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Options 10 Doing Business with the Public
Section 1. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 2. Registration of Options Principals

(a) No member or member organization or individual associated with a member organization shall be approved to transact options business with the public until such persons, who are designated as Options Principals, have been approved by and registered with the Exchange. Persons engaged in the supervision of options sales practice or a person to whom the designated general partner or executive officer (pursuant to Options 10, Section 7) or another Registered Options Principal delegates the authority to supervise options sales practices shall be designated as Options Principals.

(b) Foreign Currency Options-Qualified Customer Personnel—Registered Representatives of a member organization may solicit or accept customer orders for foreign currency options. Otherwise, an Application for Waiver of Series 7 Examination may be submitted describing and certifying at least six months of options-related experience. Such waiver is not automatic, but is subject to approval based on the information contained in the application.

Adopted Feb. 3, 2020 (20-03).

Section 3. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 4. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 5. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 6. Opening of Accounts

(a) No member or member organization shall accept an order from a customer to purchase or write an option contract or currency or index warrant contract unless the customer's account has been approved for options trading in accordance with the provisions of this Rule. In addition, no member or member organization shall accept an order from a customer to purchase or write a foreign currency option contract unless such customer's account has been specially approved by a designated Foreign Currency Options Principal of such member or member organization, in writing, for transactions in foreign currency options. Such approval to engage in foreign currency options transactions shall be based upon the facts known to the member or member organization concerning the customer and his investment objectives and financial situations.

(b) Diligence in Opening Accounts—In approving a customer's account for options transactions, a member or member organization shall exercise due diligence to learn the essential facts as to the customer and his investment objectives and financial situation, and shall make a record of such information which shall be retained in accordance with Options 6, Section 1 and Options 10, Section 7. Based upon such information, the branch office manager or other Registered Options Principal shall approve, in writing, the customer's account for options transactions; provided, that if the branch office manager is not a Registered Options Principal, his approval shall within a reasonable time be confirmed by a Registered Options Principal.

(c) Verification of Customer Background and Financial Information—The background and financial information upon which the account of every new customer that is a natural person has been approved for options trading, unless the information is included in the customer's account agreement, shall be sent to the customer for verification within fifteen (15) days after the customer's account has been approved for options transactions. A copy of the background and financial information on file with the member organization shall also be sent to the customer for verification within fifteen (15) days after the member organization becomes aware of any material change in the customer's financial situation.

(d) Agreements to Be Obtained —Within fifteen (15) days after a customer's account has been approved for options transactions, a member organization shall obtain from the customer a written agreement that the account shall be handled in accordance with the Rules of the Exchange and the rules of The Options Clearing Corporation and that such customer, acting alone or in concert with others, will not violate the position or exercise limits set forth in Rules 1001 and 1002.

(e) Options Disclosure Documents to be Furnished —At or prior to the time a customer's account is approved for options transactions, a member organization shall furnish the customer with one or more current Options Disclosure Documents in accordance with the requirements of Options 10, Section 13.

(f) Every member organization transacting business with the public in uncovered option contracts shall develop, implement and maintain specific written procedures governing the conduct of such business which shall include, at least, the following:

(1) Specific criteria and standards to be used in evaluating the suitability of a customer for uncovered short option transactions;

(2) Specific procedures for approval of accounts engaged in writing uncovered short option contracts, including written approval of such accounts by a Registered Options Principal;

(3) Designation of a specific Registered Options Principal qualified individual(s) as the person(s) responsible for approving accounts which do not meet the specific criteria and standards for writing uncovered short option transactions and for maintaining written records of the reasons for every account so approved;

(4) Establishment of specific minimum net equity requirements for initial approval and maintenance of customer uncovered option accounts; and

(5) Requirements that customers approved for writing uncovered short options transactions be provided with a special written description of the risks inherent in writing uncovered short option transactions, at or prior to the initial uncovered short option transaction. See Options 10, Section 13(b).

Supplementary Material to Options 10, Section 6

.01 In fulfilling its obligations pursuant to paragraph (b)(ii) of this Rule with respect to options customers that are natural persons, a member organization shall seek to obtain the following information at a minimum (information shall be obtained for all participants in a joint account):

1. Investment objectives (e.g., safety of principal, income, growth, trading profits, speculation)

2. Employment status (name of employer, self-employed or retired)

3. Estimated annual income from all sources

4. Estimated net worth (exclusive of family residence)

5. Estimated liquid net worth (cash, securities, other)

6. Marital status: number of dependents

7. Age

8. Investment experience and knowledge (e.g., number of years, size, frequency and types of transactions for options, stocks and bonds, and commodities)

In addition, the customer's account records shall contain the following information, if applicable:

a. Source or sources of background and financial information (including estimates) concerning the customer

b. Discretionary trading authorization: agreement on file; name; relationship to customer and experience of person holding trading authority

c. Date Options Disclosure Document(s) furnished to customer

d. Nature and types of transactions for which account is approved (e.g., buying, covered writing, uncovered writing, spreading, discretionary transactions)

e. Name of registered representative

f. Name of ROP approving account; date of approval

g. Dates of verification of currency of account information

The member organization should consider utilizing a standard account approval form so as to ensure the receipt of all the required information.

.02 Refusal of a customer to provide any of the information called for in Supplementary Material .01 shall be so noted on the customer's records at the time the account is opened. Information provided shall be considered together with other information available in determining whether and to what extent to approve the account for options transactions.

