Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 2 and 3 to the Proposed Rule Change Relating to the Amendment of Rule 342 (Offices-Approval, Supervision and Control) To Provide for a Uniform Definition of “Branch Office”, 54788-54796 [E5-5033]
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54788
Federal Register / Vol. 70, No. 179 / Friday, September 16, 2005 / Notices
In addition, under both exceptions
noted above, NASD has provided
additional flexibility by defining
‘‘business day’’ to exclude any partial
day, provided the associated person
spends at least four hours on such
business day at his or her designated
branch office during the hours such
office is normally open for business.
The Commission believes that this
should prevent associated persons from
regularly conducting business from
other remote locations for the majority
of a business day, without such activity
being counted towards the 30-day
limitation. The Commission expects
NASD to monitor and ensure that,
where the 30-business day (other
location) exemption is used by
associated persons, members maintain
records adequate to demonstrate
compliance with the ‘‘business day’’
limitations.
Finally, the Commission believes it is
reasonable for NASD to implement the
proposed branch office definition
following the commencement of the
branch office registration system on the
CRD. This should allow a smooth
transition to the new branch office
registration system by, as NASD
submits, providing members sufficient
time to transition to the proposed new
Form BR and associated filing protocols,
before making the new definition
effective.
V. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and
rules and regulations thereunder
applicable to a national securities
association, and, in particular, Section
15A(b) of the Act.97
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,98 that the
proposed rule change (SR–NASD–2003–
104), as amended by Amendment Nos.
1 through 6, is hereby approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.99
Jonathan G. Katz,
Secretary.
[FR Doc. E5–5034 Filed 9–15–05; 8:45 am]
BILLING CODE 8010–01–P
97 15
U.S.C. 78o–3(b).
U.S.C. 78s(b)(2).
99 17 CFR 200.30–3(a)(12).
98 15
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52402; File No. SR–NYSE–
2002–34]
Self-Regulatory Organizations; New
York Stock Exchange, Inc.; Order
Approving Proposed Rule Change and
Amendment No. 1 Thereto and Notice
of Filing and Order Granting
Accelerated Approval to Amendment
Nos. 2 and 3 to the Proposed Rule
Change Relating to the Amendment of
Rule 342 (Offices-Approval,
Supervision and Control) To Provide
for a Uniform Definition of ‘‘Branch
Office’’
September 9, 2005.
I. Introduction
On August 16, 2002, the New York
Stock Exchange, Inc. (‘‘NYSE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend NYSE Rule 342 (‘‘OfficesApproval, Supervision and Control’’) to
provide for a new definition of the term
‘‘branch office.’’ On October 22, 2002,
the NYSE submitted Amendment No. 1
to the proposed rule change.3 The
proposed rule change, as amended by
Amendment No. 1, was published for
comment in the Federal Register on
December 4, 2002.4 The Commission
received five comment letters with
respect to the proposal, as amended.5 In
addition, the Commission received
seven comment letters with respect to a
similar filing by the National
Association of Securities Dealers, Inc.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See letter from Darla C. Stuckey, Corporate
Secretary, NYSE, to Nancy Sanow, Assistant
Director, Division of Market Regulation
(‘‘Division’’), Commission, dated October 21, 2002
(‘‘Amendment No. 1’’).
4 See Securities Exchange Act Release No. 46888
(November 22, 2002), 67 FR 72257 (‘‘Notice’’).
5 See letters to Jonathan G. Katz, Secretary,
Commission from Arthur F. Grant, President,
Cadaret Grant, dated December 17, 2002 (‘‘Cadaret
Letter’’) and Brian C. Underwood, Senior Vice
President—Director of Compliance, A.G. Edwards &
Sons, Inc., dated December 18, 2002 (‘‘A.G.
Edwards Letter 1’’) and December 27, 2002 (‘‘A.G.
Edwards Letter 2’’); letter to Secretary, Commission
from Kimberly H. Chamberlain, Vice President and
Counsel, State Government Affairs, Securities
Industry Association, dated December 23, 2002
(‘‘SIA Letter 1’’); and e-mail to Katherine A.
England, Assistant Director, Division, Commission
from Jeffrey P. Halperin, Assistant Vice President,
Corporate Ethics and Compliance, Metropolitan Life
Insurance Company, dated January 7, 2003
(‘‘MetLife Letter 1’’).
2 17
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(‘‘NASD’’) 6 that specifically addressed
the NYSE’s proposed rule change.7 On
March 31, 2003, the Exchange filed a
response to the comment letters,8 and
on April 20, 2004, and August 25, 2005,
the Exchange filed Amendment Nos. 2 9
and 3 10 to the proposed rule change,
respectively. This order approves the
proposed rule change, as amended by
Amendment No. 1; grants accelerated
approval to Amendment Nos. 2 and 3 to
the proposed rule change; and solicits
comments from interested persons on
Amendment Nos. 2 and 3.
II. Description of the Proposal
Current NYSE Rule 342(c) requires
that a member or member organization
obtain the Exchange’s prior written
consent for each office established other
than a main office. Office is generally
defined as any location—other than a
main office-from which the business of
the member or member organization is
6 See Securities Exchange Act Release No. 48897
(December 9, 2003), 68 FR 70059 (December 16,
2003) (SR–NASD–2003–104).
7 See letters to Commission from Thomas
Moriarty, President, InterSecurities, Inc., dated
January 6, 2004 (‘‘InterSecurities Letter’’),
Christopher Shaw, Vice President & Acting Chief
Compliance Officer, Transamerica Financial
Advisors, Inc., dated January 6, 2004 (‘‘TFA
Letter’’); letters to Jonathan G. Katz, Secretary,
Commission from Leonard M. Bakal, Vice President
and Compliance Director, Metropolitan Life
Insurance Company, dated January 14, 2004
(‘‘MetLife Letter 2’’), Mario DiTrapani, President,
Association of Registration Management, dated
January 6, 2004 (‘‘ARM Letter’’); John Polanin, Jr.,
Chairman, Self-Regulation and Supervisory
Practices Committee, Securities Industry
Association, dated January 9, 2004 (‘‘SIA Letter 2’’);
and letters to Secretary, Commission from John
Gilner, Vice President, Henry H. Hopkins, Vice
President, and Sarah McCafferty, Vice President, T.
Rowe Price Investment Services, Inc., dated January
5, 2004 (‘‘Investment Services Letter’’), and Minoo
Spellerberg, Compliance Director, Princor Financial
Services Corporation, dated February 6, 2004
(‘‘Princor Letter’’).
8 See letter from Darla C. Stuckey, Corporate
Secretary, NYSE, to Nancy Sanow, Assistant
Director, Division, Commission, dated March 27,
2003 (‘‘Response to Comments’’).
9 See letter from Darla C. Stuckey, Corporate
Secretary, NYSE, to Nancy Sanow, Assistant
Director, Division, Commission, dated April 19,
2004 (‘‘Amendment No. 2’’). In Amendment No. 2,
the Exchange responded to comments and amended
proposed NYSE Rule 342.10 by eliminating the 50day limitation from its primary residence
registration exception and adding a provision
relating to supervisory procedures of primary
residences and risk-based sampling criteria. See
also discussion of Amendment No. 2 in Section II,
Description of the Proposal, infra.
10 See Form 19b–4 dated August 25, 2005
(‘‘Amendment No. 3’’). In Amendment No. 3, the
Exchange amended proposed NYSE Rule 342.10
and its discussion to clarify certain points made in
Amendment No. 2, issues related to the timing of
the adoption of the Exchange’s new definition of
branch office, and other issues related to the
Exchange’s definition of branch office as compared
with the NASD’s rule proposal. See also discussion
of Amendment No. 3 in Section II, Description of
the Proposal, infra.
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Federal Register / Vol. 70, No. 179 / Friday, September 16, 2005 / Notices
conducted. Locations such as primary
residences, operations offices/centers,
temporary locations, and offices of
convenience are all required to be
registered as branch offices.11Continued
advances in technology used by firms to
conduct, monitor, and surveil the
activities at their branch offices and
other remote locations, as well as
changes in the structure of brokerdealers and in the lifestyles and work
habits of the work force, have caused
the Exchange to reexamine whether all
business locations continue to need to
be registered as branch offices of
members and member organizations.
There is currently no uniform
standard that regulators use in defining
this term. These disparate definitions
impose unintended burdens on common
members and member organizations in
the form of compliance with multiple
and different definitions of branch
office, the filing of multiple forms to
register and/or renew registration of
such locations, different filing deadlines
for such registrations, and continued
monitoring of the rules of multiple selfregulatory organizations (‘‘SROs’’) and
states for changes.12
The Exchange has participated in a
joint regulatory initiative with the
NASD and state securities regulators to
develop a uniform definition of ‘‘branch
office’’ in an attempt to eliminate
unnecessary burdens on members. The
Exchange, the NASD and the North
American Securities Administrators
Association (‘‘NASAA’’) have worked
together to propose a uniform definition
of branch office.13 Accordingly, the
Exchange proposes to amend NYSE
Rule 342 to provide for a new definition
of the term ‘‘branch office.’’ The
proposed amendment to the rule would
limit the requirement to register certain
business locations as branch offices to
account for advances in technology used
to conduct and monitor business,
changes in the structure of brokerdealers and in the lifestyles and work
habits of associated persons of brokerdealers.
As proposed, the term ‘‘branch office’’
would mean any location 14 where one
or more associated persons of a member
or member organization regularly
conducts the business of effecting any
transactions in, or inducing or
attempting to induce, the purchase or
sale of any security, or where such
11 See
Amendment No. 2, supra note 9.
12 Id.
13 Id.
14 Amendment No. 3 deleted the exclusion ‘‘other
than the main office’’ from the definition of branch
office as initially proposed. See Amendment No. 3,
supra note 10.
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location is held out as a branch office.15
The definition would provide for
exceptions as noted below. The
proposed definition would substantially
mirror the Commission’s definition of
‘‘office’’ in its Books and Records rules
(SEC Rules 17a–3 and 17a–4) under the
Act.16 As noted above, the NASD has
also filed with the Commission a
proposed new branch office definition,
which is substantially similar to the
Exchange’s proposal.17
Attempting to recognize current
business, lifestyle, and surveillance
practices, the Exchange provides
flexibility in the form of seven
exceptions from the proposed branch
office registration requirement.18 As
discussed in the Notice,19 in developing
a definition, the NYSE considered the
evolving nature of its members’ and
member organizations’ business models
and proposed exceptions to the
registration requirement accordingly.
For instance, any office of convenience,
where an associated person occasionally
and exclusively by appointment meets
with customers and which is not held
out to the public as a branch office,
would be exempt from registering as a
branch office.20 Other than meeting
customers at these offices of
convenience, all other functions of the
associated person would be conducted
15 For purposes of this rule, the term ‘‘associated
person of a member or member organization’’
would be defined in proposed NYSE Rule 342.10
as a member, allied member, or employee
associated with a member or member organization.
Id.
16 17 CFR 240.17a–3 and 17a–4.
17 See SR–NASD–2003–104, supra note 6. The
Commission is simultaneously approving the
NASD’s proposed rule change. See Securities
Exchange Act Release No. 52403 (September 9,
2005).
18 See proposed NYSE Rule 342.10 (A) through
(G) and Amendment No. 2, supra note 9.
19 See Notice, supra note 4.
20 For example, bank-owned members and
member organizations often establish small offices
on bank premises, whereby a registered
representative would be designated to a parent
branch for supervision, but would visit different
bank branches occasionally, and by appointment
only, to meet with customers. Under the proposed
definition, such locations would be exempt from
registering as branch offices, where the bank
location is not held out as a branch office. In
exempting such offices of convenience from branch
office registration, the NYSE imposed important
safeguards for the public. In this regard, at such
offices of convenience, associated persons would be
limited to meeting customers occasionally and
exclusively by appointment. Furthermore, at bank
locations, the only permitted signage such offices of
convenience could display, under regulations
promulgated by the Office of the Comptroller of the
Currency, would be ones advertising to the public
that ‘‘non-deposit investment products’’ are being
offered at such locations in order to prevent
confusing customers who might otherwise believe
that traditional riskless investments, such as
deposits, are being offered by associated persons at
such offices located on bank premises. Id.
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54789
and supervised through the designated
branch office.
The Exchange also proposes to
exempt primary residences from the
definition of branch office. In exempting
primary residences, the Exchange
imposes limitations on such locations to
ensure that all activity is appropriately
supervised and monitored by the firm.
