Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule and Amendment No. 1 Thereto Relating to a Proposed Interpretation to Rule 342 (Offices-Approval, Supervision, and Control), 61672-61674 [E5-5879]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 205 (Tuesday, October 25, 2005)]
[Notices]
[Pages 61672-61674]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-5879]



[[Page 61672]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52640; File No. SR-NYSE-2004-51]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule and Amendment No. 1 Thereto Relating 
to a Proposed Interpretation to Rule 342 (Offices--Approval, 
Supervision, and Control)

October 19, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on September 3, 2004, the New York Stock Exchange, 
Inc. (``NYSE'' or the ``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or the ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. On September 28, 2005, the Exchange 
filed Amendment No. 1 to the proposed rule change, replacing the 
original filing in its entirety. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE is filing with the Commission a proposed Interpretation of 
Exchange Rule 342 (Offices--Approval, Supervision, and Control) to 
permit the waiver of the qualified resident branch office manager 
requirement for ``limited purpose offices'' with more than three 
registered representatives. The text of the proposed rule change is 
available on the NYSE Web site (https://www.nyse.com/pdfs/NYSE-2004-51_
A-1.pdf), at the principal office of the NYSE, and in the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose

Synopsis

    The Exchange proposes amendments to NYSE Rule 342 that would permit 
members and member organizations to seek a waiver of the qualified 
(Series 9/10--General Sales Supervisor, Options/General or Series 24--
General Securities Principal (after July 1, 2001) examinations) 
resident branch office manager requirement for ``Limited Purpose 
Offices'' with more than three registered representatives (``RRs''). 
``Limited Purpose Office'' is a proposed new category that would 
include branch office locations with RRs that conduct limited business 
activities, or that have limited registration qualifications (e.g., 
Series 6--Investment Company and Variable Contracts Products 
Representative or Series 52--Municipal Securities Representative). The 
proposed rule change sets forth a process by which members and member 
organizations may seek a waiver from the Exchange of the on-site branch 
office manager requirement on a case-by-case basis, following 
prescribed criteria as set forth in the proposed Interpretation.

Background

    Currently, except for ``small offices,'' all member and member 
organization branch offices are required to have an on-site qualified 
manager. The Interpretation of NYSE Rule 342.15 limits a small office 
to a total of three RRs. If an office has three or fewer RRs, the 
office is not required to have a qualified branch office manager on-
site. Instead, the small office must be under the close supervision and 
control of the main office or other designated branch office that has a 
qualified branch office manager on-site. In addition, supervision and 
control procedures must be made part of the member's or member 
organization's written plan of supervision. Recently, member 
organizations with branch offices that have a limited scope of 
activities, but that don't meet the definition of ``small office'' 
under the Interpretation, have approached the Exchange seeking relief 
from the requirement that such offices have a qualified branch office 
manager on-site.
    As members and member organizations have been faced with ever 
changing demographics of their workforce, as well as with evolving 
regulatory and market environments, many have responded by 
fundamentally altering the ways in which their business is conducted. 
For example, there has been a large increase in the number of small, 
multi-function offices that offer a combination of services related not 
only to securities brokerage, but also to banking and insurance 
products. Concurrently, advances in technology have resulted in 
increasingly sophisticated surveillance capabilities that enable 
members and member organizations to more effectively supervise and 
control the business activities of their associated persons in such 
offices from remote locations, such as another branch office or a 
firm's main office.
    Given these surveillance and monitoring capabilities, and the 
often-limited scope of securities-related business activities conducted 
in many offices, the requirement to have an on-site qualified branch 
office manager may often be neither practical nor necessary. 
Consequently, the Exchange has re-examined its ``four-or-more'' 
standard for requiring on-site supervision, and considered whether 
alternate criteria, such as limited securities sales activity coupled 
with proper risk-based supervisory controls and follow-up, should be 
determining factors for granting regulatory relief currently available 
only to small offices.\3\
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    \3\ See SR-NYSE-2002-34 (Definition of Branch Office). The 
Exchange has taken a similar risk-based approach in its definition 
of branch office and the exceptions to that definition for remote 
locations.
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    Prior to the adoption of the Gramm-Leach-Bliley Act (the 
``GLBA''),\4\ banks were completely exempted from the definition of the 
terms ``broker'' and ``dealer'' under the Exchange Act.\5\ The GLBA 
amended the definition of these terms and replaced the full exception 
with functional exceptions. Thus, under the current terms of the 
Exchange Act, banks must either limit their securities activities to 
those that fit within the functional exceptions, or conduct those 
activities through a registered broker-dealer. As a result, many banks 
with affiliated broker-dealers have entered