.03 The requirement of paragraph (b)(iii) of this Rule for the initial and subsequent verification of customer background and financial information is to be satisfied by sending to the customer the information required in Items 1 through 6 of Supplementary Material .01 above as contained in the member's records and providing the customer with an opportunity to correct or complete the information. In all cases, absent advice from the customer to the contrary, the information will be deemed to be verified.

.04 Approval of the accounts of customers for foreign currency options transactions shall be conducted in accordance with this Rule and, in the case of customers that are natural persons, shall include consideration of the background and financial information that a member organization must seek to obtain under Supplementary Material .01 to this Rule. With respect to institutional foreign currency options customers (i.e., customers that are not natural persons), a member organization shall seek to obtain the following information.

(i) evidence of authority for the institution to engage in foreign currency options transactions (corporate resolutions, trust documents, etc.);

(ii) written designations of individuals within the institution authorized to act for it in connection with foreign currency options transactions; and

(iii) basic financial information concerning the institution.

.05 For purposes of Options 10, Section 6 (Conduct of Accounts for Options Trading), Options 10, Section 7 (Supervision of Accounts), and Options 10, Section 13 (Delivery of Options Disclosure Document), the term writing uncovered short option positions shall include combinations and any transactions which involve naked writing.

.06 Individuals who are delegated responsibility pursuant to Option 10, Section 7 for reviewing the acceptance of discretionary accounts, for approving exceptions to a member organization's criteria or standards for uncovered options accounts, and for approval of communications, shall be designated as Options Principals and are required to qualify as an Options Principal by passing the Registered Options Principal Qualification Examination (Series 4).

.07 A person accepting orders from non-member customers (unless such customer is a broker-dealer registered with the Securities and Exchange Commission) is required to register with the Exchange and to be qualified by passing the General Securities Registered Representative Examination (Series 7).

.08 Definition of Branch Office. A "branch office" is any location where one or more associated persons of a member or member organization regularly conduct the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of any security, or is held out as such, excluding:

(i) any location that is established solely for customer service and/or back office type functions where no sales activities are conducted and that is not held out to the public as a branch office;

(ii) any location that is the associated person's primary residence; provided that: (a) only one associated person, or multiple associated persons, who reside at that location and are members of the same immediate family, conduct business at the location; (b) the location is not held out to the public as an office and the associated person does not meet with customers at the location; (c) neither customer funds nor securities are handled at that location; (d) the associated person is assigned to a designated branch office, and such branch office is reflected on all business cards, stationery, advertisements and other communications to the public by such associated person; (e) the associated person's correspondence and communications with the public are subject to all supervisory provisions of the Exchange's Rules (f) electronic communications (e.g., e-mail) are made through the member's or member organization's electronic system; (g) all orders are entered through the designated branch office or an electronic system established by the member or member organization that is reviewable at the branch office; (h) written supervisory procedures pertaining to supervision of sales activities conducted at the residence are maintained by the member or member organization; and (i) a list of the locations is maintained by the member or member organization;

(iii) any location, other than a primary residence, that is used for securities business for less than 30 business days in any one calendar year, provided the member or member organization complies with the provisions of (b) through (h) of paragraph (ii) above;

(iv) any office of convenience, where the associated person occasionally and exclusively by appointment meets with customers, which is not held out to the public as a branch office (where such location is on bank premises, however, only signage required by the Interagency Statement (Statement on Retail Sales of Nondeposit Investment Products required under Banking Regulations) may be displayed);

(v) any location that is used primarily to engage in non-securities activities and from which the associated person effects no more than 25 securities transactions in any one calendar year; provided that any advertisements or sales literature identifying such location also sets forth the address and telephone number of the location from which the associated person conducting business at the non-branch locations are directly supervised;

(vi) the Floor of a registered national securities exchange where a member or member organization conducts a direct access business with public customers; or

(vii) a temporary location established in response to the implementation of a business continuity plan.

Notwithstanding the exclusions in subparagraphs (1) - (vii) above, any location that is responsible for supervising the activities of persons associated with a member or member organization at one or more non-branch locations of such member or member organization is considered to be a branch office.

For purposes of this Rule, the term "business day" shall not include any partial business day provided that the associated person spends at least four hours on such business day at his or her designated branch office during the hours that such office is normally open for business.

For purposes of this Rule, the term "associated person of a member or member organization" is defined as a member, allied member, or employee associated with a member or member organization.

For purposes of (ii)(h) above, written supervisory procedures shall include criteria for on-site for cause reviews of an associated person's primary residence. Such reviews must utilize risk-based sampling or other techniques designed to assure compliance with applicable securities laws and regulations and with Exchange Rules.

For purposes of (ii)(h) and (iii) above, written supervisory procedures for such residences and other remote locations must be designed to assure compliance with applicable securities laws and regulations and with Exchange Rules.

Factors which should be considered when developing risk-based sampling techniques to determine the appropriateness of on-site for cause reviews of selected residences and other remote locations shall include, but not be limited to, the following: (i) the firm's size; (ii) the firm's organizational structure; (iii) the scope of business activities; (iv) the number and location of offices; (v) the number of associated persons assigned to a location; (vi) the nature and complexity of products and services offered; (vii) the volume of business done; (viii) whether the location has a Series 9/10-qualified person on-site; (ix) the disciplinary history of the registered persons or associated persons, including a review of such person's customer complaints and Forms U4 and U5; and (x) the nature and extent of a registered person's or associated person's outside business activities, whether or not related to the securities business.

