[Federal Register Volume 62, Number 10 (Wednesday, January 15, 1997)]
[Notices]
[Pages 2200-2202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-902]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38140; File No. SR-Amex-96-34]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the American Stock Exchange, Inc., Relating to Independent 
Contractors

January 8, 1997.

I. Introduction

    On September 27, 1996, the American Stock Exchange, Inc. (``Amex'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder.\2\ The proposal adopts Exchange Rule 341B, 
``Independent Contractors,'' which provides that the Amex will not 
object to the assertion of independent contractor status by a natural 
person who is a (i) registered representative, (ii) securities lending 
representative, or (iii) securities trader if such status will not 
preclude his or her characterization and treatment as an employee for 
purposes of the Constitution and rules of the Amex.\3\
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-(4) (1996).
    \3\ On October 2, 1996, the Amex amended its proposal to submit 
the proposal pursuant to Section 19(b)(2) under Act. See Letter from 
Claudia Crowley, Special Counsel, Legal and Regulatory Policy, Amex, 
to Katherine England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated October 2, 1996 
(``Amendment No. 1''). On October 23, 1996, the Amex amended its 
proposal to eliminate inconsistencies between Amex Rule 341(a) and 
Amex Rule 341, Commentary .01. See Letter from Claudia Crowley, 
Special Counsel, Legal and Regulatory Policy, Amex, to Katherine 
England, Assistant Director, Division, Commission, dated October 23, 
1996 (``Amendment No. 2''). Specifically, Amendment No. 2 deletes 
language indicating that only officers of a member must be approved 
and provides that registered representatives, securities lending 
representatives, securities traders, and direct supervisors of those 
persons must be registered and approved. Amendment No. 2 also 
includes a technical change which clarifies proposed Amex Rule 341B, 
``Independent Contractors.'' On October 24, 1996, the Exchange 
replaced an incorrect reference to Amex Rule 342 with a reference to 
Amex Rule 320. See Letter from Claudia Crowley, Special Counsel, 
Legal and Regulatory Policy, Amex, to Yvonne Fraticelli, Attorney, 
Division, Commission, dated October 24, 1996 (``Amendment No. 3'').
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    Notice of the proposed rule change and Amendment Nos. 1, 2, and 3 
to the proposed rule change were published for comment in the Federal 
Register on November 5, 1996.\4\ No comments were received on the 
proposal. This order approves the proposed rule change, as amended.
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    \4\ Securities Exchange Act Release No. 37884 (October 29, 
1996), 61 FR 56981.
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II. Description of the Proposal

    According to the Amex, several member organizations recently have 
begun to utilize independent contractors to perform duties 
traditionally performed by registered employees. To date, the Exchange 
has required member organizations who utilize independent contractors 
to provide a written acknowledgement that the member organization will 
supervise and otherwise be responsible for the independent contractor 
in the same manner as if he were an employee. In order to clarify the 
Exchange's requirements and to ensure that independent contractors are 
appropriately subject to the Exchange's jurisdiction, the Amex proposes 
to adopt new Exchange Rule 341B.
    Proposed Amex Rule 341B provides that the Amex will not object to 
the assertion of independent contractor status by a natural person who 
is a (i) registered representatives, (ii) securities lending 
representative, or (iii) securities trader if such status will not 
preclude his or her characterization and treatment as an employee for 
purposes of the Constitution and rules of the Amex. Under the proposal, 
the natural person asserting independent contractor status and the 
member organization must agree that the natural person is subject to 
the organization's direct, detailed supervision, control and discipline 
and, if required by Amex Rule 330, ``Fidelity Bonds,'' is covered by 
its fidelity bond. Once a member organization approves a registered 
person's independent contractor status, the following conditions must 
be satisfied:

    <bullet> The member organization provides written assurances to the 
Exchange that it will supervise and control all activities of the 
independent contractor effected on its behalf, to the same degree

