«SECURITIES AND EXCHANGE COMMISSION (Release No. 34-56142; File No. SR-NYSE-2007-22) July 26, 2007 Self-Regulatory Organizations; New York Stock ...»
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-56142; File No. SR-NYSE-2007-22)
July 26, 2007
Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed
Rule Change and Amendment No. 1 Thereto Relating to the Harmonization of NYSE and
NASD Regulatory Standards, the Updating of Certain NYSE Terminology, and the
Reorganization and Clarification of Certain NYSE Rules in Connection with the Harmonization
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),1 and Rule 19b-4 thereunder,2 notice is hereby given that on February 27, 2007, the New York Stock Exchange LLC (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Exchange. On July 26, 2007, NYSE filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.
I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of amendments to NYSE rules, organized categorically, that would advance the process of harmonizing the regulatory standards of the Exchange and the National Association of Securities Dealers, Inc. (“NASD”). In addition, the proposed rule change would update certain terminology and otherwise reorganize and clarify current NYSE regulatory standards. The text of the proposed rule change is available on the Exchange’s Web site (www.nyse.com), at the principal office of the Exchange, and at the Commission’s Public Reference Room.
1 15 U.S.C 78s(b)(1).
2 17 CFR 240.19b-4.
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 NYSE 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 NYSE 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange is proposing amendments to certain NYSE Rules pursuant to its SRO Rule Harmonization initiative. In connection with this filing, the Exchange is also separately submitting to the Commission a report that provides an overview of the Exchange’s approach in this regard.
Introduction Relative to the approval of the NYSE/ARCA merger,3 the Exchange agreed to initiate a comparison of its regulatory requirements (as prescribed by the NYSE Rulebook and associated interpretive materials) to corresponding NASD regulatory provisions. The purpose of the process was to achieve, to the extent practicable,4 substantive harmonization of the two regulatory schemes. To that end, this filing proposes amendments to an extensive range of NYSE rules which have been divided into four categories. In addition to organizing the rules 3 See Securities Exchange Act Release No. 53382 (February 27, 2006) 71 FR 11251 (March 6, 2006) (order approving SR-NYSE-2005-77).
4 The review process recognized the appropriateness of differing standards based upon the differences between the markets and membership of NYSE and NASD.
2 conceptually, this serves to distinguish the review and recommendation process that has been applied to each category, discussed more fully below.
The categories are arranged as follows: Category 1 addresses Member Firm Organization/Structure and Governance; Supervision; Registration, Qualification and Continuing Education; and Sales Practice (collectively, the “Sales Practice Rules”); Category 2 addresses the Financial/Operational Rules; Category 3 addresses the Buy-In Rules; and Category 4 addresses the selective deletion of the term “member” and the complete deletion of the term “allied member” from the NYSE rules (“Member” and “Allied Member” Rules).
Category 4 includes rules for which the only substantive proposed change is deletion of the terms “member” and/or “allied member.” Note, however, that the selective deletion of the term “member” and the complete deletion of the term “allied member” is proposed throughout the other three categories as well.
These amendments are discussed more fully below under Category 4 (“Member” and “Allied Member” Rules). In brief, the Exchange is proposing to delete, where appropriate, the term “member” throughout the NYSE rules to reflect its revised meaning in light of the recent merger/reorganization of the Exchange. While “member” is still recognized as a categorical designation, its current definition5 is substantively different from its pre-merger definition, rendering its use in many NYSE rules outdated. Thus, many regulatory requirements that once pertained specifically to NYSE members no longer apply at all, or apply to members only in their capacity as member organization employees.
5 The term “member” currently refers to an employee of a member organization authorized to effect transactions on the Floor of the Exchange on behalf of such member organization, which holds a license to so trade.
3 The “allied member” designation is a regulatory category based on a person’s “control” over a member organization.6 It is proposed that the term be simply deleted in rules where a person’s control status is not relevant to the rule’s application. In contexts where an individual’s status as a member organization “control person” has regulatory relevance, the Exchange proposes to substitute the newly defined category of “principal executive” (see proposed Rule 416A amendments, below). Unlike the “allied member” designation, the “principal executive” designation would not require a registration process, but would be used only for regulatory reporting and notification purposes.
In order to initiate the rule harmonization process, the Exchange enlisted, through its Compliance Advisory Group (“CAG”),7 the assistance of several securities industry regulatory professionals from member organizations who volunteered to participate in various subcommittees in order to conduct an initial review of all relevant materials and to report their findings and recommendations to the Exchange and the NASD (collectively, the “SROs”). The SROs were charged with the responsibility of considering the appropriateness of the committees’ recommendations and working together to amend their respective rules accordingly.
The review process formally began in February 2006 when the Exchange’s Member Firm Regulation (“MFR”) Division, in conjunction with the CAG, organized four 6 See subsection (b) of NYSE Rule 304 (“Allied Members and Approved Persons”).
7 The Exchange’s Compliance Advisory Group is a committee consisting of representatives from the Exchange Member Firm Regulation Division as well as legal and compliance personnel from a cross-section of the NYSE member organization community. CAG meets on a periodic basis, generally monthly, to discuss regulatory and compliance matters of interest to the securities industry.