The limitations provide that: 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; the location not be held out
as a branch office; the associated person
be assigned to a designated branch
office for supervision, and such office be
reflected on all business cards,
stationery, advertisements, and
communications to the public; the
associated person not meet with
customers at his or her residence;
neither customer funds nor securities be
handled at that location; the associated
person’s correspondence and
communications with the public be
subject to all supervisory provisions of
the Exchange’s rules including, but not
limited to, NYSE Rules 342 and 472; 21
electronic communications, including
e-mails, be made through the firm’s
electronic system; all orders be entered
through the designated branch office or
an electronic system established by the
member or member organization that is
reviewable at the branch office; 22
written supervisory procedures relating
to the supervision of sales activities
conducted at the residence be
maintained by the member or member
organization; and a list of the locations
be maintained by the member or
member organization.23
The definition would also exempt
from branch office registration any
temporary location, other than the
primary residence discussed above, that
is used for securities business 24 for less
than 30 business days in any calendar
year. In granting this exemption, the
NYSE imposes most of the same
safeguards noted above for the
exemption granted for a primary
residence.25
21 See
Amendment No. 3, supra note 10.
22 Id.
23 The NYSE had originally proposed a limitation
that the associated person’s primary residence be
used for less than 50 business days in one calendar
year. However, as discussed further, the Exchange
eliminated the 50-day limitation from the proposed
primary residence exception in response to
comments. See Amendment No. 2, supra note 9.
24 See Amendment No. 3, supra note 10.
25 The NYSE proposes to define ‘‘business day’’
to exclude any partial day, provided the associated
person spends at least four hours on such business
day at his or her designated branch office during the
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In addition, the definition would
exempt from registration locations
where associated persons are primarily
engaged in non-securities activities (e.g.,
insurance) and from which an
associated person effects no more than
25 securities transactions in a calendar
year, provided that advertisements or
sales literature identifying such location
also set forth the location from which
the associated persons would be directly
supervised. Further, such activities
attendant to the primary function and
performed as an occasional
accommodation to customers would be
conducted through and supervised by
the associated person’s designated
registered branch office.
Similarly, the new definition would
exempt non-sales locations, e.g., where
operations activities are conducted,
from registering as a branch office. Such
locations would have to be established
solely for customer service and/or back
office functions, not be held out to the
public as a branch office, and no sales
activities would be conducted from
such locations.26
However, as discussed further in
Amendment No. 3 below, the Exchange
also proposes that, notwithstanding the
exclusions in NYSE Rule 342.10 (A)–
(G), 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 would be considered to be
a branch office.27 The Exchange is
proposing this change in order to
conform with a comparable provision in
the NASD’s rule proposal.28
Amendment No. 2
The difference between the NYSE’s
definition of branch office as initially
proposed and the NASD’s definition
concerns the registration of certain
primary residences as branch offices.
The NASD proposes a functionality test
to determine whether primary
residences should register as a branch
office, considering limitations on the
activities that could be performed.29 In
addressing the use of primary
residences, important safeguards and
limitations were imposed by both SROs
hours such office is normally open for business. See
NYSE Rule 342.10 explanatory material.
26 The definition would also exempt the Floor of
a registered national securities exchange where a
member or member organization conducts a direct
access business with public customers and a
temporary location established in response to the
implementation of a business continuity plan. See
proposed NYSE Rule 342.10 (F) and (G).
27 See proposed NYSE 342.10 explanatory
material and Amendment No. 3, supra note 10.
28 See SR–NASD–2003–104, supra note 6.
29 Id.
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on such locations to provide for the
monitoring and oversight of activities.
As originally proposed, the NYSE’s
primary residence registration exception
incorporated the same limitations as the
NASD, but also limited to 50, the
number of business days associated
persons would be permitted to engage in
securities activities in their primary
residences without requiring such
residences to register as a branch office.
However, as discussed in more detail
below, after analysis of the comments
received from and related discussions
with members and member
organizations, the Exchange now
proposes to eliminate the 50-day
limitation from its primary residence
registration exception. In eliminating
the 50-day limitation on primary
residences, the Exchange acknowledges
that technological advances in
surveillance/monitoring capabilities
should help address the concerns noted
above while accommodating evolving
lifestyles and work habits of the
industry. At the same time, the
Exchange wishes to impose appropriate
regulatory/supervisory safeguards to
help ensure that members and member
organizations properly supervise such
locations.
As proposed in Amendment No. 2
and slightly amended in Amendment
No. 3, Exchange members’ and member
organizations’ written supervisory
procedures would have to include
criteria for on-site for cause reviews of
an associated person’s primary
residence. Such reviews would have to
utilize risk-based sampling or other
techniques designed to assure
compliance with applicable securities
laws and regulations and with NYSE
rules.30 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 would have to include,
at a minimum: (1) The firm’s size; (2)
the firm’s organizational structure; (3)
the scope of business activities; (4) the
number and location of offices; (5) the
number of associated persons assigned
to a location; (6) the nature and
complexity of products and services
offered; (7) the volume of business done;
(8) whether the location has a Series 9/
10-qualified person on-site; (9) the
disciplinary history of the registered
person or associated person, including a
review of such person’s customer
30 See also Amendment No. 3, supra note 10.
Similarly, written supervisory procedures for such
residences and other remote locations would have
to be designed to assure compliance with applicable
securities laws and regulations and with NYSE
rules. See Amendment No. 2, supra note 9.
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complaints and Forms U4 and U5; and
(10) the nature and extent of a registered
person’s or associated person’s outside
business activities, whether or not
related to the securities business.31
Additional criteria should be utilized
if applicable to the nature and type of
business conducted by the member or
member organization and the individual
registered person(s) involved. Such
supervisory procedures would, in the
aggregate, be required to be sufficient to
ensure compliance with the securities
laws and Exchange rules.
Given that such locations are
physically remote from registered
branch offices, members and member
organizations, in establishing
supervisory procedures, would have to
be particularly proactive and
preemptive in their approach to
supervision. As a matter of reasonable
supervision, firms should, before
granting permission to work at these
remote locations, review all applicable
criteria to determine whether such
person should be permitted to work at
such location and whether he/she
requires heightened supervision.
The Exchange believes that initial
review/approval, ongoing monitoring,
and follow-up with respect to outside
business activities by registered persons,
whether or not related to the securities
business, is particularly important,
especially when such activities are
conducted from such person’s
residence. The Exchange believes that,
given the nature of these locations,
registered persons could utilize their
outside business activities to conceal
violations of Commission and SRO
rules. Accordingly, in developing riskbased criteria to determine the extent
and frequency of on-site reviews,
members and member organizations
should give particular weight to this
factor.
The Exchange believes that the
regulatory approach adopted by the
Exchange for these locations is
consistent with the approach that the
Commission recently articulated in its
Staff Legal Bulletin No. 17: Remote
Office Supervision, regarding the
supervision of small, remote offices.32
Supervisory procedures, which do not
address the minimum requirements
noted above, would be deemed
inadequate for purposes of NYSE Rule
342, and could subject members and
member organizations to disciplinary
action for failure to supervise.33 The
31 See
also Amendment No. 3, supra note 10.
Division, SEC, Staff Legal Bulletin No. 17,
dated March 19, 2004.
33 Whereas the federal securities laws, Section
15(b)(4)(E) of the Act, 15 U.S.C. 78o(b)(4)(E),
32 See
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Federal Register / Vol. 70, No. 179 / Friday, September 16, 2005 / Notices
Exchange will be reviewing such
procedures and their implementation as
part of its regular examination of
members and member organizations.
Amendment No. 3
In Amendment No. 3, the Exchange
proposed additional changes to its rule
text and discussion to clarify certain
points made in Amendment No. 2, other
issues related to the Exchange’s
definition of branch office as compared
with the NASD’s rule proposal, and
issues related to the adoption of the
Exchange’s new branch office
definition.
The Exchange proposes the following
changes to NYSE Rule 342:
i. In NYSE Rule 342.10, the phrases
‘‘other than the main office,’’ and
‘‘(‘‘associated person’’)’’ have been
deleted from the definition of branch
office. In deleting the qualifier ‘‘other
than the main office,’’ the Exchange is
recognizing instances where a member
organization’s activities taking place in
the main office (e.g., 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 a
branch office), would place the main
office in the purview of the definition,
and thus it should be registered as a
branch office. Further, branch office
registration would be triggered where
associated persons are domiciled in the
main office of a member or member
organization and are engaging in the
above activities. Accordingly, the
Exchange recognizes that whether an
office is a branch office is a function of
the activities performed at the office
even if such activities are performed at
the main office. In addition, the latter
deletion is being made by the NYSE to
maintain a uniform definition of branch
office.
ii. The text of Rule 342.10(B)(v) has
been changed from ‘‘the associated
person’s correspondence and
communications with the public are
subject to the firm’s supervision’’ to
‘‘the associated person’s correspondence
and communications with the public are
subject to all supervisory provisions of
the Exchange’s rules including, but not
limited to, Rules 342 and 472.’’ This
change was made to eliminate any
possible ambiguity that might have
provide for sanctions on a firm and its supervisors
for failing to supervise a person who is subject to
their supervision and commits a violation of the
federal securities laws, the SRO supervision rules
do not require a predicate violation to impose
sanctions for failing to supervise. See Amendment
No. 3, supra note 10.
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15:04 Sep 15, 2005
Jkt 205001
suggested that associated persons
working from home were subject to
supervisory standards different from
those of other associated persons subject
to the supervision of a member or
member organization.
iii. The text of Rule 342.10(B)(vi) has
been changed from ‘‘electronic
communications (i.e., e-mail) are made
through the member organization’s
electronic system’’ to ‘‘electronic
communications (e.g., e-mail) are made
through the member’s or member
organization’s electronic system.’’ This
change was made to indicate that e-mail
is only an example of electronic
communications covered by the rule
and to make it consistent with other
sections in the rule.
iv. The following changes have been
made to conform to the NASD’s rule
proposal. NYSE Rule 342.10(B)(vii) has
been changed to include orders entered
in an electronic system established by
the member or member organization
that is reviewable at the branch office.
NYSE Rule 342.10(C) has been changed
by adding ‘‘securities business for’’ to
clarify that primary residences excluded
from the definition of branch office may
be used, on a limited basis, for securities
business.
v. In NYSE Rule 342.10 explanatory
material, the phrase ‘‘[t]he term
‘business day’ as used herein’’ has been
changed to ‘‘[f]or purposes of this Rule,
the term ‘business day’ ’’ to make its
wording consistent with the wording
used in other definitions in this section.
vi. In NYSE Rule 342.10 explanatory
material, the sentence ‘‘[t]he term an
‘associated person of a member’ for
purposes of this Rule means member,
allied member or employee associated
with a member or member organization’’
has been changed to ‘‘[f]or 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’’ to make its
wording consistent with the wording
used in other definitions in this section.
vii. A new paragraph is being added
to the Rule 342.10 explanatory material.
As proposed, it provides that
‘‘notwithstanding the exclusions in
subparagraphs 342.10(A)–(G), 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.’’ The Exchange thus
recognizes instances where such
locations could be discharging
supervisory activities that warrant their
registration as branch offices with the
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54791
attendant regulatory responsibility and
oversight. This amendment is being
proposed to conform with a comparable
provision in the NASD’s rule proposal.
viii. In NYSE Rule 342.10 explanatory
material, the term ‘‘sufficient’’ has been
deleted from the sentence ‘‘[f]or
purposes of Rule 342.10(B)(viii) and (C),
written supervisory procedures for such
residences and other remote locations
must be designed to assure compliance
with applicable securities laws and
regulations and with NYSE Rules,’’ to
make it more consistent with the prior
sentence, ‘‘[f]or purposes of Rule
342.10(B)(viii), written supervisory
procedures shall include criteria for onsite 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
NYSE rules.’’
ix. The Supplementary Material
section of NYSE Rule 342 titled
‘‘Annual fee,’’ which is currently
numbered 342.10, will instead be
numbered 342.11 due to a numbering
conflict with other sections of NYSE
Rule 342.
x. Current NYSE Rule 342.11
(‘‘Registered representative operating
from residence’’) has been deleted
because other proposed amendments to
NYSE Rule 342 make it redundant.
Furthermore, to clarify its response to
comments made in Amendment No. 2,
the Exchange reiterates its belief that its
proposal would actually result in
reduced overall industry costs by virtue
of the fact that the exclusion of certain
primary residences and several other
types of locations currently required to
register would cause a decline in the
overall number of branches. In support
of this statement, the Exchange, after
reviewing its database of branch offices,
estimates that the proposed definition
would reduce the number of branch
offices from approximately 16,000 to
approximately 12,800, a reduction of
approximately 20 percent.