[[Page 2201]]

and extent that it regulates the activities of all other registered 
persons and in a manner consistent with Amex Rule 320, ``Offices--
Approval, Supervision, and Control;'' \5\
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    \5\ See Amendment No. 3, supra note 3.
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    <bullet> The member organization submits to the Exchange a copy of 
a written agreement between the independent contractor and the member 
organization which provides that the independent contractor will engage 
in securities related activities solely on behalf of the member 
organization (except as otherwise explicitly may be permitted by the 
member organization in writing), that such securities related 
activities will be subject to the direct detailed supervision, control 
and discipline of the member organization, that such person is not 
subject to a statutory disqualification as defined in Section 3(a)(39) 
of the Act, and that nothing therein will negate any of the foregoing;
    <bullet> The independent contractor agrees in writing to be subject 
to the Exchange's jurisdiction; and
    <bullet> The member organization provides the Exchange with 
assurances that, if required by Amex Rule 330, the independent 
contractor is covered by the organization's fidelity insurance and is 
in compliance with applicable state Blue Sky provisions.\6\

    \6\ The Amex notes that these requirements do not apply to the 
traditional practice of a firm using an independent floor broker to 
execute a transaction on the floor of the Amex.
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    Written notice of the cessation of independent contractor status 
must be given to the Amex. Proposed Rule 341B does not apply to persons 
delegated supervisory functions (e.g., branch office manager, 
registered representative-in-charge), nor does it permit the 
incorporation of a registered persons. The Amex notes that the New York 
Stock Exchange (``NYSE'') has comparable requirements for independent 
contractors.\7\
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    \7\ See NYSE Interpretations and Guidance Handbook, 345(a)/02.
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    The Amex also proposes to amend Definition six, ``Registered 
Employee,'' to provide a definition for ``Registered Person.'' Under 
Definition six, as amended, a registered person will mean not only a 
branch office manager or a registered representative, but also a 
securities lending representative, a securities trader, and a direct 
supervisor of a securities lending representative or a securities 
trader.
    In addition, the Amex proposes a amend Amex Rule 340, Commentary 
.03, to require that a securities lending representative and his or her 
direct supervisor must pass any applicable qualification 
examination.\8\
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    \8\ Currently, there is no qualification exam for securities 
lending representatives.
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    The Amex proposes to amend Exchange Rule 341 to require that 
securities traders and securities lending representatives \9\ (and 
their direct supervisors), as well as registered representatives, must 
be registered with and approved by the Exchange and, as applicable, 
must pass a qualification examination acceptable to the Exchange. Amex 
Rule 341, Commentary .01, as amended, will provide that a natural 
person who is an independent contractor and who performs the duties of 
a registered representative, securities lending representatives, or 
securities trader is subject to Amex Rule 341.
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    \9\ Exchange Rule 341, as amended, defines a securities lending 
representatives as a person who has the discretion to commit a 
member or member organization with which he is associated to any 
contract or agreement involving securities lending or borrowing 
activities with any other person. Amex Rule 341, as amended, defines 
a securities trader as any person engaged in the purchase or sale of 
securities or other similar instruments for the account of a member 
or member organization with which he is associated and who does not 
transact any business with the public. The Amex proposes amend 
definition six, ``Registered Employee,'' to provide that a 