[[Page 61673]]

into business arrangements with those broker-dealers to ensure that 
non-excepted ``broker'' or ``dealer'' activities are properly 
conducted.
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    \4\ Pub. L. 106-102, 113 Stat. 1338 (1999). The GLBA lowered 
barriers between the banking and securities industries erected by 
the Banking Act of 1933 (known as the Glass-Steagall Act) Pub. L. 
73-66, ch. 89, 48 Stat. 162 (1933) (codified in various sections of 
12 U.S.C.).
    \5\ 15 U.S.C. 78a et seq. (Before the GLBA, Exchange Act Section 
3(a)(4) defined the term ``broker'' as ``any person engaged in the 
business of effecting transactions in securities for the account of 
others, but does not include a bank. Before the GLBA, Exchange Act 
Section 3(a)(5) defined the term ``dealer'' as ``any person engaged 
in the business of buying and selling securities for his own 
account, through a broker or otherwise, but does not include a bank 
* * *'')
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    One common practice is for the two entities to ``dually employ'' 
those bank personnel acting in a broker or dealer capacity with both 
the bank and the registered broker-dealer. This enables banking 
personnel to register and qualify for securities license exam 
qualifications, such as the Series 6 (Investment Company and Variable 
Contracts Products Representative), the Series 7 (General Securities 
Registered Representative) and the Series 66 (Uniform Combined State 
Law), in order to conduct broker and dealer activities on behalf of the 
registered broker-dealer affiliate. Other broker-dealer alliances, 
primarily with insurance companies and investment companies, have also 
engaged in similar business arrangements involving dual employment and 
referrals among various registered entities.
    Because the dually employed persons often primarily conduct 
business (e.g., banking, insurance, mutual funds) other than broker or 
dealer activities, they typically physically remain on bank, insurance 
company, or investment company premises. However, because they are 
employees of the registered broker-dealer as well, the office is 
considered a branch office pursuant to NYSE Rule 342. If it is a branch 
office with more than three RRs, it is required to have a qualified 
branch office manager on-site. As noted above, the Interpretation of 
NYSE Rule 342 currently exempts only small offices--defined as offices 
with three or fewer RRs--from the on-site qualified branch office 
manager requirement.
    This does not offer much flexibility to shared, multi-function 
broker-dealer offices that have more than three RRs but don't offer a 
full line of securities products and services. Often, offering a 
limited selection of securities products is an accommodation to the 
bank's, insurance company's or investment company's customers, and 
these products are complementary to such entities' traditional 
activities. In fact, many broker-dealer business models are becoming 
more reliant on offices of more than three RRs servicing geographically 
isolated locations with an abbreviated securities product/services 
menu. Because of the limited scope of securities-related business 
conducted in these offices, members and member organizations often have 
the technological capability to adequately supervise and control them 
without having a qualified branch office manager on-site.

Supervision

    Pursuant to NYSE Rule 342, all offices of members and member 
organizations must be subject to an effective system of supervision and 
control. As broker-dealers have incorporated technological advancements 
into their business activities, they have been able to make greater use 
of electronic means to enhance overall supervision and control. For 
instance, firms have enacted policies and procedures that require their 
RRs to communicate through internal e-mail systems, which are used by 
supervisors and firms for monitoring and surveillance purposes. 
Centralized communication networks are likewise used to monitor the 
trading and handling of funds in customer accounts serviced in branch 
offices. All such activities are generally transacted through a broker-
dealer's internal order management system, which feeds surveillance 
systems and exception reports.
    The reports these systems can provide monitor activities as diverse 
as registration and continuing education status; daily trade review; 
new accounts review and approval; errors and corrections; employee 
trade and monthly statement review; outside business activity; selling 
away; customer address changes; customer complaints; blue sky 
monitoring; cancel and rebills; fund switch exceptions; missing 
documentation; various risk and product limits; and correspondence 
review and approval. With regard to correspondence, broker-dealers have 
utilized a variety of systems to organize electronic correspondence, 
such as e-mail, so that it can be monitored and reviewed in a timely 
manner. In addition, these systems have enabled firms to index, store 
and search e-mails for investigative and surveillance purposes.