In addition, the Exchange clarifies a
footnote in Amendment No. 2 to more
accurately express the Exchange’s
intended point that whereas the federal
securities laws provide for sanctions on
a firm and its supervisors for failing to
supervise a person who is subject to
their supervision and commits a
violation of the federal securities laws,
the SRO’s supervision rules do not
require a predicate violation to impose
sanctions for failing to supervise.
In order to make use of a technique
mandatory without requiring any
particular technique that might not be
appropriate for every member
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organization, the Exchange also
amended the explanatory material in
NYSE Rule 342.10 relating to written
supervisory procedures of an associated
person’s primary residence, to clarify
that the criteria for on-site for cause
reviews of an associated person’s
primary residence would have to utilize
risk-based sampling or other techniques
designed to assure compliance with
applicable securities laws and
regulations and with NYSE rules.
Furthermore, the Exchange notes that it
has added factors (e.g., the firm’s size,
the firm’s organizational structure, the
number and location of offices, and the
number of associated persons assigned
to a location) to be considered when
member firms develop risk-based
sampling techniques to determine the
appropriateness of on-site for cause
review of residences and other remote
locations. The Exchange believes that
these additional factors will better
enable member firms to make such
determinations.
Finally, the Exchange emphasizes that
a registered representative in a branch
office classified as a ‘‘small office’’
pursuant to Interpretations /01 and /02
of NYSE Rule 342.15 may not be the
supervisor of that or any other office or
non-branch location unless he or she is
Series 9/10 qualified, regardless of that
person’s designation as the registered
representative ‘‘in charge’’ of the office.
In proposing a uniform definition
with exclusions, the Exchange
recognizes that, in an evolving business
and regulatory environment, it cannot
capture every conceivable business
arrangement/structure its members or
member organizations seek to utilize.
Accordingly, the Exchange will review,
on a case-by-case basis, instances where
a firm’s proposal does not fall squarely
within the rule and/or its exclusions.
With respect to the timing of the
adoption of the Exchange’s proposed
definition of branch office, the Exchange
states that the proposed new definition
of branch office is ‘‘the product of a
coordinated effort among regulators to
reduce inconsistencies in the definitions
used by the Commission, NASD, the
NYSE, and state securities regulators in
identifying locations where broker/
dealers conduct securities or investment
banking business.’’ 34 The proposed new
definition is intended ‘‘to facilitate the
creation of a branch office registration
system through the Central Registration
Depository (‘‘CRD’’) to provide a more
efficient, centralized method’’ for
members and member organizations ‘‘to
register branch office locations as
34 See Amendment No. 3, supra note 10
(referencing SR–NASD–2003–104).
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required by the rules and regulations of
states and self-regulatory
organizations.’’ 35 It is expected that
both the Exchange and the NASD will
revise their forms to incorporate the
respective new definitions of branch
office, and that the new forms will
become operational on CRD during the
fourth quarter of 2005.36
The Exchange believes that
implementing its new definition of
branch office prior to revising the CRD
and the related forms will make the
transition to the new branch office
registration system and forms smoother,
since its members’ and member
organizations’ familiarity with the new
definition will allow them to
concentrate on the subsequent technical
changes in the branch registration
process. The Exchange does not believe
that changing its definition of branch
office prior to the aforementioned CRD
changes will create confusion or in any
way undermine the coordinated
transition to the new branch office
registration system.
III. Summary of Comments and NYSE’s
Response
As noted above, the Commission
received five comment letters with
respect to the Notice,37 and seven
comment letters with respect to a
similar filing by the NASD 38 that
specifically addressed the NYSE’s
proposed rule change.39 The NYSE filed
a response letter to address concerns
raised by the commenters.40
Comment Letters
The commenters generally applauded
the NYSE, the NASD, and NASAA for
their efforts in creating a uniform
definition of branch office, reducing the
regulatory burdens currently imposed
upon firms, and accounting for
advances in technology and changes in
the structure of broker-dealer firms and
in the lifestyle and work habits of
associated persons of broker-dealers.41
One commenter noted that this attempt
at uniformity would only be successful
if all exchanges, regulatory agencies,
and states adopt consistent definitions
and uniformly interpret those
definitions.42
35 Id.
36 See Securities Exchange Act Release No. 51923
(June 24, 2005), 70 FR 38229 (July 1, 2005) (SR–
NYSE–2005–13).
37 See supra note 5.
38 See supra note 6.
39 See supra note 7.
40 See Response to Comments, supra note 8.
41 See A.G. Edwards Letter 2, ARM Letter,
InterSecurities Letter, MetLife Letter 1, MetLife
Letter 2, Princor Letter, SIA Letter 1, SIA Letter 2,
TFA Letter, supra notes 5 and 7.
42 See A.G. Edwards Letter 2, supra note 5.
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However, the commenters believed
that the proposed amendments to the
definition of branch office would
substantially increase the number of
offices that must be inspected and that
NYSE member firms would have to
annually inspect every office, including
homes, vacation homes or convenience
offices, meeting the definition of a
‘‘branch office.’’ 43 Similarly, another
commenter believed that imposition of
the new definition of branch office
would result in firms needlessly having
to closely monitor where work was
being performed and for how long, and
that the logistical difficulties created by
the NYSE proposal would encourage
some firms to prohibit people from
working outside the office.44
Furthermore, the likelihood that firms
would choose not to track but rather to
register everybody or preclude activity
outside the branch office would be
increased by the serious consequences
for an inadvertent failure to register.45
A few commenters also believed that,
if the proposed NYSE definition is
adopted, the number of registered
branch offices would increase
dramatically and result in substantial
increased costs for large and small
firms.46 One commenter observed that
the substantial costs associated with this
proposed definition would not be
limited to branch office supervision, but
that additional costs would include
costs associated with tracking
employees’ activity to determine
whether or not they fall within the 50or 30-day exclusions and a substantial
increase in registration costs and fees.47
Accordingly, it would be possible that
the registration, bonding, personnel, and
supervisory costs associated with this
proposed definition would outweigh
any cost savings through central
registration.48
Furthermore, the commenters
generally believed that the proposal
presents a huge burden for firms with
far-reaching branch networks and were
generally against the 50-day cap on
working from home and the 30-day cap
on working at other locations in order
to qualify under the primary residence
exception.49 They believed that there
43 See A.G. Edwards Letter 1, A.G. Edwards Letter
2, SIA Letter 1, supra note 5.
44 See SIA Letter 1, supra note 5.
45 Id.
46 See SIA Letter 1, MetLife Letter 1, supra note
5.
47 See SIA Letter 1; see also MetLife Letter 1,
supra note 5.
48 See SIA Letter 1, supra note 5.
49 See A.G. Edwards Letter 1, A.G. Edwards Letter
2, MetLife Letter 1, SIA Letter 1, supra note 5; see
also ARM Letter, InterSecurities Letter, Investment
Services Letter, MetLife Letter 2, Princor Letter, SIA
Letter 2, and TFA Letter (supporting the NASD’s
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would be no customer protection or
regulatory interest served by requiring
annual inspections of a location merely
based on the number of days someone
works from a location, if the location is
not ‘‘held out’’ to the public, if no
customer funds or securities are
maintained at the location, and if the
location is not used to conduct
functions that occur in an office of
supervisory jurisdiction.50 Specifically,
according to some commenters, what
matters should be the type of activities
performed at the site, the records
maintained, the number of registered
representatives working there, the
ability to conduct supervision, and how
the location is held out to the public,
and not on an arbitrary criteria such as
the number of days spent at the
location.51 Similarly, some of the
commenters believed that real investor
protection comes from limiting the
types of activities performed outside the
branch office and providing appropriate
supervision of all associated persons,
regardless of where they are conducting
their business. As long as these two
criteria are satisfied, the 50-day cap on
working from home and the 30-day cap
on working at other locations is
unnecessary, unduly cumbersome, and
of little value.52 Another commenter
believed that the SROs should not
require the registration of a
representative’s residence under most
circumstances. This commenter
believed that the primary effect of
adding a requirement to register homes
and other locations that are not held out
to the public would be an increase in
fees that firms must pay to their
regulators.53
Moreover, one commenter believed
that the definition of ‘‘office’’ in the
SEC’s Books and Records Rule, Rule
17a–3(h)(1),54 is not identical to the
definition contained in the Exchange’s
proposal. The commenter believed that,
if the SEC definition is not interpreted
so that any location that is excluded
from the definition of ‘‘branch office’’ in
this rule would also be excluded from
the SEC definition, there would be
significantly higher costs and additional
regulatory burdens. Furthermore, an
decision to eliminate the fifty-day limitation for the
primary residence exception), supra note 7.
50 See A.G. Edwards Letter 1, A.G. Edwards Letter
2, ARM Letter, SIA Letter 1, supra notes 5 and 7.
51 See ARM Letter, SIA Letter 1, SIA Letter 2,
supra notes 5 and 7; see also A.G. Edwards Letter
2, supra note 5.
52 See A.G. Edwards Letter 2, SIA Letter 1, supra
note 5; see also MetLife Letter 2 (against the 50-day
requirement in the primary residence exception as
being burdensome, time-consuming and difficult to
enforce), supra note 7.
53 See MetLife Letter 1, supra note 5.
54 17 CFR 240.17a–3(h)(1).
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inconsistent interpretation of the
definition under the Books and Records
Rule could lead to a situation where a
state could require that records be
maintained or produced at a location
that is not a ‘‘branch office’’ within the
NYSE proposal.55 Similarly, another
commenter expressed concern that the
mere act of registering a primary
residence as a branch office could be
misinterpreted as satisfying the
‘‘holding out’’ requirement in SEC Rule
17a–4(l) of the Act 56 and therefore lead
to a situation where a state would
require that records be maintained or
produced at a location that would not
otherwise be deemed a ‘‘branch office’’
under SEC rules. This commenter
requested that the NYSE and/or the
Commission clarify that this would not
be the case.57
NYSE’s Response to Comments
The Exchange agrees, in part, with
some of the comments relating to the
proposed branch office definition’s
exceptions and has, thus, excepted
primary residences and other locations
from the definition, if certain
appropriate supervisory and business
limitations safeguards are satisfied by
the member or member organization. In
justifying the Exchange’s initial
proposal to impose a 50-day limitation
for the primary residence exception, the
Exchange stated that, notwithstanding
the need for flexibility, adequate
supervision could be most effectively
accomplished when associated persons
are assigned to, and have some actual
physical presence at, a supervised
location. By limiting the number of full
business days that associated persons
could conduct business at non-branch
locations, members and member
organizations could better supervise
such persons while still providing them
the flexibility that their lifestyles require
today. The Exchange believed that the
proposed 50- and 30-day limitations in
the proposed exceptions would provide
further flexibility by excluding partial
business days at a broker’s designated
branch office during the hours such
office is normally open for business.58
55 See
A.G. Edwards Letter 2, supra note 5.
CFR 240.17a–4(l).
57 See SIA Letter 1, supra note 5.
58 See Response to Comments, supra note 8.
Furthermore, if an associated person, i.e., registered
representative (‘‘RR’’), works primarily from his or
her home, the Exchange believed that such location
should be registered as a branch office subject to all
attendant requirements including firm supervision
and examination. Although an RR could not hold
out his or her residence as a branch office, in reality
customers would generally come to know that the
RR is working from home. As a result, the Exchange
believed that it would be likely that RRs would
eventually meet with customers at their homes, or
56 17
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However, as noted above, after
analysis of and in response to the
comments received, the Exchange has
eliminated its 50-day limitation on the
primary residence registration
exception. In eliminating the 50-day
limitation on primary residences, the
Exchange acknowledges that
technological advances in surveillance/
monitoring capabilities should help
address the concerns posed by
associated persons working from home,
combined with the rest of the
limitations in the exemption. At the
same time, the Exchange still proposes
to impose appropriate regulatory/
supervisory safeguards, such as on-site
review of such residences and remote
locations, to help ensure that members
and member organizations properly
supervise such locations.59
In response to the comments that the
new definition would present logistical
obstacles and result in substantial time
and effort to track each associated
person’s whereabouts and to register
those locations that satisfy the 30-day
threshold, the Exchange notes that the
30-day business day exclusion was
proposed to address changes in lifestyle
and work habits for associated
persons.60 The Exchange indicates that
flexible work schedules usually are
prearranged and are something such
persons and their firms should be aware
of on a prospective basis. However, the
Exchange recognizes that exigent
circumstances could arise where such
information would not be clearly
foreseeable to such persons and their
firms. Since the Exchange has no
interest in inadvertent rule violations
that arise as the result of unforeseen
circumstances, the Exchange intends to
provide flexibility through
interpretative relief for such unforeseen
circumstances. Once the thresholds
have been met, the Exchange represents
that members and member organizations
would be given a 30-day window to
submit applications for registering such
locations as branch offices. Pending
branch office approval, associated
persons could continue conducting
business from such locations. If
approved, the location would be a
branch office. If not approved, the
associated person would have to
that customers would stop by to drop off checks or
securities certificates. In addition, when an RR
works primarily from home, he or she would keep
records there and might not be diligent in ensuring
that all required records are provided to the
designated branch office. Id.