``registered person'' will include a securities lending 
representative, a securities trader, and a direct supervisor of a 
securities lending representative or a securities trader, in 
addition to a branch officer manager or a registered representative.
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    The Amex believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and furthers the objectives of 
Sections 6(b)(5) and 6(b)(6), in particular, in that it is consistent 
with the Exchange's regulatory responsibilities and will promote just 
and equitable principles of trade and protect investors and the public 
interest.
III. Findings and Conclusion
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5) \10\ in that it is 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest.\11\ Specifically, 
proposed Amex Rule 341B will help to provide for adequate supervision 
of persons asserting independent contractor status by requiring members 
to provide direct, detailed supervision, control and discipline of 
independent contractions.\12\ In addition, the proposed amendments to 
Amex Rules 340 and 341 will help the Amex to monitor securities traders 
and securities lending representatives, as well as direct supervisors 
of registered representatives, securities traders, and securities 
lending representatives, by requiring such persons to register with and 
be qualified and approved by the Amex.
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    \10\ 15 U.S.C. 78f(b)(5) (1988).
    \11\ In approving this rule, the Commission has considered the 
proposed rule's impact an efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \12\ In 1982, the Division issued a letter restating the 
Division's policy toward independent contractors. See Letter from 
Douglas Scarff, Director, Division, Commission, to Gordon S. 
Macklin, President, National Association of Securities Dealers, 
Inc., dated June 18, 1982 (``1982 Letter''). In its 1982 Letter, the 
Division noted that the Act requires that a person selling 
securities be registered with the Commission as a broker-dealer 
under Section 15(a) unless he is an associated person as defined in 
Section 3(a)(18) of the Act. With regard to securities salespersons 
designated as independent contractors, the Division stated that 
unless an independent contractors's activities are subject to 
control by the broker-dealer within the scope of Section 3(a)(18) of 
the Act, the salesperson must be registered individually as a 
broker-dealer. The Division noted that an independent contractor 
salesperson whose activities are subject to control by a broker-
dealer must be registered with a self-regulatory organization and 
should be covered by the employer broker-dealer's fidelity bond. 
Finally, the Division stated that a firm a responsible for ensuring 
either that an independent contractor is registered as a broker-
dealer or assuming the supervisory responsibilities attendant to a 
relationship with an associated person. The Commission believes that 
the Amex's proposal is consistent with the 1982 Letter.
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    According to the Amex, several member organizations recently have 
begun to utilize independent contractors to perform duties 
traditionally performed by registered employees. To date, the Exchange 
has required member organizations who utilize independent contractors 
to provide a written acknowledgment that the member organization will 
supervise and otherwise be responsible for the independent contractor, 
in the same manner as if he were an employee. This position is 
consistent with the 1982 Letter. The Commission believes that the 
proposal will protect investors and the public interest by codifying 
the Amex's policies governing supervision of independent contractors in 
new Amex Rule 341B. In addition, the Commission believes that Amex Rule 
341B will facilitate compliance with the Exchange's rules and the 
federal securities laws by providing a clear statement of the Amex's 
policy regarding supervision of independent contractors and by 
requiring members to provide direct, detailed supervision, control and 
discipline of independent contractors.
    Amex Rule 341B provides that the Amex will not object to the 
assertion of independent contractor status by a

