proper training, these associated persons may
inadvertently engage in transactions in the firm's account that are
improper under the federal securities laws and regulations or rules of
the SROs. In the Commission's opinion, the proposed rule revision
satisfies the objectives of Section 6(b)(5) \41\ of the Act because, by
satisfactorily completing the Series 7 Exam, these off-floor traders
who trade on a proprietary basis will gain a greater understanding of
the regulations, procedures and principles governing the securities
industry.
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\40\ 15 U.S.C. 78f(b)(5).
\41\ Id.
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Most commenters suggested that the Phlx instead should require off-
floor traders to pass the Series 55 Exam or another examination
specifically tailored to the activities of these off-floor traders,
rather than the Series 7 Exam. The Commission believes that, although
the Series 7 Exam does not focus on trading off the floor of the
Exchange, the exam covers a reasonably broad range of applicable laws,
rules, regulations, and industry practices that are pertinent to most
associated persons. In essence, the Series 7 Exam is the industry
standard for persons who want to be affiliated with a broker-dealer and
trade securities. In addition, typically a person must pass the Series
7 Exam to qualify to take the Series 55 Exam, which is a specialized
registration category.\42\ The Series 55 Exam focuses on activities,
automated execution and trading systems, and trade reporting
obligations geared toward the Nasdaq market maker.\43\ In contrast, the
Series 7 Exam is broader in scope, used principally to qualify persons
seeking registration as general securities representatives. It tests
for appropriate levels of knowledge and expertise regarding securities
laws and regulations, characteristics of different investment products,
investment risk, and principal factors affecting securities markets and
prices for individual securities. The Commission agrees with the Phlx
that the Series 7 Exam is the more appropriate test for off-floor
traders.
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\42\ Securities Exchange Act Release No. 39516 (January 2,
1998), 63 FR 1520 (January 9, 1998) (order approving Series 55
Examination).
\43\ See Letter from Richard S. Rudolph, Counsel, Phlx, to Karl
Varner, Esquire, Division, SEC, at pp. 1-2 (June 9, 1999).
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One commenter remarked that the proposal discriminates against off-
floor traders because traders on the floor of the Phlx do not have to
take the Series 7 Exam. The Commission, however, finds that the
proposal does not unfairly discriminate against off-floor traders
because traders on the floor of the Exchange must pass the Series 7
Exam, the Series 7A examination,\44\ or an options proficiency
examination for Registered Options Traders (``ROT'') administered by
the Phlx Department of Regulatory Services.\45\ Another commenter
suggested that the Exchange's proposal would not apply to firms engaged
in proprietary trading, even though such firms' employees are routinely
permitted to trade large firm proprietary positions far exceeding the
position that an LLC member would take using his or her own capital.
The Commission finds that the proposal, however, is intended to apply
to all off-floor traders of members or participant organizations who
trade for the member firm's proprietary account when the Phlx is the
DEA, and not just those associated with LLCs.\46\ In addition, as noted
above, all traders on the floor of the Exchange who trade for the
member firm's proprietary account must successfully complete the Series
7 Exam, the Series 7A examination, or a Phlx options proficiency
examination, depending on which is applicable.
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\44\ See Phlx Rule 604. The Series 7A examination is a module of
the Series 7 Exam developed to test the knowledge of the relevant
securities laws and Exchange Rules required of a member who conducts
a public business that is limited to accepting orders from
professional customers for execution on the trading floor.
\45\ See Telephone conversation between Richard S. Rudolph,
Legal Counsel, Phlx, and Karl Varner, Attorney, Division, SEC (Aug.
17, 1999). An ROT is a regular member or a foreign currency options
participant of the Exchange located on the trading floor who has
received permission from the Exchange to trade options for his own
account. See Phlx Rule 1014(b). See also Phlx Rule 901(c)(1), which
specifies that the Exchange may bar a person from becoming
associated with a member or condition the association of a person
with a member organization if the person does not successfully
complete such written proficiency examinations as required by the
Exchange to enable it to examine and verify the applicant's
qualifications to function in one or more of the capacities applied
for.