59 See Amendment No. 2, supra note 9.
60 These same concerns were raised with respect
to the 50-day threshold; however, the NYSE has
eliminated the 50-day threshold in response to the
comments received.
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immediately cease conducting business
at the location.61
The Exchange would also address the
industry’s concerns regarding the
perceived logistical problems associated
with the Exchange’s proposed definition
by providing the same threshold
flexibility in the registration/approval
process of primary residences for
locations that exceed the ‘‘25 securities
transaction’’ exclusion permitted under
proposed NYSE Rule 342.10(E).
Furthermore, the Exchange will provide
interpretative guidance as to what
constitutes a ‘‘securities transaction’’ for
purposes of this exclusion from the
definition of branch office. For example,
transactions effected pursuant to a
dividend reinvestment plan, or similar
types of transactions would be excluded
in calculating the 25 securities
transactions threshold. In aggregate, the
Exchange believes that the registration/
approval process and exclusions from
the 25 securities transactions threshold
should alleviate some of the industry’s
perceived concerns with regard to the
proposed definition.62
Moreover, the Exchange believes that
the commenters’ concern that
registering primary residences and other
locations used for securities business
would impose substantial costs
overlooks current NYSE rules that
require all offices, including residential
offices, to be registered. In addition,
each branch office location is currently
required to be inspected on an annual
basis. Accordingly, the Exchange
believes that adoption of the proposed
rule would reduce the number of
locations that would be required to be
registered by NYSE members and
member organizations by eliminating
locations such as exempt residences,
locations engaged in customer service
and back office operations, offices of
convenience, and locations used
primarily for non-securities activities.63
61 See
Response to Comments, supra note 8.
62 Id.
63 Id. See also, Amendment No. 2, supra note 9.
The proposal would actually result in reduced
overall industry costs by virtue of the fact that the
exclusion of certain primary residences and several
other location types currently required to register
would cause a decline in the overall number of
branches. Id. Finally, the Exchange disagrees with
the commenters’ view that the 50-day limitation
that was initially proposed raises potential
inconsistencies with the SEC’s books and records
rule. On the contrary, the Exchange believes that its
proposed definition is not inconsistent with the
SEC’s books and records requirement and, in fact,
incorporates the substance of SEC Rule 17a–3(h)(1),
17 CFR 240.17a–3(h)(1). The Exchange believes that
the act of registering a primary residence as a
branch office would not, in and of itself, constitute
‘‘holding out’’ for purposes of the SEC’s new record
keeping requirements. In dealing with primary
residences, the Exchange has imposed many of the
conditions required under SEC Rule 17a–4(l), 17
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In support of this statement, the
Exchange, after reviewing its database of
branch offices, estimates that the
proposed definition would reduce the
number of branch offices from
approximately 16,000 to approximately
12,800, a reduction of approximately 20
percent.64
In summary, the Exchange represents
that, in proposing its definition of
‘‘branch office,’’ among other things, it
is the Exchange’s intent to reduce
regulatory burdens for the industry and
to provide for a consistent approach
among various securities regulators with
respect to branch offices and other
business locations.65
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment Nos.
2 and 3, including whether Amendment
Nos. 2 and 3 are consistent with the Act.
Comments may be submitted by any of
the following methods:
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NYSE–2002–34 and should
be submitted on or before October 7,
2005.
V. Discussion
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the Act and
the rules and regulations promulgated
thereunder applicable to a national
Electronic Comments
securities exchange and, in particular,
with the requirements of Section 6(b) of
• Use the Commission’s Internet
the Act.66 Specifically, the Commission
comment form (https://www.sec.gov/
finds that approval of the proposed rule
rules/sro.shtml); or
• Send an e-mail to rulechange, as amended, is consistent with
comments@sec.gov. Please include File
Section 6(b)(5) of the Act 67 in that it is
Number SR–NYSE–2002–34 on the
designed to prevent fraudulent and
subject line.
manipulative acts and practices; to
promote just and equitable principles of
Paper Comments
trade; to foster cooperation and
• Send paper comments in triplicate
coordination with persons engaged in
to Jonathan G. Katz, Secretary,
regulating, clearing, settling, processing
Securities and Exchange Commission,
information with respect to, and
100 F Street, NE., Washington, DC
facilitating transactions in securities; to
20549–9303.
remove impediments to and perfect the
All submissions should refer to File
mechanism of a free and open market
Number SR–NYSE–2002–34. This file
and a national market system; and in
number should be included on the
general, to protect investors and the
subject line if e-mail is used. To help the public interest.
Commission process and review your
Given the continued advances in
comments more efficiently, please use
technology used to conduct and monitor
only one method. The Commission will businesses and changes in the structure
post all comments on the Commission’s of broker-dealers and in the lifestyles
Internet Web site (https://www.sec.gov/
and work habits of the workforce, the
rules/sro.shtml). Copies of the
Commission believes it is reasonable for
the Exchange to reexamine whether all
submission, all subsequent
business locations need to be registered
amendments, all written statements
as branch offices of broker-dealer
with respect to the proposed rule
members and member organizations.
change that are filed with the
The Commission also supports the
Commission, and all written
Exchange, the NASD and state securities
communications relating to the
regulators’ joint, regulatory effort to
eliminate inconsistencies and
CFR 240.17a–4(l). Where a primary residence
exceeds the 50-day threshold and thus would be
duplication by developing a uniform
required to register as a branch office (as initially
definition of ‘‘branch office.’’ The
proposed), it would not necessarily be required to
maintain records at that office. Rather records could Commission believes that such
regulatory coordination and cooperation
be maintained at the designated branch office that
is responsible for supervision of the home office,
provided that the member or member organization
adheres to the criteria of the rule. See Response to
Comments, supra note 8.
64 See Amendment No. 3, supra note 10.
65 See Response to Comments, supra note 8.
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66 15 U.S.C. 78f(b). In approving this proposal, the
Commission has considered the proposed rule’s
impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
67 15 U.S.C. 78f(b)(5).
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will result in an effective and efficient
regulation that will serve the entire
broker-dealer community by recognizing
the many different business models and
streamlining the branch office
registration process significantly. In
addition, the Commission believes that
the proposed definition strikes the right
balance between providing flexibility to
broker-dealer firms to accommodate the
needs of their associated persons, while
at the same time setting forth parameters
that should ensure that all locations,
including home offices, are
appropriately supervised. In this regard,
the Commission emphasizes the
responsibility of firms to supervise their
associated persons, regardless of their
location and reminds all broker-dealers
of their statutory duty to supervise.68
The Commission also believes that the
ability to identify the personnel located
at each branch office is an important
improvement to the CRD database and
will provide regulators valuable
information.
Furthermore, the Commission
believes that the seven proposed
exceptions to registering as a branch
office constitute a reasonable approach
to recognize current business, lifestyle,
and surveillance practices and provide
associated persons with flexibility with
respect to where they perform their jobs.
For instance, because associated persons
may have to work from home due to
illness, or to provide childcare or
eldercare for certain family members,
the Commission believes it is
appropriate to except primary
residences from the definition of branch
office. In this regard, the Commission
believes that the Exchange has also
directly responded to negative
comments on the 50-day cap on working
from home and, accordingly, eliminated
such limitation from its primary
residence exception. This change made
the proposed definition substantially
similar to the definition proposed by the
NASD. Moreover, the definition would
also exempt from branch office
registration any temporary location,
other than the primary residence,
provided it is used less than 30 business
days in any calendar year.
The Commission finds it reasonable
for the Exchange to not only propose
conditions on the primary residence and
temporary location exceptions (e.g., the
location can not be held out to the
public as an office, neither customer
funds nor securities can be handled
there) but to also impose appropriate
supervisory safeguards and limitations
to help ensure that members and
68 See Section 15(b)(4)(E) of the Act, 15 U.S.C.
78o(b)(4)(E).
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member organizations properly
supervise and monitor such locations.
For instance, the Exchange proposes to
require that written supervisory
procedures for such residences and
other remote locations include criteria
for on-site for cause reviews of an
associated person’s primary residence
and that such reviews utilize risk-based
sampling or other techniques designed
to assure compliance with securities
laws and regulations. The Exchange also
included a list of factors which should
be considered when developing riskbased sampling techniques for on-site
reviews of such locations.69 The
Commission agrees with the Exchange
that effective supervision can be
achieved using advanced and
sophisticated technology in the
supervision and review of associated
persons in such exempt locations. In
this regard, the Commission expects the
Exchange to review such written
supervisory procedures and their
implementation as part of its regular
examination of members and member
organizations.
In addition, under both exceptions
noted above, the NYSE has provided
additional flexibility by defining
‘‘business day’’ to exclude any partial
day, provided the associated person
spends at least four hours on such
business day at his or her designated
branch office during the hours such
office is normally open for business.
The Commission believes that this
should prevent associated persons from
regularly conducting business from
other remote locations for the majority
of a business day, without such activity
being counted towards the 30-day
69 The Commission notes that the factors
proposed in NYSE Rule 342, which should be
considered when developing risk-based sampling
techniques to determine the appropriateness of onsite for cause reviews of primary residences and
other remote locations, are substantially similar to
the factors proposed by the NASD in SR–NASD–
2003–104. See SR–NASD–2003–104, supra note 6.
However, while the NASD’s list of factors would
broadly apply to the internal inspections and
review of their members’ businesses, including
offices of supervisory jurisdiction (‘‘OSJs’’), branch
offices, and non-branch offices, the NYSE’s
proposed list of factors would apply only to
primary residences and other remote locations.
However, the Commission notes that the NYSE
provides for branch office inspections in NYSE Rule
342/03 of the NYSE Interpretation Handbook
(‘‘Handbook’’). Under NYSE Rule 342/03 of the
Handbook, 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: Safeguarding of
customer funds and securities; maintaining books
and records; supervision of customer accounts
serviced by branch office managers; transmittal of
funds between customers and registered
representatives and between customers and third
parties; validation of customer address changes, and
validation of changes in customer account
information.
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limitation. The Commission expects the
Exchange to monitor and ensure that,
where the 30-business day (other
location) exemption is utilized by
associated persons, members and
member organizations are maintaining
records adequate to demonstrate
compliance with the ‘‘business day’’
limitations.
Finally, the Commission believes it is
reasonable for the Exchange to establish
and implement its new definition of
branch office before the changes to the
CRD and the related forms are
implemented. This should make the
transition to the new branch office
registration system and forms smoother
by providing Exchange members and
member organizations with sufficient
time to become familiar with the new
definition and to focus on the
subsequent technical changes in the
branch registration process. As the
Exchange represents, changing the
definition of branch office prior to the
aforementioned CRD changes should
not create confusion, or in any way
undermine the coordinated transition to
the new branch office registration
system.
Accelerated Approval of Amendment
Nos. 2 and 3
The Commission finds good cause for
approving Amendment Nos. 2 and 3 to
the proposed rule change prior to the
thirtieth day after the amendment is
published for comment in the Federal
Register pursuant to Section 19(b)(2) of
the Act.70 Amendment No. 2 responded
to comment letters by amending
proposed NYSE Rule 342 to eliminate
the 50-day limitation from its primary
residence registration exception, adding
a provision requiring written
supervisory procedures of primary
residences and other remote locations,
and listing factors which should be
considered in developing risk-based
sampling techniques. The Commission
finds that, given the objections raised
with respect to the 50-day limitation
and the potential logistical difficulties
that could have resulted in complying
with and enforcing the rule, it is
appropriate and responsive for the
Exchange to eliminate this condition
from its proposed exception. Also,
elimination of the 50-day limitation
renders the NYSE’s proposal virtually
identical to the NASD’s proposal,
serving the industry’s desire for
uniformity. Furthermore, the
Commission believes that requiring
written supervisory procedures for
primary residences and other remote
locations and providing a list of factors
70 15
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U.S.C. 78s(b)(2).
16SEN1
54796
Federal Register / Vol. 70, No. 179 / Friday, September 16, 2005 / Notices
which should be included in the
development of the risk-based sampling
techniques in the proposed rule text
will clarify members’ and member
organizations’ obligations in monitoring
the use of these exceptions, as well as
provide for effective supervision and
review of associated persons in such
exempt locations.