[[Page 2202]]

natural person who is a (i) registered representative, (ii) securities 
lending representative, or (iii) securities trader if such status will 
not preclude his or her characterization and treatment as an employee 
for purposes of the Constitution and rules of the Amex.\13\ The 
independent contractor and the member must agree that the independent 
contractor is subject to the member's direct, detailed supervision, 
control and discipline. In addition, Amex Rule 341B requires a member 
to assure the Exchange in writing that it will supervise and control 
all activities of the independent contractor effected on the member's 
behalf to the same degree and extent that it regulates the activities 
of all other registered persons and in a manner consistent with Amex 
Rule 320.
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    \13\ As noted above, only a natural person who is a registered 
representative, securities trader or securities lending 
representative may assert independent contractor status. Telephone 
conversation between Claudia Crowley, Special Counsel, Legal and 
Regulatory Policy, Amex, and Yvonne Fraticelli, Attorney, OMS, 
Division, Commission, on December 6, 1996. Persons with supervisory 
functions may not assert independent contractor status. In addition, 
Amex Rule 341B does not permit the incorporation of registered 
persons.
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    Amex Rule 341B further provides for supervision of independent 
contractors by requiring the member to submit to the Amex a copy of a 
written agreement between the member and the independent contractor 
which provides that: (1) The independent contractor will engage in 
securities related activities solely on the member's behalf (except as 
otherwise permitted by the member); (2) the independent contractor's 
securities related activities will be subject to the direct, detailed 
supervision, control and discipline of the member; and (3) the 
independent contractor is not subject to a statutory disqualification, 
as defined in Section 3(a)(39) of the Act. In addition, the proposal 
requires a member to assure the Exchange that, if required by Amex Rule 
330, the individual is covered by the organization's fidelity insurance 
and has complied with applicable state Blue Sky provisions. Amex Rule 
341B also requires an independent contractor to subject himself to the 
Amex's jurisdiction.\14\
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    \14\ Registered persons submit to the authority of the 
organizations to which they apply for registration on the Uniform 
Application for Securities Industry Registration or Transfer (``Form 
U-4''). Accordingly, the independent contractors discussed in the 
proposal become subject to the Amex's jurisdiction when they apply 
for registration with the Exchange.
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    The Commission believes that these requirements should help to 
ensure that members employ qualified persons as independent contractors 
and provide adequate supervision of their securities related 
activities, as required by the Act. In addition, Amex Rule 341B will 
make clear to independent contractors that they are subject to the 
Amex's jurisdiction and, accordingly, are subject to disciplinary 
proceedings by the Amex for violations of the Exchange's rules. The 
Commission also believes that the provision requiring an independent 
contractor to be covered by the member's fidelity insurance, if 
required under Amex Rule 330, will help to protect the member against 
losses resulting from dishonesty by an independent contractor and is 
consistent with the proposal's general requirement that independent 
contractors be treated as employees for purposes of the Exchange's 
Constitution and rules. The Commission notes that the provisions of 
Amex Rule 341B are similar to the NYSE's requirements for independent 
contractors.\15\
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    \15\ See note 7, supra.
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    The Commission finds that the proposed amendments to Amex Rules 340 
and 341 are appropriate and consistent with the Act. Specifically, the 
Commission believes that the proposed amendments to Amex Rule 341 
requiring securities lending representatives and securities traders, as 
well as direct supervisors of registered representatives, securities 
lending representatives, or securities traders, to register with and be 
qualified and approved by the Amex will protect investors and the 
public interest by allowing the Amex to evaluate persons who seek to 
perform these functions.\16\
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    \16\ Registered representatives, securities traders, and 
securities lending representatives apply for registration with the 
Exchange through the Form U-4. To approve a registered 
representative, securities trader, securities lending 
representative, or his or her direct supervisor, the Amex reviews 
the Form U-4, which contains a registered person's disciplinary 
history and information concerning whether he or she is subject to a 
statutory disqualification as defined in Section 3(a)(39) of the 
Act. The Amex also reviews the Form U-4 to determine whether another 
exchange has approved or rejected the registered person's 
application to register with that exchange. Telephone conversation 
between Robert Klein, Managing Director, Membership Services, Amex, 
and Yvonne Fraticelli, Attorney, OMS, Division, Commission, on 
December 6, 1996.
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    The Commission believes, as it has concluded previously, that it is 
consistent with the Amex's regulatory responsibility to monitor the 
activities of securities traders and securities lending 
representatives.\17\ In addition, the Commission continues to believe 
that requiring securities lenders and securities traders to register 
with the Amex and assuring that they have adequate qualifications 
ultimately will protect investors and the public interest. The 
Commission believes that the proposal also protects investors by 
applying Amex Rule 341 to an independent contractor who performs the 
duties normally performed by a registered representative, securities 
lending representative, or a securities trader.
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    \17\ See Securities Exchange Act Release No. 25312 (February 4, 
1988), 53 FR 4089 (February 11, 1988) (order approving File No. SR-
NYSE-86-22).
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    Finally, the Commission believes that the examination requirements 
contained in Amex Rule 340, Commentary .03, will help to ensure that 
only a person with an understanding of the applicable rules acts as a 
securities trader, securities lending representative, or as a direct 
supervisor of a securities trader or securities lending 
representative.\18\
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    \18\ As noted above, there currently is no qualification 
examination for securities lending representatives. The provision 
relating to securities lending representatives will apply if a 
qualification examination for securities lending representatives is 
developed.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Amex-96-34), as amended, is 
approved.

    \19\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-902 Filed 1-14-97; 8:45 am]
BILLING CODE 8010-01-M