Proposal

    Given that the development of technologically sophisticated systems 
has automated and enhanced so many aspects of the supervisory process 
and expanded the range of supervisory functions that can be conducted 
remotely, the Exchange believes more flexibility and discretion is 
needed to determine whether a qualified on-site branch office manager 
is necessary for offices with more than three RRs if only a limited 
range of securities-related services is offered, or if a limited level 
of such activity is conducted. The proposed Interpretation would 
address this need. Further, it would give increased flexibility to 
member organizations that acquire new offices through merger, 
acquisition or regulatory change, to structure their business 
activities in compliance with Exchange supervisory requirements.
    Under the proposed Interpretation, members and member organizations 
seeking a waiver of the on-site qualified branch office manager 
requirement for limited purpose offices would be required to provide a 
written plan of risk-based supervision and control acceptable to the 
Exchange. Notwithstanding the grant of a waiver, all limited purpose 
offices would be required to be under the close supervision and control 
of a qualified person, as defined under NYSE Rule 342.13, at the main 
office or other designated branch office.
    The Exchange believes that allowing a risk-based approach to 
supervision for limited purpose offices would benefit members' and 
member organizations' diverse business models while maintaining the 
integrity of their supervision and control systems. The proposed 
Interpretation sets forth factors to be used in determining whether a 
location qualifies as a limited purpose office and the supervisory 
requirements for each such office, including:
    (i) The number of registered persons in the office (the RR to 
offsite Branch Office Manager ratio), their registration category, and 
the functions they perform (the nature and level of the RRs' 
responsibilities would be taken into account);
    (ii) The scope and types of business activities conducted (in 
general, the nature of business should not pose special risks or 
otherwise warrant on-site supervision);
    (iii) The nature and complexity of products and services offered 
(likewise, the products and services offered should not pose special 
risks or otherwise warrant on-site supervision);
    (iv) The volume of business done (e.g., annual revenues, number of 
transactions, number of customers, etc. Locations with high activity 
levels would generally be deemed more likely to require an on-site 
manager);
    (v) The adequacy of procedures to supervise the limited purpose 
office activities; and
    (vi) The adequacy and independence of systems and supervisory 
persons for regular and ``for cause'' internal and third party 
inspections and audits.\6\
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    \6\ See also NYSE Info Memo 04-38 regarding independence of 
supervision and internal controls.
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    With respect to factors (v) and (vi) above, the Exchange expects 
members and member organizations to present a system of supervision and 
control

[[Page 61674]]

reasonably designed to detect and prevent regulatory violations and 
which otherwise meets the requirements of NYSE Rule 342. Such a system 
should include, but is not limited to, the following elements, where 
applicable: (1) Clearly articulated policies and procedures, and 
sufficient resources to implement them; (2) systematic monitoring of 
activity using routine and exception reporting criteria; (3) an 
appropriate system of follow-up and review if ``red flags'' are 
detected, and mechanisms for verifying that deficiencies are corrected; 
(4) routine and ``for cause'' inspections, including possible use of 
unannounced surprise inspections; (5) offsite monitoring of trading, 
handling of funds, and use of personal computers; (6) adequate 
designation of supervisors and clearly delineated supervisory 
responsibilities, including a system of review and follow-up to ensure 
that such supervision is sufficiently independent and is diligently 
exercised; (7) monitoring of outside business activities and outside 
accounts; (8) monitoring and surveillance of internal and external 
communications; and (9) the education and training of RRs and their 
supervisors to ensure they understand their responsibilities under the 
firm's procedures and all applicable securities laws.
    In addition to the elements enumerated above, members and member 
organizations should also take into consideration relevant guidance 
provided by the Exchange and other regulatory bodies when developing 
their supervisory plan for a proposed limited purpose office.\7\
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    \7\ See, e.g., NYSE Info Memo 04-38 (Amendments to Rules 342, 
401, 408 and 410 Relating to Supervision and Internal Controls) 
(July 26, 2004); SEC Division of Market Regulation Staff Legal 
Bulletin No. 17: Remote Office Supervision (March 19, 2004).
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    All of the above factors will be considered as a whole to determine 
whether an application for limited purpose office status should be 
granted. However, any one factor could cause an application to be 
delayed or rejected by the Exchange if it raises a substantive issue 
with respect to the appropriateness or advisability of a remote 
supervisory arrangement. If an application for limited purpose office 
status encompasses more than one office, pursuant to a categorical 
description or plan, the member organization must submit the proposed 
list of prospective offices so as to disclose the scope of the request.
    Members and member organizations will be responsible for 
maintaining a readily available, current and accurate list of all 
locations either specifically approved and designated by the Exchange 
as a limited purpose office, or otherwise designated as such pursuant 
to a general categorical description or plan approved by the Exchange. 
Further, any material change with respect to the representations made 
by any member or member organization pursuant to this Interpretation 
with respect to any location so approved and designated must be 
promptly brought to the attention of the Exchange for reconsideration.
2. Statutory Basis
    The basis for the proposed rule change is the requirement under 
Section 6(b)(5) \8\ of the Exchange Act that the rules of the Exchange 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and, in general to 
protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is 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-2004-51 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-2004-51. 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, 100 F Street, 
NE., Washington, DC 20549. 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-2004-51 and should be 
submitted on or before November 15, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5879 Filed 10-24-05; 8:45 am]
BILLING CODE 8010-01-P