Amendment No. 3 provides a more
comprehensive list of factors to be
considered in the development of the
risk-based sampling techniques, makes
technical and clarifying changes to the
rule text, and provides a discussion on
the timing of the adoption of the
Exchange’s new definition of branch
office. The Commission believes that the
proposed changes in Amendment No. 3
provide for a clearer understanding of
the implementation of the proposed
branch office definition. Specifically,
the Commission agrees with the
Exchange that branch office registration
should be primarily determined by the
functions performed in an office. For
instance, the Exchange’s proposed
deletion of the qualifier ‘‘other than the
main office’’ from the definition of
branch office recognizes that the
definition of branch office and its
corresponding registration should be
triggered based on the activities
performed at the location, even if the
activities are performed at the main
office. Similarly, the Exchange also
proposes that, despite the seven
exceptions to the definition of branch
office, any location 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 should nevertheless
register as a branch office. The
Commission notes that this rule change
is similar to one proposed by the NASD
in its branch office filing. Finally, the
Commission notes that the additional
technical and clarifying changes made
to NYSE Rule 342.10 raise no new
issues of regulatory concern.
Accordingly, the Commission believes
that accelerated approval of
Amendment Nos. 2 and 3 is appropriate.
VI. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange, and, in
particular, with Section 6(b)(5) of the
Act.71
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,72 that the
proposed rule change (SR–NYSE–2002–
34) and Amendment No. 1 thereto are
approved, and that Amendment Nos. 2
and 3 thereto are approved on an
accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.73
Jonathan G. Katz,
Secretary.
[FR Doc. E5–5033 Filed 9–15–05; 8:45 am]
VerDate Aug<31>2005
15:04 Sep 15, 2005
Jkt 205001
[Disaster Declaration # 10180 and # 10181]
Alabama Disaster Number AL–00003
U.S. Small Business
Administration.
ACTION: Amendment 1.
AGENCY:
SUMMARY: This is an amendment of the
Presidential declaration of a major
disaster for the State of Alabama
(FEMA–1605–DR), dated 08/29/2005.
Incident: Hurricane Katrina.
Incident Period: 08/29/2005 and
continuing.
Effective Date: 09/08/2005.
Physical Loan Application Deadline
Date: 10/28/2005.
EIDL Loan Application Deadline Date:
05/29/2006.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Disaster Area Office 3,
14925 Kingsport Road Fort Worth, TX
76155.
A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street, Suite 6050, Washington,
DC 20416.
SUPPLEMENTARY INFORMATION: The notice
of the Presidential disaster declaration
for the State of Alabama, dated 08/29/
2005, is hereby amended to include the
following areas as adversely affected by
the disaster:
Primary Counties:
Choctaw, Clarke, Greene, Hale,
Pickens, Sumter, Tuscaloosa.
Contiguous Counties:
Alabama, Bibb, Fayette, Jefferson,
Lamar, Marengo, Perry, Walker,
Wilcox.
Mississippi, Clarke, Kemper,
Lauderdale, Lowndes, Noxubee.
All other information in the original
declaration remains unchanged.
FOR FURTHER INFORMATION CONTACT:
PO 00000
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
Frm 00093
Fmt 4703
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration # 10137 and # 10138]
Florida Disaster Number FL–00005
U.S. Small Business
Administration.
ACTION: Amendment 4.
SMALL BUSINESS ADMINISTRATION
73 17
BILLING CODE 8025–01–P
AGENCY:
BILLING CODE 8010–01–P
72 15
71 XXX
(Catalog of Federal Domestic Assistance
Numbers 59002 and 59008)
Herbert L. Mitchell,
Associate Administrator for Disaster
Assistance.
[FR Doc. 05–18436 Filed 9–15–05; 8:45 am]
Sfmt 4703
SUMMARY: This is an amendment of the
Presidential declaration of a major
disaster for the State of Florida (FEMA–
1595–DR), dated 07/10/2005.
Incident: Hurricane Dennis.
Incident Period: 07/07/2005 and
continuing through 07/20/2005.
Effective Date: 08/31/2005.
Physical Loan Application Deadline
Date: 09/08/2005.
EIDL Loan Application Deadline Date:
04/10/2006.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Disaster Area Office 3,
14925 Kingsport Road Fort Worth, TX
76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street, Suite 6050, Washington,
DC 20416.
SUPPLEMENTARY INFORMATION: The notice
of the President’s major disaster
declaration for the State of Florida,
dated 07/10/2005, is hereby amended to
re-establish the incident period for this
disaster as beginning 07/07/2005 and
continuing through 07/20/2005.
All other information in the original
declaration remains unchanged.
(Catalog of Federal Domestic Assistance
Numbers 59002 and 59008)
Herbert L. Mitchell,
Associate Administrator for Disaster
Assistance.
[FR Doc. 05–18437 Filed 9–15–05; 8:45 am]
BILLING CODE 8025–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration # 10193 and # 10194]
Georgia Disaster # GA–00004
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
SUMMARY: This is a notice of an
Administrative declaration of a disaster
E:\FR\FM\16SEN1.SGM
16SEN1
]]>Agencies
[Federal Register Volume 70, Number 179 (Friday, September 16, 2005)]
[Notices]
[Pages 54788-54796]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-5033]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52402; File No. SR-NYSE-2002-34]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Amendment No. 1 Thereto and
Notice of Filing and Order Granting Accelerated Approval to Amendment
Nos. 2 and 3 to the Proposed Rule Change Relating to the Amendment of
Rule 342 (Offices-Approval, Supervision and Control) To Provide for a
Uniform Definition of ``Branch Office''
September 9, 2005.
I. Introduction
On August 16, 2002, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend NYSE Rule 342
(``Offices-Approval, Supervision and Control'') to provide for a new
definition of the term ``branch office.'' On October 22, 2002, the NYSE
submitted Amendment No. 1 to the proposed rule change.\3\ The proposed
rule change, as amended by Amendment No. 1, was published for comment
in the Federal Register on December 4, 2002.\4\ The Commission received
five comment letters with respect to the proposal, as amended.\5\ In
addition, the Commission received seven comment letters with respect to
a similar filing by the National Association of Securities Dealers,
Inc. (``NASD'') \6\ that specifically addressed the NYSE's proposed
rule change.\7\ On March 31, 2003, the Exchange filed a response to the
comment letters,\8\ and on April 20, 2004, and August 25, 2005, the
Exchange filed Amendment Nos. 2 \9\ and 3 \10\ to the proposed rule
change, respectively. This order approves the proposed rule change, as
amended by Amendment No. 1; grants accelerated approval to Amendment
Nos. 2 and 3 to the proposed rule change; and solicits comments from
interested persons on Amendment Nos. 2 and 3.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy Sanow, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated October 21, 2002 (``Amendment No.
1'').
\4\ See Securities Exchange Act Release No. 46888 (November 22,
2002), 67 FR 72257 (``Notice'').
\5\ See letters to Jonathan G. Katz, Secretary, Commission from
Arthur F. Grant, President, Cadaret Grant, dated December 17, 2002
(``Cadaret Letter'') and Brian C. Underwood, Senior Vice President--
Director of Compliance, A.G. Edwards & Sons, Inc., dated December
18, 2002 (``A.G. Edwards Letter 1'') and December 27, 2002 (``A.G.
Edwards Letter 2''); letter to Secretary, Commission from Kimberly
H. Chamberlain, Vice President and Counsel, State Government
Affairs, Securities Industry Association, dated December 23, 2002
(``SIA Letter 1''); and e-mail to Katherine A. England, Assistant
Director, Division, Commission from Jeffrey P. Halperin, Assistant
Vice President, Corporate Ethics and Compliance, Metropolitan Life
Insurance Company, dated January 7, 2003 (``MetLife Letter 1'').
\6\ See Securities Exchange Act Release No. 48897 (December 9,
2003), 68 FR 70059 (December 16, 2003) (SR-NASD-2003-104).
\7\ See letters to Commission from Thomas Moriarty, President,
InterSecurities, Inc., dated January 6, 2004 (``InterSecurities
Letter''), Christopher Shaw, Vice President & Acting Chief
Compliance Officer, Transamerica Financial Advisors, Inc., dated
January 6, 2004 (``TFA Letter''); letters to Jonathan G. Katz,
Secretary, Commission from Leonard M. Bakal, Vice President and
Compliance Director, Metropolitan Life Insurance Company, dated
January 14, 2004 (``MetLife Letter 2''), Mario DiTrapani, President,
Association of Registration Management, dated January 6, 2004 (``ARM
Letter''); John Polanin, Jr., Chairman, Self-Regulation and
Supervisory Practices Committee, Securities Industry Association,
dated January 9, 2004 (``SIA Letter 2''); and letters to Secretary,
Commission from John Gilner, Vice President, Henry H. Hopkins, Vice
President, and Sarah McCafferty, Vice President, T. Rowe Price
Investment Services, Inc., dated January 5, 2004 (``Investment
Services Letter''), and Minoo Spellerberg, Compliance Director,
Princor Financial Services Corporation, dated February 6, 2004
(``Princor Letter'').
\8\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy Sanow, Assistant Director, Division, Commission, dated
March 27, 2003 (``Response to Comments'').
\9\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy Sanow, Assistant Director, Division, Commission, dated
April 19, 2004 (``Amendment No. 2''). In Amendment No. 2, the
Exchange responded to comments and amended proposed NYSE Rule 342.10
by eliminating the 50-day limitation from its primary residence
registration exception and adding a provision relating to
supervisory procedures of primary residences and risk-based sampling
criteria. See also discussion of Amendment No. 2 in Section II,
Description of the Proposal, infra.
\10\ See Form 19b-4 dated August 25, 2005 (``Amendment No. 3'').
In Amendment No. 3, the Exchange amended proposed NYSE Rule 342.10
and its discussion to clarify certain points made in Amendment No.
2, issues related to the timing of the adoption of the Exchange's
new definition of branch office, and other issues related to the
Exchange's definition of branch office as compared with the NASD's
rule proposal. See also discussion of Amendment No. 3 in Section II,
Description of the Proposal, infra.
---------------------------------------------------------------------------
II. Description of the Proposal
Current NYSE Rule 342(c) requires that a member or member
organization obtain the Exchange's prior written consent for each
office established other than a main office. Office is generally
defined as any location--other than a main office-from which the
business of the member or member organization is
[[Page 54789]]
conducted. Locations such as primary residences, operations offices/
centers, temporary locations, and offices of convenience are all
required to be registered as branch offices.\11\Continued advances in
technology used by firms to conduct, monitor, and surveil the
activities at their branch offices and other remote locations, as well
as changes in the structure of broker-dealers and in the lifestyles and
work habits of the work force, have caused the Exchange to reexamine
whether all business locations continue to need to be registered as
branch offices of members and member organizations.
---------------------------------------------------------------------------
\11\ See Amendment No. 2, supra note 9.
---------------------------------------------------------------------------
There is currently no uniform standard that regulators use in
defining this term. These disparate definitions impose unintended
burdens on common members and member organizations in the form of
compliance with multiple and different definitions of branch office,
the filing of multiple forms to register and/or renew registration of
such locations, different filing deadlines for such registrations, and
continued monitoring of the rules of multiple self-regulatory
organizations (``SROs'') and states for changes.\12\
---------------------------------------------------------------------------
\12\ Id.
---------------------------------------------------------------------------
The Exchange has participated in a joint regulatory initiative with
the NASD and state securities regulators to develop a uniform
definition of ``branch office'' in an attempt to eliminate unnecessary
burdens on members. The Exchange, the NASD and the North American
Securities Administrators Association (``NASAA'') have worked together
to propose a uniform definition of branch office.\13\ Accordingly, the
Exchange proposes to amend NYSE Rule 342 to provide for a new
definition of the term ``branch office.'' The proposed amendment to the
rule would limit the requirement to register certain business locations
as branch offices to account for advances in technology used to conduct
and monitor business, changes in the structure of broker-dealers and in
the lifestyles and work habits of associated persons of broker-dealers.
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
As proposed, the term ``branch office'' would mean any location
\14\ where one or more associated persons of a member or member
organization regularly conducts the business of effecting any
transactions in, or inducing or attempting to induce, the purchase or
sale of any security, or where such location is held out as a branch
office.\15\ The definition would provide for exceptions as noted below.
The proposed definition would substantially mirror the Commission's
definition of ``office'' in its Books and Records rules (SEC Rules 17a-
3 and 17a-4) under the Act.\16\ As noted above, the NASD has also filed
with the Commission a proposed new branch office definition, which is
substantially similar to the Exchange's proposal.\17\
---------------------------------------------------------------------------
\14\ Amendment No. 3 deleted the exclusion ``other than the main
office'' from the definition of branch office as initially proposed.
