Document ID: SEC-2005-0191-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2005-11-03T05:00Z

[Federal Register: November 3, 2005 (Volume 70, Number 212)]
[Notices]               
[Page 66882-66885]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03no05-96]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52685; File No. SR-NYSE-2005-17]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto To Amend NYSE Rule 472 (``Communications With the Public'')

October 26, 2005.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Exchange Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is 
hereby given that on February 15, 2005, 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 August 12, 2005, the NYSE submitted 
Amendment No. 1 to the proposed rule change.\4\ On October 19, 2005, 
the NYSE submitted Amendment No. 2 to the proposed rule change.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ Amendment No. 1 clarifies the proposal and includes 
additional information on the use of the term ``Qualified 
Investor.''
    \5\ Amendment No. 2 to the proposed rule change makes a 
technical amendment to the filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Commission a proposed amendment to 
NYSE Rule 472, which will exempt certain communications with the public 
from the pre-use review and approval requirement. Below is the text of 
the proposed rule change. Proposed new language is italicized; proposed 
deletions are in [brackets].

Rule 472

Communications With the Public
Approval of Communications and Research Reports
    (a)(1) Except for institutional sales material, [E]each 
advertisement[,] and market letter, and all sales literature or other 
similar type of communication which is generally distributed or made 
available by a member or member organization to customers or the public 
must be approved in advance by a member, allied member, supervisory

[[Page 66883]]

analyst, or qualified person designated under the provisions of Rule 
342(b)(1). All communications with the public are subject to the 
standards set forth under Rule 342.17.
    (2)(A) Written policies and procedures relating to institutional 
sales material are required. Such policies and procedures must include 
a risk-based system to conduct ``spot-check'' reviews of institutional 
sales material, prior to distribution or within a reasonable period of 
time thereafter, for compliance with Rule 472. Factors to be considered 
in conducting such risk-based reviews must include, at minimum, i) the 
source of the material (i.e., the department from which the material 
originates); ii) the functions and responsibilities of persons 
producing the material; iii) the quantity of material produced per 
person; iv) the disciplinary history of persons producing the material; 
v) the content of the material; and vi) the formatting of the material.
    (B) The materials selected must be reviewed to determine, at 
minimum: i) Whether they qualify as institutional sales material 
pursuant to Rule 472 Supplementary Material .10(6); ii) whether the 
material gives rise to any conflicts of interest; and iii) whether the 
material complies with the content standards of Rule 472(i).
    [(2)] (3) Research reports must be prepared or approved, in 
advance, by a supervisory analyst acceptable to the Exchange under the 
provisions of Rule 344. Where a supervisory analyst does not have 
technical expertise in a particular product area, the basic analysis 
contained in such report may be co-approved by a product specialist 
designated by the organization. In the event that the member 
organization has no principal or employee qualified with the Exchange 
to approve such material, it must be approved by a qualified 
supervisory analyst in another member organization by arrangement 
between the two member organizations.
    (b)(1) through (k)(3) UNCHANGED
    Supplementary Material: * * *
.10 Definitions
    (1) Communication--The term ``Communication'' is deemed to include, 
but is not limited to advertisements, market letters, research reports, 
sales literature, electronic communications, communications in and with 
the press and wires and memoranda to branch offices or correspondent 
firms which are shown or distributed to customers or the public.
    (2) Research Report--``Research report'' is generally defined as a 
written or electronic communication which includes an analysis of 
equity securities of individual companies or industries, and provides 
information reasonably sufficient upon which to base an investment 
decision.

For purposes of approval by a supervisory analyst pursuant to Rule 
472(a)[(2)](3), the term research report includes but is not limited 
to, a report which recommends equity securities, derivatives of such 
securities, including options, debt and other types of fixed income 
securities, single stock futures products, and other investment 
vehicles subject to market risk.
    (3) Advertisement--``Advertisement'' is defined to include, but is 
not limited to, any sales communications that is published, or designed 
for use in any print, electronic or other public media such as 
newspapers, periodicals, magazines, radio, television, telephone 
recordings, web sites, motion pictures, audio or video device, 
telecommunications device, billboards or signs.
    (4) Market Letters--``Market Letters'' are defined as, but are not 
limited to, any written comments on market conditions, individual 
securities, or other investment vehicles that are not defined as 
research reports. They also may include ``follow-ups'' to research 
reports and articles prepared by members or member organizations which 
appear in newspapers and periodicals.
    (5) Sales literature--``Sales literature'' is defined as, but is 
not limited to, written or electronic communications including, but not 
limited to, telemarketing scripts, performance reports or summaries, 
form letters, seminar texts, and press releases discussing or promoting 
the products, services, and facilities offered by a member or member 
organization, the role of investment in an individual's overall 
financial plan, or other material calling attention to any other 
communication.
    (6) Institutional Sales Material--For purposes of Rule 472, the 
term ``institutional sales material'' includes any communication, other 
than ``research reports'' and ``advertisements'' as those terms are 
defined in Supplementary Material section .10 (2) and .10(3) 
respectively, that is distributed or made available only to ``Qualified 
Investors'' as defined in section 3(a)(54) of the Securities Exchange 
Act of 1934, as amended. A member or member organization may not treat 
a communication as having been distributed or made available only to 
Qualified Investors if such member or member organization has reason to 
believe that the communication, or any excerpt thereof, will be 
forwarded or made available to any person other than a Qualified 
Investor.
.20 through .120 UNCHANGED