Adopted Feb. 3, 2020 (20-03).

Section 7. Supervision of Accounts

The deadline to submit the annual supervision-related reports pursuant to Options 10, Section 7(g) and (h) will be extended from June 1, 2020 to June 30, 2020.

(a) Duty to Supervise; —The general partners or directors of each member organization that conducts a non-member customer business shall provide for appropriate supervisory control and shall designate a general partner or executive officer, who shall be identified to the Exchange, to assume overall authority and responsibility for internal supervision and control of the organization and compliance with securities laws and regulations. This person, who may be the same individual designated pursuant to substantially similar New York Stock Exchange or FINRA rules shall:

(i) Delegate to qualified employees responsibilities and authority for supervision and control of each office, department or business activity, and shall provide for appropriate written procedures of supervision and control.

(ii) Establish a separate system of follow-up and review to determine that the delegated authority and responsibility is being properly exercised.

(iii) Develop and implement written policies and procedures reasonably designed to independently supervise the activities of accounts serviced by branch office managers, sales managers, regional/district sales managers or any person performing a similar supervisory function. Such supervisory reviews must be performed by a qualified Registered Options Principal who:

A. Is either senior to, or otherwise independent of, the producing manager under review. For purposes of this Rule, an "otherwise independent" person: may not report either directly or indirectly to the producing manager under review; must be situated in an office other than the office of the producing manager; must not otherwise have supervisory responsibility over the activity being reviewed; and must alternate such review responsibility with another qualified person every two years or less. Further, if a person designated to review a producing manager receives an override or other income derived from that producing manager's customer activity that represents more than 10% of the designated person's gross income derived from the member organization over the course of a rolling twelve-month period, the member organization must establish alternative senior or otherwise independent supervision of that producing manager to be conducted by a qualified Registered Options Principal other than the designated person receiving the income.

B. If a member organization is so limited in size and resources that there is no qualified Registered Options Principal senior to, or otherwise independent of, the producing manager to conduct the reviews pursuant to paragraph (a)(iii)(A) of this Rule (for instance, the member organization has only one office, or an insufficient number of qualified personnel who can conduct reviews on a two-year rotation), the reviews may be conducted by a Registered Options Principal in compliance with paragraph (a)(iii)(A) of this Rule to the extent practicable.

C. A member organization relying on subparagraph (a)(iii)(B) of this Rule must document the factors used to determine that complete compliance with all of the provisions of subparagraph (a)(iii)(A) of this Rule is not possible, and that the required supervisory systems and procedures in place with respect to any producing manager comply with the provisions of subparagraph (a)(iii)(A) of this Rule to the extent practicable.

D. A member organization that complies with requirements of the New York Stock Exchange or FINRA that are substantially similar to the requirements in subparagraphs (a)(iii)(A), (a)(iii)(B) and (a)(iii)(C) of this Rule will be deemed to have met such requirements.

(b) Maintenance of Customer Records—

(i) Background and financial information of customers who have been approved for options transactions shall be maintained at both the branch office servicing the customer's account and the principal supervisory office having jurisdiction over that branch office. Copies of account statements of options customers shall be maintained at both the branch office supervising the accounts and the principal supervisory office having jurisdiction over that branch for the most recent six-month period. With respect to the record retention responsibility of principal supervisory offices, customer information and account statements may be maintained at a location off premises so long as the records are readily accessible and promptly retrievable. Other records necessary to the proper supervision of accounts shall be maintained at a place easily accessible both to the branch office servicing the customer's account and to the principal supervisory office having jurisdiction over that branch office.

(ii) Upon the written instructions of a customer, a member may hold mail for a customer who will not be at his or her usual address for the period of his or her absence, but (A) not to exceed two months if the member is advised that such customer will be on vacation or traveling or (b) not to exceed three months if the customer is going abroad.

(iii) Before any customer order is executed, there must be placed upon the memorandum for each transaction, the name or designation of the account (or accounts) for which such order is to be executed. No change in such account name(s) (including related accounts) or designation(s) (including error accounts) shall be made unless the change has been authorized by a member or a person(s) designated by the designated general partner or executive officer pursuant to this Rule. Such person must, prior to giving his or her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate his or her approval of such change in writing on the order or other similar record of the member. The essential facts relied upon by the person approving the change must be documented in writing and preserved for a period of not less than three years, the first two years in an easily accessible place, as the term "easily accessible place" is used in SEC Rule 17a-4.

For purposes of this subparagraph (b)(iii), any person designated by the designated general partner or executive officer, pursuant to this Rule, must be a Registered Options Principal.

(c) Internal Controls.

(i) Member organizations must develop and maintain adequate controls over each of its business activities. Such controls must provide for the establishment of procedures for verification and testing of those business activities. An ongoing analysis, based upon appropriate criteria, may be employed to assess and prioritize those business activities requiring independent verification and testing. A review of each member organization's efforts with respect to internal controls, including a summary of tests conducted and significant exceptions identified, must be included in the annual report required by paragraph (g) of this Rule.

(ii) A member organization that complies with requirements of the New York Stock Exchange or FINRA that are substantially similar to the requirements in subparagraph (c)(i) of this Rule will be deemed to have met such requirements.

(d) Annual Branch Office Inspections.