See Amendment No. 3, supra note 10.
\15\ For purposes of this rule, the term ``associated person of
a member or member organization'' would be defined in proposed NYSE
Rule 342.10 as a member, allied member, or employee associated with
a member or member organization. Id.
\16\ 17 CFR 240.17a-3 and 17a-4.
\17\ See SR-NASD-2003-104, supra note 6. The Commission is
simultaneously approving the NASD's proposed rule change. See
Securities Exchange Act Release No. 52403 (September 9, 2005).
---------------------------------------------------------------------------
Attempting to recognize current business, lifestyle, and
surveillance practices, the Exchange provides flexibility in the form
of seven exceptions from the proposed branch office registration
requirement.\18\ As discussed in the Notice,\19\ in developing a
definition, the NYSE considered the evolving nature of its members' and
member organizations' business models and proposed exceptions to the
registration requirement accordingly. For instance, any office of
convenience, where an associated person occasionally and exclusively by
appointment meets with customers and which is not held out to the
public as a branch office, would be exempt from registering as a branch
office.\20\ Other than meeting customers at these offices of
convenience, all other functions of the associated person would be
conducted and supervised through the designated branch office.
---------------------------------------------------------------------------
\18\ See proposed NYSE Rule 342.10 (A) through (G) and Amendment
No. 2, supra note 9.
\19\ See Notice, supra note 4.
\20\ For example, bank-owned members and member organizations
often establish small offices on bank premises, whereby a registered
representative would be designated to a parent branch for
supervision, but would visit different bank branches occasionally,
and by appointment only, to meet with customers. Under the proposed
definition, such locations would be exempt from registering as
branch offices, where the bank location is not held out as a branch
office. In exempting such offices of convenience from branch office
registration, the NYSE imposed important safeguards for the public.
In this regard, at such offices of convenience, associated persons
would be limited to meeting customers occasionally and exclusively
by appointment. Furthermore, at bank locations, the only permitted
signage such offices of convenience could display, under regulations
promulgated by the Office of the Comptroller of the Currency, would
be ones advertising to the public that ``non-deposit investment
products'' are being offered at such locations in order to prevent
confusing customers who might otherwise believe that traditional
riskless investments, such as deposits, are being offered by
associated persons at such offices located on bank premises. Id.
---------------------------------------------------------------------------
The Exchange also proposes to exempt primary residences from the
definition of branch office. In exempting primary residences, the
Exchange imposes limitations on such locations to ensure that all
activity is appropriately supervised and monitored by the firm. The
limitations provide that: 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; the location
not be held out as a branch office; the associated person be assigned
to a designated branch office for supervision, and such office be
reflected on all business cards, stationery, advertisements, and
communications to the public; the associated person not meet with
customers at his or her residence; neither customer funds nor
securities be handled at that location; the associated person's
correspondence and communications with the public be subject to all
supervisory provisions of the Exchange's rules including, but not
limited to, NYSE Rules 342 and 472; \21\ electronic communications,
including e-mails, be made through the firm's electronic system; all
orders be entered through the designated branch office or an electronic
system established by the member or member organization that is
reviewable at the branch office; \22\ written supervisory procedures
relating to the supervision of sales activities conducted at the
residence be maintained by the member or member organization; and a
list of the locations be maintained by the member or member
organization.\23\
---------------------------------------------------------------------------
\21\ See Amendment No. 3, supra note 10.
\22\ Id.
\23\ The NYSE had originally proposed a limitation that the
associated person's primary residence be used for less than 50
business days in one calendar year. However, as discussed further,
the Exchange eliminated the 50-day limitation from the proposed
primary residence exception in response to comments. See Amendment
No. 2, supra note 9.
---------------------------------------------------------------------------
The definition would also exempt from branch office registration
any temporary location, other than the primary residence discussed
above, that is used for securities business \24\ for less than 30
business days in any calendar year. In granting this exemption, the
NYSE imposes most of the same safeguards noted above for the exemption
granted for a primary residence.\25\
---------------------------------------------------------------------------
\24\ See Amendment No. 3, supra note 10.
\25\ The NYSE proposes to define ``business day'' to exclude any
partial day, provided the associated person spends at least four
hours on such business day at his or her designated branch office
during the hours such office is normally open for business. See NYSE
Rule 342.10 explanatory material.
---------------------------------------------------------------------------
[[Page 54790]]
In addition, the definition would exempt from registration
locations where associated persons are primarily engaged in non-
securities activities (e.g., insurance) and from which an associated
person effects no more than 25 securities transactions in a calendar
year, provided that advertisements or sales literature identifying such
location also set forth the location from which the associated persons
would be directly supervised. Further, such activities attendant to the
primary function and performed as an occasional accommodation to
customers would be conducted through and supervised by the associated
person's designated registered branch office.
Similarly, the new definition would exempt non-sales locations,
e.g., where operations activities are conducted, from registering as a
branch office. Such locations would have to be established solely for
customer service and/or back office functions, not be held out to the
public as a branch office, and no sales activities would be conducted
from such locations.\26\
---------------------------------------------------------------------------
\26\ The definition would also exempt the Floor of a registered
national securities exchange where a member or member organization
conducts a direct access business with public customers and a
temporary location established in response to the implementation of
a business continuity plan. See proposed NYSE Rule 342.10 (F) and
(G).
---------------------------------------------------------------------------
However, as discussed further in Amendment No. 3 below, the
Exchange also proposes that, notwithstanding the exclusions in NYSE
Rule 342.10 (A)-(G), 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 would be considered to be a branch office.\27\ The
Exchange is proposing this change in order to conform with a comparable
provision in the NASD's rule proposal.\28\
---------------------------------------------------------------------------
\27\ See proposed NYSE 342.10 explanatory material and Amendment
No. 3, supra note 10.
\28\ See SR-NASD-2003-104, supra note 6.
---------------------------------------------------------------------------
Amendment No. 2
The difference between the NYSE's definition of branch office as
initially proposed and the NASD's definition concerns the registration
of certain primary residences as branch offices. The NASD proposes a
functionality test to determine whether primary residences should
register as a branch office, considering limitations on the activities
that could be performed.\29\ In addressing the use of primary
residences, important safeguards and limitations were imposed by both
SROs on such locations to provide for the monitoring and oversight of
activities. As originally proposed, the NYSE's primary residence
registration exception incorporated the same limitations as the NASD,
but also limited to 50, the number of business days associated persons
would be permitted to engage in securities activities in their primary
residences without requiring such residences to register as a branch
office.
---------------------------------------------------------------------------
\29\ Id.
---------------------------------------------------------------------------
However, as discussed in more detail below, after analysis of the
comments received from and related discussions with members and member
organizations, the Exchange now proposes to eliminate the 50-day
limitation from its primary residence registration exception. In
eliminating the 50-day limitation on primary residences, the Exchange
acknowledges that technological advances in surveillance/monitoring
capabilities should help address the concerns noted above while
accommodating evolving lifestyles and work habits of the industry. At
the same time, the Exchange wishes to impose appropriate regulatory/
supervisory safeguards to help ensure that members and member
organizations properly supervise such locations.
As proposed in Amendment No. 2 and slightly amended in Amendment
No. 3, Exchange members' and member organizations' written supervisory
procedures would have to include criteria for on-site for cause reviews
of an associated person's primary residence. Such reviews would have to
utilize risk-based sampling or other techniques designed to assure
compliance with applicable securities laws and regulations and with
NYSE rules.\30\ 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 would have to include, at a minimum: (1) The firm's size; (2)
the firm's organizational structure; (3) the scope of business
activities; (4) the number and location of offices; (5) the number of
associated persons assigned to a location; (6) the nature and
complexity of products and services offered; (7) the volume of business
done; (8) whether the location has a Series 9/10-qualified person on-
site; (9) the disciplinary history of the registered person or
associated person, including a review of such person's customer
complaints and Forms U4 and U5; and (10) the nature and extent of a
registered person's or associated person's outside business activities,
whether or not related to the securities business.\31\
---------------------------------------------------------------------------
\30\ See also Amendment No. 3, supra note 10. Similarly, written
supervisory procedures for such residences and other remote
locations would have to be designed to assure compliance with
applicable securities laws and regulations and with NYSE rules. See
Amendment No. 2, supra note 9.
\31\ See also Amendment No. 3, supra note 10.
---------------------------------------------------------------------------
Additional criteria should be utilized if applicable to the nature
and type of business conducted by the member or member organization and
the individual registered person(s) involved. Such supervisory
procedures would, in the aggregate, be required to be sufficient to
ensure compliance with the securities laws and Exchange rules.
Given that such locations are physically remote from registered
branch offices, members and member organizations, in establishing
supervisory procedures, would have to be particularly proactive and
preemptive in their approach to supervision. As a matter of reasonable
supervision, firms should, before granting permission to work at these
remote locations, review all applicable criteria to determine whether
such person should be permitted to work at such location and whether
he/she requires heightened supervision.
The Exchange believes that initial review/approval, ongoing
monitoring, and follow-up with respect to outside business activities
by registered persons, whether or not related to the securities
business, is particularly important, especially when such activities
are conducted from such person's residence. The Exchange believes that,
given the nature of these locations, registered persons could utilize
their outside business activities to conceal violations of Commission
and SRO rules. Accordingly, in developing risk-based criteria to
determine the extent and frequency of on-site reviews, members and
member organizations should give particular weight to this factor.
The Exchange believes that the regulatory approach adopted by the
Exchange for these locations is consistent with the approach that the
Commission recently articulated in its Staff Legal Bulletin No. 17:
Remote Office Supervision, regarding the supervision of small, remote
offices.\32\ Supervisory procedures, which do not address the minimum
requirements noted above, would be deemed inadequate for purposes of
NYSE Rule 342, and could subject members and member organizations to
disciplinary action for failure to supervise.\33\ The
[[Page 54791]]
Exchange will be reviewing such procedures and their implementation as
part of its regular examination of members and member organizations.
---------------------------------------------------------------------------
\32\ See Division, SEC, Staff Legal Bulletin No. 17, dated March
19, 2004.
\33\ Whereas the federal securities laws, Section 15(b)(4)(E) of
the Act, 15 U.S.C. 78o(b)(4)(E), provide for sanctions on a firm and
its supervisors for failing to supervise a person who is subject to
their supervision and commits a violation of the federal securities
laws, the SRO supervision rules do not require a predicate violation
to impose sanctions for failing to supervise. See Amendment No. 3,
supra note 10.
---------------------------------------------------------------------------
Amendment No. 3
In Amendment No. 3, the Exchange proposed additional changes to its
rule text and discussion to clarify certain points made in Amendment
No. 2, other issues related to the Exchange's definition of branch
office as compared with the NASD's rule proposal, and issues related to
the adoption of the Exchange's new branch office definition.
The Exchange proposes the following changes to NYSE Rule 342:
i. In NYSE Rule 342.10, the phrases ``other than the main office,''
and ``(``associated person'')'' have been deleted from the definition
of branch office. In deleting the qualifier ``other than the main
office,'' the Exchange is recognizing instances where a member
organization's activities taking place in the main office (e.g., 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 a branch office), would place the main office in the
purview of the definition, and thus it should be registered as a branch
office. Further, branch office registration would be triggered where
associated persons are domiciled in the main office of a member or
member organization and are engaging in the above activities.