\46\ See Telephone conversation between Richard S. Rudolph,
Legal Counsel, Phlx, and Karl Varner, Attorney, Division, SEC (Aug.
9, 1999).
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With respect to one commenter's statement that adequate controls
exist to limit any possible impact of trading off the floor of the
Exchange, the Commission finds that the proposal will properly
supplement existing controls to ensure that off-floor traders and other
associated persons of members are appropriately qualified to become
associated with a member. By successfully completing the Series 7 Exam,
off-floor traders of the Phlx should hve a sufficient level of
knowledge of securities laws and regulations, as well as investment
products and risks, that is suitable to their role as associated
persons of a member organization and who trade on a proprietary basis
in the firm's account.
In one commenter's view, the proposal is an indirect attempt to
regulate credit used by off-floor traders. The Commission does not
consider the proposal to be an indirect attempt to impose greater
credit restrictions on off-floor traders, but an effort to assure a
level of understanding and competency regarding securities matters by
[[Page 47218]]
associated persons of broker-dealers. In fact, the Phlx rule change may
benefit a member firm because its off-floor traders will be
comprehensively trained and tested on fundamental securities matters.
Finally, the Commission finds that the proposal will bring the
Exchange's qualification requirements in line with those of other
securities exchanges by adding testing requirements for off-floor
traders and other associated persons of members who are not covered by
the current qualification requirements for floor traders. The Series 7
Exam was adopted as an industry-wide qualification examination in 1974.
In addition to mandating the exam for general securities
representatives, other securities exchanges currently require off-floor
traders to pass the Series 7 Exam.\47\ The Commission notes that other
SROs such as the NYSE, Amex, and CHX already require securities traders
who do not conduct a public business to pass the Series 7 Exam.\48\ For
example, NYSE Rule 345 requires ``securities traders'' engaged in the
purchase or sale of securities for the account of their employer and
who do not transact business with the public to pass the Series 7 Exam.
Amex Rule 341 parallels this rule. In addition, Interpretation and
Policy .02 to CHX Rule 3 establishes a Series 7 examination requirement
for associated persons who execute, make trading decisions, or
otherwise engage in proprietary or agency trading off the floor of the
exchange. The examination requirement for off-floor traders at the Phlx
will enhance the consistency of exam requirements across the exchanges
and prevent off-floor traders from associating with members of the Phlx
solely to avoid the examination requirements of other SROs.
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\47\ See NYSE Rule 345; Amex Rule 341; NASD Conduct Rule 1030;
CHX Article VI, Rule 3. On June 1, 1999, the Pacific Exchange, Inc.
(``PCX'') filed a similar proposed rule change with the Commission
to require that qualified off-floor traders for which the PCX is the
designated examining authority successfully complete the Series 7
Exam. See Securities Exchange Act Release No. 41555 (June 24, 1999),
64 FR 36063 (July 2, 1999) (SR-PCX-99-16).
\48\ Id.
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The Commission also finds good cause for approving proposed
Amendment No. 3 prior to the thirtieth day after the date of
publication of notice of filing in the Federal Register. Amendment No.
3 conforms the proposal to similar rules of other self regulatory
organizations.\49\ For these reasons, the Commission finds good cause
for accelerating approval of the proposed rule change, as amended.
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\49\ Id.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 3, including whether the proposed
rule change is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. Sec. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of the filing
will also be available for inspection and copying at the principal
offices of the Phlx. All submissions should refer to File No. SR-Phlx-
99-07 and should be submitted by September 20, 1999.
V. Conclusion
The Commission finds that the proposed rule change is consistent
with the Act, and in particular, with Sections 6(b)(5) and 6(c)(3) (A)
and (B).\50\
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\50\ 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,\51\ that the proposal, SR-Phlx-99-07, as amended, be and hereby is
approved.\52\
\51\ 15 U.S.C. 78s(b)(2).
\52\ In approving the proposal, the Commission has considered
the rule's impact on efficiency, competition, and capital formation.
15 U.S.C. 78c(f).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22426 Filed 8-27-99; 8:45 am]
BILLING CODE 8010-01-M