(i) Each branch office that supervises one or more non-branch locations must be inspected no less often than once each calendar year unless:

A. it has been demonstrated to the satisfaction of the Exchange that because of proximity, special reporting or supervisory practice, other arrangements may satisfy this Rule's requirements for a particular branch office; or

B. based upon the written policies and procedures of such member organization providing for a systematic risk-based surveillance system, the member organization submits a proposal to the Exchange and receives, in writing, an exemption from this requirement pursuant to paragraph (e) of this Rule.

(ii) Every branch office, without exception, must be inspected at least once every three calendar-years. All required inspections must be conducted by a person who is independent of the direct supervision and control of the branch office in question (i.e., not the branch office manager, or any person who directly or indirectly reports to such manager, or any person to whom such manager directly reports). Written reports reflecting the results of such inspections are to be maintained at the member organization for the longer of three years or until the next branch office inspection.

(iii) A member organization that complies with requirements of the New York Stock Exchange or FINRA that are substantially similar to the requirements in subparagraph (d)(1) and (d)(2) of this Rule as well as to related requirements in subparagraphs (e) and (f) of this Rule will be deemed to have met such requirements.

(e) Risk -Based Surveillance and Branch Office Identification.

(i) Any member organization seeking an exemption, pursuant to subpargraph 7(d)(i)(B), from the annual branch office inspection requirement must submit to the Exchange written policies and procedures for systematic risk-based surveillance of its branch offices. Such policies and procedures should reflect, among other factors, the member organization's business model and product mix. Such policies and procedures must also, at a minimum, provide for:

A. The inspection of branches where developments during the year require a reconsideration of such branch's exemption;

B. A requirement that no less than half of the branch offices inspected each year on a cycle basis be done on an unannounced basis; and

C. A system to enable employees to report compliance issues on a confidential basis outside of the branch office chain of command.

(ii) For purposes of subparagraph (e)(i) of this Rule, the risk-based factors to be considered should include, but not necessarily be limited to, the following:

A. Number of Registered Representatives;

B. A significant increase in the number of Registered Representatives;

C. Number of customers and volume of transactions;

D. A significant increase in branch office revenues;

E. Incidence of concentrated securities positions in customer's accounts;

F. Aggregate customer assets held;

G. Nature of the business conducted and the sales practice risk to investors associated with the products sold, and product mix (e.g. options, equities, mutual funds, annuities, etc.);

H. Numbers of accounts serviced on a discretionary basis;

I. Compliance and regulatory history of the branch, including:

(1) Registered Representatives subject to special supervision by the member organization, self-regulatory authorities, state regulatory authorities or the Securities and Exchange Commission in years other than the previous or current year;

(2) Complaints, arbitrations, internal discipline, or prior inspection findings; and

(3) Persons subject to recent disciplinary actions by self-regulatory authorities, state regulatory authorities or the Securities and Exchange Commission.

J. Operational factors, such as the number of errors and account designation changes per Registered Representative;

K. Incidence of accommodation mailing addresses (e.g., post office boxes and "care of" accounts);

L. Whether the branch office permits checks to be picked up by customers or hand delivery of checks to customers;

M. Experience, function (producing or non-producing) and compensation structure of branch office manager;

N. Branch offices recently opened or acquired; and

O. Changes in branch location, status or management personnel.

(iii) Notwithstanding any policies or procedures implemented pursuant to this Rule, branch offices that meet any of the following criteria must be inspected no less often than once each calendar year:

A. Offices with one or more Registered Representatives subject to special supervision as required by a self-regulatory authority or state regulatory authority during the current or immediately preceding year.

B. Offices with 25 or more registered individuals;

C. Offices in the top 20% of production or customer assets for the member organization;

D. Any branch office not inspected within the previous two calendar years; and

E. Any branch office designated as exercising supervision over another branch office.

(f) Criteria for Inspection Programs. An annual branch office inspection program must include, but is not limited to, testing and independent verification of internal controls related to the following areas:

(i) Safeguarding of customer funds and securities:

(ii) Maintaining books and records;

(iii) Supervision of customer accounts serviced by branch office managers;

(iv) Transmittal of funds between customers and Registered Representatives and between customers and third parties;

(v) Validation of customer address changes; and

(vi) Validation of changes in customer account information.

(g) Written Report. By April 1 of each year, each member organization that conducts a nonmember customer business shall submit to the Exchange a written report on the member organization's supervision and compliance effort during the preceding year and on the adequacy of the member organization's ongoing compliance processes and procedures. Each member organization that conducts a public customer options business shall also specifically include its options compliance program in the report. The report shall include, but not be limited to, the following:

(i) A tabulation of customer complaints (including arbitrations and civil actions) and internal investigations.

(ii) Identification and analysis of significant compliance problems, plans for future systems or procedures to prevent and detect violations and problems, and an assessment of the preceding year's efforts of this nature.

(iii) Discussion of the preceding year's compliance efforts, new procedures, educational programs, etc. in each of the following areas:

(A) antifraud and trading practices;

(B) investment banking activities;

(C) sales practices;

(D) books and records;

(E) finance and operations;

(F) supervision;

(G) internal controls; and

(H) anti-money laundering.

If any of these areas do not apply to the member organization, the report shall so state.

(iv) for each member organization, the designation of a general partner or principal executive officer as Chief Compliance Officer (which designation shall be updated on Schedule A of Form BD).

(v) A certification signed by the member organization's Chief Executive Officer (or equivalent), that:

A. The member organization has in place processes to:

(1) establish and maintain policies and procedures reasonably designed to achieve compliance with applicable Exchange Rules and federal securities laws and regulations,

(2) modify such policies and procedures as business, regulatory and legislative changes and events dictate, and

(3) test the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with Exchange Rules and federal securities laws and regulations.