4 subcommittees and assigned each a group of rules within a specified regulatory category. The following four subcommittees were thus established: (1) Member Firm Organization/Structure and Governance; (2) Supervision; (3) Registration, Qualification and Continuing Education; and (4) Sales Practice. Representatives from the Exchange, the NASD, and the Securities Industry Association (“SIA”)8 participated throughout this review process in a consultative role.9 The recommendations that resulted from these subcommittees’ comparison of NYSE and NASD rules are, in large part, the basis for the Category 1 amendment proposals presented herein.
The subcommittee review process essentially consisted of identifying inconsistencies between the NYSE rules and the NASD rules, determining which SRO standard made more regulatory sense, and then recommending rule changes that would either conform an NYSE standard to its NASD counterpart or vice versa. In some instances, the subcommittees recommended a hybrid approach that included amendments to corresponding rules of both SROs.
Each of the recommendations has been reviewed with the CAG Group and the NASD.
These subsequent discussions allowed further exploration of the issues raised by the subcommittees and provided a better sense for which recommendations clearly warrant redress via the formal rule amendment process and which require further consideration.10 8 Note that SIA has since combined with the Bond Market Association to form the Securities Industry and Financial Markets Association (“SIFMA”).
9 NASD did not participate in the Member Firm Organization/Structure and Governance Subcommittee.
10 See NYSE Report submitted in conjunction with this filing for a further discussion and enumeration of such rules.
5 The Exchange has also taken the opportunity, where appropriate, to reorganize and clarify rule text related to the subcommittees’ recommendations and to otherwise update, refine and clarify its regulatory standards.
Rule 311 Formation of Member Organizations NYSE Rule 311 governs the formation and approval of member organizations by the Exchange. The proposed amendments to Rule 311(b) would extend the application of the rule, which currently addresses partnerships and corporations, to include any type of entity (e.g., a limited liability company) applying to the Exchange to become a member organization.
The proposed amendments would delete subsection (b)(7) of Rule 311 which requires every employee who is associated as a member with a member organization to be designated with a title, such as vice president, consistent with such person’s responsibilities and the usage of titles within such organization. Additionally, the amendments propose the deletion of subsection (h) which prescribes the number of partners to be named in a member organization in order for it to conduct business. These two provisions are being deleted as they are outdated and no longer necessary in light of the current spectrum of NYSE member organizations business models.
Rule 313 Submission of Partnership Articles-Submission of Corporate Documents NYSE Rule 313 requires member organizations to submit to the Exchange for approval certain documents which establish a partnership’s or corporation’s existence. The proposed amendments to Rule 313 add limited liability agreements to the enumeration of documents required to be submitted to and approved by the NYSE in order for an entity to be a member organization. The proposed amendments to Rule 313 also amend.23 of the supplementary material to provide that all corporations, not just those organized under the laws of the State of New York, shall subject themselves to the restrictions set forth in.23.
6 Rule 322 (Guarantees by, or Flow Through Benefits for Members or Member Organizations) Rule 322.10 currently requires each member organization to provide written notice to the Exchange prior to: (1) guaranteeing, endorsing or assuming, directly or indirectly, the obligations of another person or (2) receiving flow-through capital benefits. The practice by member organizations of guaranteeing the liabilities of other persons has long been recognized as a matter that gives rise to special risks with respect to the member organization’s capital.
Accordingly, as a matter of practice, the Exchange has carefully reviewed and vetted such submissions such that the “prior notice” requirement has effectively been treated as a “prior approval” requirement.
The proposed amendments would codify this well-established approach by replacing the present requirement that “notice” of at least 10 business days be given to the Exchange prior to entering into an arrangement prescribed by the rule with an explicit requirement that written Exchange approval be obtained prior to the finalization of any such arrangement.
The NASD does not currently have an analogue to Rule 322. The Member Firm Organization/Structure and Governance Subcommittee recommended that NASD adopt a similar rule and NASD has taken the recommendation under advisement.
Rule 342 (Offices – Approval, Supervision and Control) and its Interpretation Rule 342.13 - Acceptability of Supervisors NYSE Rule 342.13(a) currently requires that persons who are to be assigned certain prescribed supervisory responsibilities11 have a “creditable” three year record as a registered 11 In this regard, Rule 342.13(a) references Rule 342(d) which requires that “[q]ualified persons acceptable to the Exchange shall be in charge of: (1) any office of a member or member organization, (2) any regional or other group of offices, (3) any sales department or activity.” 7 representative or have three years of “equivalent experience” before functioning as a supervisor.12 The Exchange proposes that Rule 342.13(a) be amended to eliminate the prescribed three-year experience requirement for supervisory personnel and conform with the standard outlined in NASD Rule 1014(a)(10)(D) with respect to firms that are submitting an application to become registered as a broker dealer. In addition, as under NASD 1014(a)(10)(D), the proposed amendments would require that supervisory candidates have one year of “direct experience” or two years of “related experience” in the subject area to be supervised.
With respect to existing broker dealers, the Exchange believes that, given a member organizations’ first hand knowledge of their supervisory candidates, it is reasonable to provide greater flexibility than Rule 342.13(a) currently allows. Accordingly, the proposed amendments would allow member organizations to make informed determinations, on a caseby-case basis, as to the length and type of experience and training required for each supervisory candidate before he or she is deemed sufficiently prepared to assume particular responsibilities.