Accordingly, the Exchange recognizes that whether an office is a branch
office is a function of the activities performed at the office even if
such activities are performed at the main office. In addition, the
latter deletion is being made by the NYSE to maintain a uniform
definition of branch office.
ii. The text of Rule 342.10(B)(v) has been changed from ``the
associated person's correspondence and communications with the public
are subject to the firm's supervision'' to ``the associated person's
correspondence and communications with the public are subject to all
supervisory provisions of the Exchange's rules including, but not
limited to, Rules 342 and 472.'' This change was made to eliminate any
possible ambiguity that might have suggested that associated persons
working from home were subject to supervisory standards different from
those of other associated persons subject to the supervision of a
member or member organization.
iii. The text of Rule 342.10(B)(vi) has been changed from
``electronic communications (i.e., e-mail) are made through the member
organization's electronic system'' to ``electronic communications
(e.g., e-mail) are made through the member's or member organization's
electronic system.'' This change was made to indicate that e-mail is
only an example of electronic communications covered by the rule and to
make it consistent with other sections in the rule.
iv. The following changes have been made to conform to the NASD's
rule proposal. NYSE Rule 342.10(B)(vii) has been changed to include
orders entered in an electronic system established by the member or
member organization that is reviewable at the branch office. NYSE Rule
342.10(C) has been changed by adding ``securities business for'' to
clarify that primary residences excluded from the definition of branch
office may be used, on a limited basis, for securities business.
v. In NYSE Rule 342.10 explanatory material, the phrase ``[t]he
term `business day' as used herein'' has been changed to ``[f]or
purposes of this Rule, the term `business day' '' to make its wording
consistent with the wording used in other definitions in this section.
vi. In NYSE Rule 342.10 explanatory material, the sentence ``[t]he
term an `associated person of a member' for purposes of this Rule means
member, allied member or employee associated with a member or member
organization'' has been changed to ``[f]or 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'' to make its wording consistent with the wording
used in other definitions in this section.
vii. A new paragraph is being added to the Rule 342.10 explanatory
material. As proposed, it provides that ``notwithstanding the
exclusions in subparagraphs 342.10(A)-(G), 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.'' The Exchange thus recognizes instances where such locations
could be discharging supervisory activities that warrant their
registration as branch offices with the attendant regulatory
responsibility and oversight. This amendment is being proposed to
conform with a comparable provision in the NASD's rule proposal.
viii. In NYSE Rule 342.10 explanatory material, the term
``sufficient'' has been deleted from the sentence ``[f]or purposes of
Rule 342.10(B)(viii) and (C), written supervisory procedures for such
residences and other remote locations must be designed to assure
compliance with applicable securities laws and regulations and with
NYSE Rules,'' to make it more consistent with the prior sentence,
``[f]or purposes of Rule 342.10(B)(viii), 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 NYSE rules.''
ix. The Supplementary Material section of NYSE Rule 342 titled
``Annual fee,'' which is currently numbered 342.10, will instead be
numbered 342.11 due to a numbering conflict with other sections of NYSE
Rule 342.
x. Current NYSE Rule 342.11 (``Registered representative operating
from residence'') has been deleted because other proposed amendments to
NYSE Rule 342 make it redundant.
Furthermore, to clarify its response to comments made in Amendment
No. 2, the Exchange reiterates its belief that its proposal would
actually result in reduced overall industry costs by virtue of the fact
that the exclusion of certain primary residences and several other
types of locations currently required to register would cause a decline
in the overall number of branches. In support of this statement, the
Exchange, after reviewing its database of branch offices, estimates
that the proposed definition would reduce the number of branch offices
from approximately 16,000 to approximately 12,800, a reduction of
approximately 20 percent.
In addition, the Exchange clarifies a footnote in Amendment No. 2
to more accurately express the Exchange's intended point that whereas
the federal securities laws provide for sanctions on a firm and its
supervisors for failing to supervise a person who is subject to their
supervision and commits a violation of the federal securities laws, the
SRO's supervision rules do not require a predicate violation to impose
sanctions for failing to supervise.
In order to make use of a technique mandatory without requiring any
particular technique that might not be appropriate for every member
[[Page 54792]]
organization, the Exchange also amended the explanatory material in
NYSE Rule 342.10 relating to written supervisory procedures of an
associated person's primary residence, to clarify that the criteria for
on-site for cause reviews of an associated person's primary residence
would have to utilize risk-based sampling or other techniques designed
to assure compliance with applicable securities laws and regulations
and with NYSE rules. Furthermore, the Exchange notes that it has added
factors (e.g., the firm's size, the firm's organizational structure,
the number and location of offices, and the number of associated
persons assigned to a location) to be considered when member firms
develop risk-based sampling techniques to determine the appropriateness
of on-site for cause review of residences and other remote locations.
The Exchange believes that these additional factors will better enable
member firms to make such determinations.
Finally, the Exchange emphasizes that a registered representative
in a branch office classified as a ``small office'' pursuant to
Interpretations /01 and /02 of NYSE Rule 342.15 may not be the
supervisor of that or any other office or non-branch location unless he
or she is Series 9/10 qualified, regardless of that person's
designation as the registered representative ``in charge'' of the
office.
In proposing a uniform definition with exclusions, the Exchange
recognizes that, in an evolving business and regulatory environment, it
cannot capture every conceivable business arrangement/structure its
members or member organizations seek to utilize. Accordingly, the
Exchange will review, on a case-by-case basis, instances where a firm's
proposal does not fall squarely within the rule and/or its exclusions.
With respect to the timing of the adoption of the Exchange's
proposed definition of branch office, the Exchange states that the
proposed new definition of branch office is ``the product of a
coordinated effort among regulators to reduce inconsistencies in the
definitions used by the Commission, NASD, the NYSE, and state
securities regulators in identifying locations where broker/dealers
conduct securities or investment banking business.'' \34\ The proposed
new definition is intended ``to facilitate the creation of a branch
office registration system through the Central Registration Depository
(``CRD'') to provide a more efficient, centralized method'' for members
and member organizations ``to register branch office locations as
required by the rules and regulations of states and self-regulatory
organizations.'' \35\ It is expected that both the Exchange and the
NASD will revise their forms to incorporate the respective new
definitions of branch office, and that the new forms will become
operational on CRD during the fourth quarter of 2005.\36\
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\34\ See Amendment No. 3, supra note 10 (referencing SR-NASD-
2003-104).
\35\ Id.
\36\ See Securities Exchange Act Release No. 51923 (June 24,
2005), 70 FR 38229 (July 1, 2005) (SR-NYSE-2005-13).
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The Exchange believes that implementing its new definition of
branch office prior to revising the CRD and the related forms will make
the transition to the new branch office registration system and forms
smoother, since its members' and member organizations' familiarity with
the new definition will allow them to concentrate on the subsequent
technical changes in the branch registration process. The Exchange does
not believe that changing its definition of branch office prior to the
aforementioned CRD changes will create confusion or in any way
undermine the coordinated transition to the new branch office
registration system.
III. Summary of Comments and NYSE's Response
As noted above, the Commission received five comment letters with
respect to the Notice,\37\ and seven comment letters with respect to a
similar filing by the NASD \38\ that specifically addressed the NYSE's
proposed rule change.\39\ The NYSE filed a response letter to address
concerns raised by the commenters.\40\
---------------------------------------------------------------------------
\37\ See supra note 5.
\38\ See supra note 6.
\39\ See supra note 7.
\40\ See Response to Comments, supra note 8.
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Comment Letters
The commenters generally applauded the NYSE, the NASD, and NASAA
for their efforts in creating a uniform definition of branch office,
reducing the regulatory burdens currently imposed upon firms, and
accounting for advances in technology and changes in the structure of
broker-dealer firms and in the lifestyle and work habits of associated
persons of broker-dealers.\41\ One commenter noted that this attempt at
uniformity would only be successful if all exchanges, regulatory
agencies, and states adopt consistent definitions and uniformly
interpret those definitions.\42\
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\41\ See A.G. Edwards Letter 2, ARM Letter, InterSecurities
Letter, MetLife Letter 1, MetLife Letter 2, Princor Letter, SIA
Letter 1, SIA Letter 2, TFA Letter, supra notes 5 and 7.
\42\ See A.G. Edwards Letter 2, supra note 5.
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However, the commenters believed that the proposed amendments to
the definition of branch office would substantially increase the number
of offices that must be inspected and that NYSE member firms would have
to annually inspect every office, including homes, vacation homes or
convenience offices, meeting the definition of a ``branch office.''
\43\ Similarly, another commenter believed that imposition of the new
definition of branch office would result in firms needlessly having to
closely monitor where work was being performed and for how long, and
that the logistical difficulties created by the NYSE proposal would
encourage some firms to prohibit people from working outside the
office.\44\ Furthermore, the likelihood that firms would choose not to
track but rather to register everybody or preclude activity outside the
branch office would be increased by the serious consequences for an
inadvertent failure to register.\45\
---------------------------------------------------------------------------
\43\ See A.G. Edwards Letter 1, A.G. Edwards Letter 2, SIA
Letter 1, supra note 5.
\44\ See SIA Letter 1, supra note 5.
\45\ Id.
---------------------------------------------------------------------------
A few commenters also believed that, if the proposed NYSE
definition is adopted, the number of registered branch offices would
increase dramatically and result in substantial increased costs for
large and small firms.\46\ One commenter observed that the substantial
costs associated with this proposed definition would not be limited to
branch office supervision, but that additional costs would include
costs associated with tracking employees' activity to determine whether
or not they fall within the 50- or 30-day exclusions and a substantial
increase in registration costs and fees.\47\ Accordingly, it would be
possible that the registration, bonding, personnel, and supervisory
costs associated with this proposed definition would outweigh any cost
savings through central registration.\48\
---------------------------------------------------------------------------
\46\ See SIA Letter 1, MetLife Letter 1, supra note 5.
\47\ See SIA Letter 1; see also MetLife Letter 1, supra note 5.
\48\ See SIA Letter 1, supra note 5.
---------------------------------------------------------------------------
Furthermore, the commenters generally believed that the proposal
presents a huge burden for firms with far-reaching branch networks and
were generally against the 50-day cap on working from home and the 30-
day cap on working at other locations in order to qualify under the
primary residence exception.\49\ They believed that there
[[Page 54793]]
would be no customer protection or regulatory interest served by
requiring annual inspections of a location merely based on the number
of days someone works from a location, if the location is not ``held
out'' to the public, if no customer funds or securities are maintained
at the location, and if the location is not used to conduct functions
that occur in an office of supervisory jurisdiction.\50\ Specifically,
according to some commenters, what matters should be the type of
activities performed at the site, the records maintained, the number of
registered representatives working there, the ability to conduct
supervision, and how the location is held out to the public, and not on
an arbitrary criteria such as the number of days spent at the
location.\51\ Similarly, some of the commenters believed that real
investor protection comes from limiting the types of activities
performed outside the branch office and providing appropriate
supervision of all associated persons, regardless of where they are
conducting their business. As long as these two criteria are satisfied,
the 50-day cap on working from home and the 30-day cap on working at
other locations is unnecessary, unduly cumbersome, and of little
value.\52\ Another commenter believed that the SROs should not require
the registration of a representative's residence under most
circumstances. This commenter believed that the primary effect of
adding a requirement to register homes and other locations that are not
held out to the public would be an increase in fees that firms must pay
to their regulators.\53\
---------------------------------------------------------------------------
\49\ See A.G. Edwards Letter 1, A.G. Edwards Letter 2, MetLife
Letter 1, SIA Letter 1, supra note 5; see also ARM Letter,
InterSecurities Letter, Investment Services Letter, MetLife Letter
2, Princor Letter, SIA Letter 2, and TFA Letter (supporting the
NASD's decision to eliminate the fifty-day limitation for the
primary residence exception), supra note 7.
\50\ See A.G. Edwards Letter 1, A.G. Edwards Letter 2, ARM
Letter, SIA Letter 1, supra notes 5 and 7.
\51\ See ARM Letter, SIA Letter 1, SIA Letter 2, supra notes 5
and 7; see also A.G. Edwards Letter 2, supra note 5.
\52\ See A.G. Edwards Letter 2, SIA Letter 1, supra note 5; see
also MetLife Letter 2 (against the 50-day requirement in the primary
residence exception as being burdensome, time-consuming and
difficult to enforce), supra note 7.
\53\ See MetLife Letter 1, supra note 5.
---------------------------------------------------------------------------
Moreover, one commenter believed that the definition of ``office''
in the SEC's Books and Records Rule, Rule 17a-3(h)(1),\54\ is not
identical to the definition contained in the Exchange's proposal. The
commenter believed that, if the SEC definition is not interpreted so
that any location that is excluded from the definition of ``branch
office'' in this rule would also be excluded from the SEC definition,
there would be significantly higher costs and additional regulatory
burdens. Furthermore, an inconsistent interpretation of the definition
under the Books and Records Rule could lead to a situation where a
state could require that records be maintained or produced at a
location that is not a ``branch office'' within the NYSE proposal.\55\
Similarly, another commenter expressed concern that the mere act of
registering a primary residence as a branch office could be
misinterpreted as satisfying the ``holding out'' requirement in SEC
Rule 17a-4(l) of the Act \56\ and therefore lead to a situation where a
state would require that records be maintained or produced at a
location that would not otherwise be deemed a ``branch office'' under
SEC rules. This commenter requested that the NYSE and/or the Commission
clarify that this would not be the case.\57\
---------------------------------------------------------------------------
\54\ 17 CFR 240.17a-3(h)(1).
\55\ See A.G. Edwards Letter 2, supra note 5.
\56\ 17 CFR 240.17a-4(l).
\57\ See SIA Letter 1, supra note 5.