B. In member organizations, the Chief Executive Officer (or equivalent officer) conducted one or more meetings with the organization's Chief Compliance Officer during the preceding 12 months, and that they discussed and reviewed the matters described in this certification, including the organization's prior compliance efforts, and identified and addressed significant compliance problems and plans for emerging business areas.

C. In member organizations, the processes described in paragraph (g)(v)(A)(1) of this Rule, are evidenced in a report reviewed by the Chief Executive Officer ( or equivalent officer), Chief Compliance Officer and such other officers as the organization may deem necessary to make this certification, and submitted to the organization's board of directors and audit committee (if such committee exists) on or before April 1 of each year.

D. In member organizations, the Chief Executive Officer (or equivalent officer) has consulted with the Chief Compliance Officer and other officers referenced in subparagraph (g)(v)(C) of this Rule and such other employees, outside consultants, lawyers and accountants, to the extent they deem appropriate, in order to attest to the statements made in this certification.

A member organization that specifically includes its options compliance program in a report that complies with substantially similar requirements of the New York Stock Exchange or FINRA will be deemed to have met the requirements of paragraphs (g) and (h).

(h) Reports to Control Persons—By April 1 of each year, each member organization shall submit a copy of the report that Options 10, Section 7(g) requires the member organization to prepare to its one or more control persons or, if the member organization has no control person, to the audit committee of its board of directors or its equivalent committee or group. In the case of a control person that is an organization (a "controlling organization"), the member organization shall submit the report to the general counsel of the controlling organization and to the audit committee of the controlling organization's board of directors or its equivalent committee or group. For the purpose of this paragraph, "control person" means a person who controls the member organization, and the term "control" means the power to exercise a controlling influence over the management or policies of the member organization, unless such power is solely the result of an official position with the member organization. Any person who owns beneficially, directly or indirectly, more than 20% of the voting power in the election of directors of the member organization, or more than 25% of the voting power in the election of directors of any other corporation which directly or through one or more affiliates owns beneficially more than 25% of the voting power in the election of directors of the member organization, shall be presumed to control the member organization.

(i) Foreign Currency Options Principal—Every member handling public orders for foreign currency options shall designate and specifically identify to the Exchange one or more principals of the organization who shall be responsible for supervision of the member organization's nonmember customer accounts and communications to customers insofar as such accounts and communications relate to foreign currency options. Each designated Foreign Currency Options Principal shall be a general partner, an officer or a person of appropriate supervisory or managerial rank of the member and shall have successfully completed a Registered Options Principal Qualification Examination, allied member's examination or other principal's examination or have demonstrated equivalent knowledge, and an examination prescribed by the Exchange for the purpose of demonstrating an adequate knowledge of foreign currency options and the markets for the underlying foreign currencies.

(j) The provisions of this Rule are applicable to currency and index warrants. Supplementary Material to Options 10, Section 7

.01 A designated Foreign Currency Options Principal, in meeting his responsibility for supervision of nonmember customer accounts and orders, may delegate to qualified employees responsibility and authority, as provided above in the case of the Senior Registered Options Principal.

.02 Each member organization that conducts a non-member customer business shall establish, maintain, and enforce written procedures which detail the specific methods used to supervise all non-member customer accounts and all orders in such accounts. Such written procedures shall specifically identify the titles and positions of individuals who have been delegated authority and responsibility for an identified segment of the member organization's business, including option compliance functions. The procedures shall also include the registration status and location of all such supervisory and compliance personnel. Each member organization shall also develop and implement specific written procedures concerning the manner of supervision of customer accounts maintaining uncovered short option positions, and specifically providing for frequent supervisory review of such accounts.

.03 Each member organization shall maintain, at the principal supervisory office having jurisdiction over the office servicing the customer's account, or shall have readily accessible and promptly retrievable, information to permit review of each customer's options account, on a timely basis to determine (i) the compatibility of options transactions with investment objectives and with the types of transactions for which the account was approved; (ii) the size and frequency of option transactions; (iii) commission activity in the account; (iv) profit or loss in the account; (v) undue concentration in any options class or classes; and (vi) compliance with the provisions of Regulation T of the Federal Reserve Board.

.04 As a general matter, supervisory qualifications of a designated Foreign Currency Options Principal may be demonstrated only by successful completion of a registered options principal examination, allied member's examination or other principal examination. In exceptional circumstances, however, the Exchange may, upon written request by a member organization, accept as a demonstration of equivalent knowledge other evidence of a designated Foreign Currency Options Principal's supervisory qualifications. Advanced age, physical infirmity or experience in fields ancillary to the foreign exchange trading, investment banking or securities businesses will not individually of themselves constitute sufficient grounds to excuse a designated Foreign Currency Options Principal from the general requirement that supervisory qualifications be shown by successful completion of an appropriate examination.

.05 Documentation evidencing the annual written report required by paragraph (g) of this Rule, must be maintained in a place that is easily accessible and shall be provided to the Exchange upon request.

Adopted Feb. 3, 2020 (20-03); amended Mar. 27, 2020 (20-16); amended June 1, 2020 (20-29).

Section 8. Suitability

(a) No member, member organization or registered employee thereof shall recommend to any customer any transaction to purchase or write an option contract unless such member, member organization or registered employee has reasonable grounds to believe that the entire recommended transaction is not unsuitable for such customer on the basis of information furnished by such customer after reasonable inquiry concerning the customer's investment objectives, financial situation and needs, and any other information known by such member, member organization or registered employee.

(b) No member, member organization or registered employee thereof, shall recommend to a customer an opening transaction in any option contract unless the person making the recommendation has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that he may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended position in the option contract.

(c) The provisions of this Rule are applicable to currency and index warrants.

Adopted Feb. 3, 2020 (20-03).

Section 9. Discretionary Accounts

(a) Authorization and Approval Required. The authorization of all discretionary options accounts and the approval of all discretionary options transactions shall be handled as follows:

(i) Stock, Index or Exchange-Traded Fund Share Options—No member or member organization and no partner or employee of a member organization shall exercise any discretionary power with respect to trading in stock, index or Exchange-Traded Fund Share options contracts in a customer's account unless such customer has given prior written authorization and the account has been accepted in writing by a Registered Options Principal. Each firm shall designate specific Registered Options Principals pursuant to Options 10, Section 7 to review discretionary accounts. A Registered Options Principal specifically delegated such responsibilities under Options 10, Section 7 (who is an individual other than the Registered Options Principal who accepted the account) shall review the acceptance of each discretionary account to determine that the Registered Options Principal accepting the account had a reasonable basis for believing that the customer was able to understand and bear the risks of the strategies or transactions proposed, and he shall maintain a record of the basis for his determination.

(ii) Foreign Currency Options—No member or member organization and no partner or employee of a member organization shall exercise any discretionary power with respect to trading in foreign currency options contracts in a customer's account unless such customer has given prior written authorization with respect to such trading and the account has been accepted in writing by a designated Foreign Currency Options Principal, who shall maintain a record of the basis for his determination that such customer was able to understand and bear the risks of the strategies or transactions proposed. Such designated Foreign Currency Options Principal must approve and initial each discretionary foreign currency options order on the day entered unless such order has already been approved and initialled by a Registered Options Principal, provided that in the case of approvals by Registered Options Principals who are not designated Foreign Currency Options Principals, such approvals shall be confirmed within a reasonable time by a designated Foreign Currency Options Principal..

(iii) General —Every discretionary order shall be identified as discretionary on the order at the time of entry. Discretionary accounts shall receive frequent appropriate supervisory review by the Registered Options Principal specifically delegated such responsibilities under Options 10, Section 7, who is not exercising the discretionary authority.

(iv) The provisions of this Rule are applicable to index warrants.

(b) Options Programs—Where the discretionary account utilizes options programs involving the systematic use of one or more options strategies, the customer shall be furnished with a written explanation meeting the requirements of Options 10, Section 20 of the nature and risks of such programs.

(c) Prohibited Transactions—No member or member organization and no partner, officer or employee of a member organization shall effect with or for any customer's account in respect to which such member or member organization or partner, officer or employee of a member organization is vested with any discretionary power any transactions of purchase or sale of option contracts which are excessive in size or frequency in view of the financial resources and character of such account.

(d) Record of Transactions—A record shall be made of every option transaction for an account in respect to which a member or member organization or a partner, officer or employee of a member organization is vested with any discretionary authority, such record to include the name of the customer, the designation, number of contracts and premium of the option contracts, the date and time when such transaction took place and clearly reflecting the fact that discretionary authority was exercised.

(e) Discretion as to Time or Price Excepted—This Rule shall not apply to discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite number of option contracts in a specified security or foreign currency shall be executed, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer. This limitation shall not apply to time and price discretion exercised in an institutional account, as defined below, pursuant to valid Good-Till-Cancelled instructions issued on a "not held" basis. Any exercise of time and price discretion must be reflected on the order ticket. As used in this paragraph (e) the term "institutional account" shall mean the account of: (i) a bank, savings and loan association, insurance company, or registered investment company; (ii) an investment adviser registered either with the Securities and Exchange Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (iii) any other entity (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million.

(f) Any member organization that does not utilize computerized surveillance tools for the frequent and appropriate review of discretionary account activity must establish and implement procedures to require Registered Options Principal qualified individuals who have been designated to review discretionary accounts to approve and initial each discretionary order on the day entered.

Adopted Feb. 3, 2020 (20-03).

Section 10. Confirmations to Customers

(a) Every member and member organization shall promptly furnish to each customer a written confirmation of each transaction in option contracts for such customer's account. Each such confirmation shall show the type of option, the underlying stock, Exchange-Traded Fund Share or foreign currency, as the case may be, the expiration month, the exercise price, the number of option contracts, the premium, commissions, the transaction and settlement dates, whether the transaction was a purchase or a sale (writing) transaction, whether the transaction was an opening or a closing transaction, and whether the transaction was effected on a principal or agency basis. The confirmation shall by appropriate symbols distinguish between Exchange options transactions and other transactions in option contracts though such confirmation does not need to specify the exchange or exchanges on which such option contracts were executed.

Adopted Feb. 3, 2020 (20-03).

Section 11. Statements of Accounts

(a) Statements of accounts required by General 9, Section 65 shall be sent not less frequently than once every month to each customer in whose account there has been an entry during the preceding month with respect to an option contract and at least quarterly to all accounts having a money or a security position during the preceding quarter. Statements of accounts to customers shall show security and money positions, entries, interest charges and any special charges that have been assessed against such account during the period covered by the statement; provided, however, that such charges need not be specifically delineated on the statement if they are otherwise accounted for on the statement and have been itemized on transaction confirmations.