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NYSE's Response to Comments
The Exchange agrees, in part, with some of the comments relating to
the proposed branch office definition's exceptions and has, thus,
excepted primary residences and other locations from the definition, if
certain appropriate supervisory and business limitations safeguards are
satisfied by the member or member organization. In justifying the
Exchange's initial proposal to impose a 50-day limitation for the
primary residence exception, the Exchange stated that, notwithstanding
the need for flexibility, adequate supervision could be most
effectively accomplished when associated persons are assigned to, and
have some actual physical presence at, a supervised location. By
limiting the number of full business days that associated persons could
conduct business at non-branch locations, members and member
organizations could better supervise such persons while still providing
them the flexibility that their lifestyles require today. The Exchange
believed that the proposed 50- and 30-day limitations in the proposed
exceptions would provide further flexibility by excluding partial
business days at a broker's designated branch office during the hours
such office is normally open for business.\58\
---------------------------------------------------------------------------
\58\ See Response to Comments, supra note 8. Furthermore, if an
associated person, i.e., registered representative (``RR''), works
primarily from his or her home, the Exchange believed that such
location should be registered as a branch office subject to all
attendant requirements including firm supervision and examination.
Although an RR could not hold out his or her residence as a branch
office, in reality customers would generally come to know that the
RR is working from home. As a result, the Exchange believed that it
would be likely that RRs would eventually meet with customers at
their homes, or that customers would stop by to drop off checks or
securities certificates. In addition, when an RR works primarily
from home, he or she would keep records there and might not be
diligent in ensuring that all required records are provided to the
designated branch office. Id.
---------------------------------------------------------------------------
However, as noted above, after analysis of and in response to the
comments received, the Exchange has eliminated its 50-day limitation on
the primary residence registration exception. In eliminating the 50-day
limitation on primary residences, the Exchange acknowledges that
technological advances in surveillance/monitoring capabilities should
help address the concerns posed by associated persons working from
home, combined with the rest of the limitations in the exemption. At
the same time, the Exchange still proposes to impose appropriate
regulatory/supervisory safeguards, such as on-site review of such
residences and remote locations, to help ensure that members and member
organizations properly supervise such locations.\59\
---------------------------------------------------------------------------
\59\ See Amendment No. 2, supra note 9.
---------------------------------------------------------------------------
In response to the comments that the new definition would present
logistical obstacles and result in substantial time and effort to track
each associated person's whereabouts and to register those locations
that satisfy the 30-day threshold, the Exchange notes that the 30-day
business day exclusion was proposed to address changes in lifestyle and
work habits for associated persons.\60\ The Exchange indicates that
flexible work schedules usually are prearranged and are something such
persons and their firms should be aware of on a prospective basis.
However, the Exchange recognizes that exigent circumstances could arise
where such information would not be clearly foreseeable to such persons
and their firms. Since the Exchange has no interest in inadvertent rule
violations that arise as the result of unforeseen circumstances, the
Exchange intends to provide flexibility through interpretative relief
for such unforeseen circumstances. Once the thresholds have been met,
the Exchange represents that members and member organizations would be
given a 30-day window to submit applications for registering such
locations as branch offices. Pending branch office approval, associated
persons could continue conducting business from such locations. If
approved, the location would be a branch office. If not approved, the
associated person would have to
[[Page 54794]]
immediately cease conducting business at the location.\61\
---------------------------------------------------------------------------
\60\ These same concerns were raised with respect to the 50-day
threshold; however, the NYSE has eliminated the 50-day threshold in
response to the comments received.
\61\ See Response to Comments, supra note 8.
---------------------------------------------------------------------------
The Exchange would also address the industry's concerns regarding
the perceived logistical problems associated with the Exchange's
proposed definition by providing the same threshold flexibility in the
registration/approval process of primary residences for locations that
exceed the ``25 securities transaction'' exclusion permitted under
proposed NYSE Rule 342.10(E). Furthermore, the Exchange will provide
interpretative guidance as to what constitutes a ``securities
transaction'' for purposes of this exclusion from the definition of
branch office. For example, transactions effected pursuant to a
dividend reinvestment plan, or similar types of transactions would be
excluded in calculating the 25 securities transactions threshold. In
aggregate, the Exchange believes that the registration/approval process
and exclusions from the 25 securities transactions threshold should
alleviate some of the industry's perceived concerns with regard to the
proposed definition.\62\
---------------------------------------------------------------------------
\62\ Id.
---------------------------------------------------------------------------
Moreover, the Exchange believes that the commenters' concern that
registering primary residences and other locations used for securities
business would impose substantial costs overlooks current NYSE rules
that require all offices, including residential offices, to be
registered. In addition, each branch office location is currently
required to be inspected on an annual basis. Accordingly, the Exchange
believes that adoption of the proposed rule would reduce the number of
locations that would be required to be registered by NYSE members and
member organizations by eliminating locations such as exempt
residences, locations engaged in customer service and back office
operations, offices of convenience, and locations used primarily for
non-securities activities.\63\ In support of this statement, the
Exchange, after reviewing its database of branch offices, estimates
that the proposed definition would reduce the number of branch offices
from approximately 16,000 to approximately 12,800, a reduction of
approximately 20 percent.\64\
---------------------------------------------------------------------------
\63\ Id. See also, Amendment No. 2, supra note 9. The proposal
would actually result in reduced overall industry costs by virtue of
the fact that the exclusion of certain primary residences and
several other location types currently required to register would
cause a decline in the overall number of branches. Id. Finally, the
Exchange disagrees with the commenters' view that the 50-day
limitation that was initially proposed raises potential
inconsistencies with the SEC's books and records rule. On the
contrary, the Exchange believes that its proposed definition is not
inconsistent with the SEC's books and records requirement and, in
fact, incorporates the substance of SEC Rule 17a-3(h)(1), 17 CFR
240.17a-3(h)(1). The Exchange believes that the act of registering a
primary residence as a branch office would not, in and of itself,
constitute ``holding out'' for purposes of the SEC's new record
keeping requirements. In dealing with primary residences, the
Exchange has imposed many of the conditions required under SEC Rule
17a-4(l), 17 CFR 240.17a-4(l). Where a primary residence exceeds the
50-day threshold and thus would be required to register as a branch
office (as initially proposed), it would not necessarily be required
to maintain records at that office. Rather records could be
maintained at the designated branch office that is responsible for
supervision of the home office, provided that the member or member
organization adheres to the criteria of the rule. See Response to
Comments, supra note 8.
\64\ See Amendment No. 3, supra note 10.
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In summary, the Exchange represents that, in proposing its
definition of ``branch office,'' among other things, it is the
Exchange's intent to reduce regulatory burdens for the industry and to
provide for a consistent approach among various securities regulators
with respect to branch offices and other business locations.\65\
---------------------------------------------------------------------------
\65\ See Response to Comments, supra note 8.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 2 and 3, including whether
Amendment Nos. 2 and 3 are consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2002-34 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-NYSE-2002-34. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSE-2002-34 and should be submitted on or before
October 7, 2005.
V. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the Act and the rules and
regulations promulgated thereunder applicable to a national securities
exchange and, in particular, with the requirements of Section 6(b) of
the Act.\66\ Specifically, the Commission finds that approval of the
proposed rule change, as amended, is consistent with Section 6(b)(5) of
the Act \67\ in that it is designed to prevent fraudulent and
manipulative acts and practices; to promote just and equitable
principles of trade; to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and in general, to
protect investors and the public interest.
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\66\ 15 U.S.C. 78f(b). In approving this proposal, the
Commission has considered the proposed rule's impact on efficiency,
competition and capital formation. 15 U.S.C. 78c(f).
\67\ 15 U.S.C. 78f(b)(5).
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Given the continued advances in technology used to conduct and
monitor businesses and changes in the structure of broker-dealers and
in the lifestyles and work habits of the workforce, the Commission
believes it is reasonable for the Exchange to reexamine whether all
business locations need to be registered as branch offices of broker-
dealer members and member organizations. The Commission also supports
the Exchange, the NASD and state securities regulators' joint,
regulatory effort to eliminate inconsistencies and duplication by
developing a uniform definition of ``branch office.'' The Commission
believes that such regulatory coordination and cooperation
[[Page 54795]]
will result in an effective and efficient regulation that will serve
the entire broker-dealer community by recognizing the many different
business models and streamlining the branch office registration process
significantly. In addition, the Commission believes that the proposed
definition strikes the right balance between providing flexibility to
broker-dealer firms to accommodate the needs of their associated
persons, while at the same time setting forth parameters that should
ensure that all locations, including home offices, are appropriately
supervised. In this regard, the Commission emphasizes the
responsibility of firms to supervise their associated persons,
regardless of their location and reminds all broker-dealers of their
statutory duty to supervise.\68\ The Commission also believes that the
ability to identify the personnel located at each branch office is an
important improvement to the CRD database and will provide regulators
valuable information.
---------------------------------------------------------------------------
\68\ See Section 15(b)(4)(E) of the Act, 15 U.S.C. 78o(b)(4)(E).
---------------------------------------------------------------------------
Furthermore, the Commission believes that the seven proposed
exceptions to registering as a branch office constitute a reasonable
approach to recognize current business, lifestyle, and surveillance
practices and provide associated persons with flexibility with respect
to where they perform their jobs. For instance, because associated
persons may have to work from home due to illness, or to provide
childcare or eldercare for certain family members, the Commission
believes it is appropriate to except primary residences from the
definition of branch office. In this regard, the Commission believes
that the Exchange has also directly responded to negative comments on
the 50-day cap on working from home and, accordingly, eliminated such
limitation from its primary residence exception. This change made the
proposed definition substantially similar to the definition proposed by
the NASD. Moreover, the definition would also exempt from branch office
registration any temporary location, other than the primary residence,
provided it is used less than 30 business days in any calendar year.
The Commission finds it reasonable for the Exchange to not only
propose conditions on the primary residence and temporary location
exceptions (e.g., the location can not be held out to the public as an
office, neither customer funds nor securities can be handled there) but
to also impose appropriate supervisory safeguards and limitations to
help ensure that members and member organizations properly supervise
and monitor such locations. For instance, the Exchange proposes to
require that written supervisory procedures for such residences and
other remote locations include criteria for on-site for cause reviews
of an associated person's primary residence and that such reviews
utilize risk-based sampling or other techniques designed to assure
compliance with securities laws and regulations. The Exchange also
included a list of factors which should be considered when developing
risk-based sampling techniques for on-site reviews of such
locations.\69\ The Commission agrees with the Exchange that effective
supervision can be achieved using advanced and sophisticated technology
in the supervision and review of associated persons in such exempt
locations. In this regard, the Commission expects the Exchange to
review such written supervisory procedures and their implementation as
part of its regular examination of members and member organizations.
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\69\ The Commission notes that the factors proposed in NYSE Rule
342, which should be considered when developing risk-based sampling
techniques to determine the appropriateness of on-site for cause
reviews of primary residences and other remote locations, are
substantially similar to the factors proposed by the NASD in SR-
NASD-2003-104. See SR-NASD-2003-104, supra note 6. However, while
the NASD's list of factors would broadly apply to the internal
inspections and review of their members' businesses, including
offices of supervisory jurisdiction (``OSJs''), branch offices, and
non-branch offices, the NYSE's proposed list of factors would apply
only to primary residences and other remote locations. However, the
Commission notes that the NYSE provides for branch office
inspections in NYSE Rule 342/03 of the NYSE Interpretation Handbook
(``Handbook''). Under NYSE Rule 342/03 of the Handbook, 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: Safeguarding of customer funds and
securities; maintaining books and records; supervision of customer
accounts serviced by branch office managers; transmittal of funds
between customers and registered representatives and between
customers and third parties; validation of customer address changes,
and validation of changes in customer account information.
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In addition, under both exceptions noted above, the NYSE has
provided additional flexibility by defining ``business day'' to exclude
any partial day, provided the associated person spends at least four
hours on such business day at his or her designated branch office
during the hours such office is normally open for business. The
Commission believes that this should prevent associated persons from
regularly conducting business from other remote locations for the
majority of a business day, without such activity being counted towards
the 30-day limitation. The Commission expects the Exchange to monitor
and ensure that, where the 30-business day (other location) exemption
is utilized by associated persons, members and member organizations are
maintaining records adequate to demonstrate compliance with the
``business day'' limitations.
Finally, the Commission believes it is reasonable for the Exchange
to establish and implement its new definition of branch office before
the changes to the CRD and the related forms are implemented. This
should make the transition to the new branch office registration system
and forms smoother by providing Exchange members and member
organizations with sufficient time to become familiar with the new
definition and to focus on the subsequent technical changes in the
branch registration process. As the Exchange represents, changing the
definition of branch office prior to the aforementioned CRD changes
should not create confusion, or in any way undermine the coordinated
transition to the new branch office registration system.
Accelerated Approval of Amendment Nos. 2 and 3