(b) With respect to options customers having a general (margin) account, such statement shall also provide the mark-to-market price and market value of each option position and other security position in the general (margin) account, the total market value of all positions in the account, the outstanding debit or credit balance in the account and the general (margin) account equity. The statement shall bear a legend stating that further information with respect to commissions and other charges related to the execution of listed option transactions has been included in confirmations of such transactions previously furnished to the customer, and that such information will be made available to the customer promptly upon request. The statement shall also bear a legend requesting the customer to promptly advise the member of any material change in the customer's investment objectives or financial situation.

Supplementary Material to Options 10, Section 11

.01 For purposes of the foregoing Rule, general (margin) account equity shall be computed by subtracting the total of the "short" security values and any debit balance from the total of the "long" security values and any credit balance.

Adopted Feb. 3, 2020 (20-03).

Section 12. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 13. Delivery of Options Disclosure Documents

(a) Options Disclosure Documents—Every member and member organization shall deliver a current Options Disclosure Document to each customer at or prior to the time such customer's account is approved for options transactions. A copy of each amendment to an Options Disclosure Document shall be furnished to each customer who was previously furnished the Options Disclosure Document to which the amendment pertains, not later than the time a confirmation of a transaction in the category of options to which the amendment pertains is delivered to such customer. The term "current Options Disclosure Document" means the most recent edition of such Document which meets the requirements of Rule 9b-1 promulgated under the Exchange Act.

(b) The written description of risks required by Options 10, Section 2(c)(v) shall be in a format prescribed by the Exchange or in a format developed by the member organization, provided it contains substantially similar information as the prescribed Exchange format and has received prior written approval of the Exchange.

(c) Below is a sample risk description for use by member organizations to satisfy the requirements of paragraph (b) of this Options 10, Section 13:

Special Statement for Uncovered Options Writers.

There are special risks associated with uncovered options writing which expose the investor to potentially significant loss. Therefore, this type of strategy may not be suitable for all customers approved for options transactions.

1. The potential loss of uncovered call writing is unlimited. The writer of an uncovered call is in an extremely risky position, and may incur large losses if the value of the underlying instrument increases above the exercise price.

2. As with writing uncovered calls, the risk of writing uncovered put options is substantial. The writer of an uncovered put option bears a risk of loss if the value of the underlying instrument declines below the exercise price. Such loss could be substantial if there is a significant decline in the value of the underlying instrument.

3. Uncovered options writing is thus suitable only for the knowledgeable investor who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements. In this regard, if the value of the underlying instrument moves against an uncovered writer's options position, the investor's broker may request significant additional margin payments. If an investor does not make such margin payments, the broker may liquidate stock or options positions in the investor's account with little or no prior notice in accordance with the investor's margin agreement.

4. For combination writing, where the investor writes both a put and a call on the same underlying instrument, the potential risk is unlimited.

5. If a secondary market in options were to become unavailable, investors could not engage in closing transactions, and an options writer would remain obligated until expiration or assignment.

6. The writer of an American-style option is subject to being assigned an exercise at any time after he has written the option until the option expires. By contrast, the writer of a European-style option is subject to exercise assignment only during the exercise period. NOTE: It is expected that you will read the booklet entitled CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS available from your broker. In particular, your attention is directed to the chapter entitled Risks of Buying and Writing Options. This statement is not intended to enumerate all of the risks entailed in writing uncovered options.

Supplementary Material to Options 10, Section 13

.01 Where the customer of a member or member organization is a broker or dealer entering his orders with the member or member organization in a single omnibus account, such member or member organization shall take reasonable steps to assure that such broker or dealer is furnished reasonable quantities of current Options Disclosure Documents, as requested by him in order to enable him to comply with the requirements of this Rule.

.02 Where a broker or dealer enters orders for his customers with, or clears transactions through, a member organization on a fully disclosed basis and such member organization carries the accounts of such customers, the responsibility for delivering one or more current Options Disclosure Documents as provided in this Rule shall rest with the member organization. However, such member organization may rely upon the good faith representation of the introducing broker or dealer that one or more current Options Disclosure Documents have been delivered in compliance with this Rule.

.03 The Exchange will advise members and member organizations when an Options Disclosure Document is amended.

Adopted Feb. 3, 2020 (20-03).

Section 14. Restrictions on Pledge of Customers' Securities

(a) No agreement between a member organization and a customer authorizing the member organization to pledge securities carried for the account of the customer either alone or with other securities, either for the amount due thereon or for a greater amount, or to lend such securities, shall justify the member organization in pledging or lending more of such securities than is fair and reasonable in view of the indebtedness of said customer to said member organization, except as provided in paragraph (d) of this Rule.

Agreements for use of customers' securities

(b) No member organization shall lend, either to itself as broker or to others, securities held on margin for a customer and which may be pledged or loaned under paragraph (a) hereof, unless such member organization shall first have obtained a separate written authorization from such customer permitting the lending of such securities by such member organization.

Restrictions on delivery of customers' securities

(c) No general agreement between a member organization and a customer shall justify the member organization in delivering securities carried for the customer on sales made by the member organization for any account in which such member organization or any partner thereof or stockholder therein is directly or indirectly interested.

Free or excess margin securities

(d) No securities held by a member organization for the account of a customer, whether free or representing excess margin, may be loaned to itself as broker, or to others, or delivered on sales made by the member organization for any account in which the organization or any partner or stockholder has a direct or indirect interest unless a specific written agreement designating the particular securities to be loaned is first obtained from the customer.

Adopted Feb. 3, 2020 (20-03).

Section 15. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 16. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 17. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 18. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 19. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 20. Options Communications

(a) Nasdaq PHLX members and persons associated with a member shall comply with FINRA Rule 2220 (except FINRA Rule 2220(c)) as if such Rule were part of Nasdaq PHLX's Rules. Nasdaq PHLX and FINRA are parties to the Regulatory Contract pursuant to which FINRA has agreed to perform certain functions on behalf of Nasdaq PHLX. Therefore, Nasdaq PHLX members are complying with Nasdaq PHLX Rule 1049 by complying with FINRA Rule 2220 as written, including, for example, filing requirements and notifications. In addition, functions performed by FINRA, FINRA departments, and FINRA staff under Options 10, Section 20 are being performed by FINRA on Nasdaq's behalf.

Adopted Feb. 3, 2020 (20-03).

Section 21. Reserved

Adopted Feb. 3, 2020 (20-03).

Section 22. Customer Complaints

(a) Every member organization conducting a customer business shall maintain and keep current a separate central log, index or other file for all options-related complaints, through which these complaints can easily be identified and retrieved. The central file shall be located at the principal place of business of the member organization or such other principal office as shall be designated by the member organization. At a minimum, the central file shall include: (i) identification of complaint; (ii) date complaint was received; (iii) identification of Registered Representative servicing the account; (iv) a general description of the matter complained of, and (v) a record of what action, if any, has been taken by the member organization with respect to the complaint. The term "options-related complaint" shall mean any written statement by a customer or person acting on behalf of a customer alleging a grievance arising out of or in connection with listed options. Each options-related complaint received by a branch office of a member organization shall be forwarded to the office in which the separate, central file is located no later than 30 days after receipt by the branch office. A copy of every options-related complaint shall be maintained at the branch office that is the subject of the complaint.

(1) The provisions of this Rule shall be applicable to index warrants.

Adopted Feb. 3, 2020 (20-03).

Section 23. Telemarketing

(a) No member or person associated with a member shall:

(1) make outbound telephone calls to the residence of any person for the purpose of soliciting the purchase of securities or related services at any time other than between 8:00 a.m. and 9:00 p.m. local time at the called person's location, without the prior consent of the person; or

(2) make an outbound telephone call to any person for the purpose of soliciting the purchase of securities or related services without disclosing promptly and in a clear and conspicuous manner to the called person the following information:

(A) the identity of the caller and the firm; and

(B) the telephone number or address at which the caller may be contacted; and

(C) that the purpose of the call is to solicit the purchase of securities or related services.

(3) The prohibitions of paragraphs (1) and (2) shall not apply to telephone calls by any person associated with a member organization or another associated person acting at the direction of such person for the purpose of maintaining and servicing the accounts of existing customers of the member organization under the control of or assigned to such associated person:

(A) to an existing customer who, within the preceding twelve months, has affected a securities transaction in, or made a deposit of funds or securities into, an account that, at the time of the transaction or the deposit, was under the control of or assigned to, such associated person:

(B) to an existing customer who previously has effected a securities transaction in, or made a deposit of funds or securities into, an account that, at the time of the transaction or deposit, was under the control of or assigned to such associated person, provided that such customer's account has earned interest or dividend income during the preceding twelve months, or

(C) to a broker or dealer.

For the purposes of paragraph (3), the term "existing customer" means a customer for whom the member organization, or a clearing member broker or dealer on behalf of such member organization, carries an account. The scope of this rule is limited to the telemarketing calls described herein; the terms of this rule shall not otherwise expressly or by implication impose on members any additional requirements with respect to the relationship between a member and a customer or between a person associated with a member organization and a customer.

(b) Each member organization shall make and maintain a centralized do-not-call list of persons who do not wish to receive telephone solicitations from such member organization or its associated persons.

(c) No member organization or person associated with such member organization shall obtain from a customer or submit for payment a check, draft or other form of negotiable paper drawn on a customer's checking, savings, share, or similar account, without that person's express written authorization, which may include the customer's signature on the negotiable instrument. Such written authorization shall be preserved by the member organization for a period of not less than three years. This provision shall not, however, require maintenance of copies of negotiable instruments signed by customers.

Adopted Feb. 3, 2020 (20-03).

Section 24. Transactions With Issuers

No member or member organization shall accept an order for the account of any corporation which is the issuer of an underlying stock or Exchange-Traded Fund Share for the sale (writing) of a call option contract with respect to that underlying stock or Exchange-Traded Fund Share.

Adopted Feb. 3, 2020 (20-03).

Section 25. Restricted Stocks

For the purposes of: (i) covering a short position in a call option contract, or (ii) delivery pursuant to the exercise of a put option contract, or (iii) satisfying an exercise notice assigned in respect of a call option contract, no member or member organization shall accept shares of an underlying stock, which may not be sold by the holder thereof except upon registration pursuant to the provisions of the Securities Act of 1933 or pursuant to SEC Rules promulgated under the Securities Act of 1933, unless, at the time such securities are accepted and at any later time such securities are delivered, applicable provisions of the Securities Act of 1933 and the rules thereunder have been complied with by the holder of such securities.

Adopted Feb. 3, 2020 (20-03).

 
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