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
    The Exchange is proposing an amendment to NYSE Rule 472, which will 
exempt certain communications with the public provided to institutional 
investors from the pre-use review and approval requirement.
    Exchange Rule 472 (``Communications with the Public'') prescribes 
supervisory standards for several types of communications. It currently 
requires that all market letters, advertisements, sales literature and 
similar communications be approved in advance by a member, allied 
member, supervisory analyst, or qualified person designated under the 
provisions of NYSE Rule 342(b)(1). Communications deemed to be research 
reports must be prepared or approved, in advance, by a supervisory 
analyst acceptable to the Exchange under the provisions of NYSE Rule 
344 (``Research Analysts and Supervisory Analysts'') (see NYSE Rule 
472.10 for definitions of types of communications).
    The proposed amendment would exempt communications, except 
advertising and research reports, from prior-approval requirements if 
they are directed only to ``Qualified Investors,'' as that term is 
defined under Section 3(a)(54) \6\ of the Exchange Act. The exempted 
communications are defined as ``institutional sales material.''
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    \6\ 15 U.S.C. 78c(a)(54).
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    According to the NYSE, the Qualified Investor standard was chosen 
because it is an established definition, readily recognized in the 
securities industry, that encompasses what are generally

[[Page 66884]]

understood to be ``sophisticated'' investors.\7\ Although it includes 
certain individuals (natural persons), they are subject to a higher 
financial standard (any natural person who owns and invests on a 
discretionary basis, not less than $25,000,000 in investments) than an 
``Accredited Investor'' (natural persons with net worth of $1,000,000 
or $200,000 annual income) defined under Rules 215(e) and (f) \8\ of 
the Securities Act of 1933 (the ``Securities Act'') \9\ or a 
``Qualified Purchaser'' (natural person who owns not less than 
$5,000,000 in investments) under Section 2(a)(51) the Investment 
Company Act of 1940.\10\
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    \7\ Exchange Act Section 3(a)(54) expressly defines the term 
``qualified investor,'' and provides authority to the Commission by 
rule or order to expand the definition to include any other person, 
taking into consideration such factors as the person's financial 
sophistication, net worth, and knowledge and experience in financial 
matters. Subsection (xi) of Section 3(a)(54)(A) provides that ``any 
corporation, company, or partnership that owns and invests on a 
discretionary basis, not less than $25,000,000 in investments'' is a 
qualified investor. The Commission interpreted the term ``company'' 
as used in this subsection to have a broad meaning that encompasses 
any other type of entity not otherwise specifically listed in 
Section 3(a)(54). In addition, subsection (v) of Section 3(a)(54)(A) 
includes certain employee benefit plans within the definition of 
``qualified investor.'' The Commission clarified that any State 
sponsored employee benefit plan, or any other employee benefit plan, 
within the meaning of the Employee Retirement Income Security Act of 
1974, other than an individual retirement account, qualifies only if 
the investment decisions are made by a plan fiduciary, as defined in 
Section 3(21) of that Act, which is either a bank, savings and loan 
association, insurance company, or registered investment adviser. 
Section 3(a)(54) expressly limited the definition of ``qualified 
investor'' to these types of employee benefit plans, and the 
Commission's interpretation does not cover other types of employee 
benefit plans. See Release No. 47364 (February 13, 2003), 68 FR 8686 
(Feb. 24, 2003).
    \8\ 17 CFR 230.215(e) and (f).
    \9\ 15 U.S.C. 77a.
    \10\ 15 U.S.C. 80a-2(a)(51).
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    According to the NYSE, the rationale for the proposed amendment is 
based on the fact that the types of communications to be exempted from 
pre-use review (primarily trader commentary, market ``color'' comments, 
and other spontaneous market-related communications) are provided as an 
ongoing, time-sensitive service to sophisticated investors. The NYSE 
believes that these types of communications are generally understood by 
such investors to be of-the-moment commentary, not to be confused with 
formalized, detailed, and prescriptive materials that would rise to the 
level of research. The NYSE notes that the following types of 
communications are illustrative of exempted communications (neither 
advertising nor research) addressed by the proposed amendment: \11\
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    \11\ See Joint Memorandum of NASD and the New York Stock 
Exchange (NYSE Information Memo Nos. 02-26, dated June 26, 2002 and 
04-10, dated March 9, 2004).
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     Summaries of, or commentary on economic, political or 
market conditions that do not recommend or rate individual securities.
     Notices of ratings or price target changes that do not 
contain any narrative discussion or analysis of the company, provided 
that the member or member organization simultaneously directs the 
readers of the notice as to where they may obtain the most recent 
research report on the subject company (such report would be subject to 
pre-distribution approval and would include disclosures required by 
NYSE Rule 472, including ``conflicts of interest'' disclosures).
     Information conveyed by trading desk representatives who 
evaluate and analyze trading conditions for the market as a whole or 
for particular market sectors. Such communications may include risk 
arbitrage opportunities such as the near-simultaneous buying and 
selling of the same or similar securities in different markets to 
profit on market price differentials.
    According to the NYSE, generally speaking, in order for the 
foregoing information to be effective it must be conveyed in a timely 
manner. Accordingly, virtually all such information is transmitted 
electronically. The NYSE believes that requiring item-by-item pre-use 
review undercuts the value that timeliness imparts to such 
communications. Further, the NYSE notes that given that the exempted 
materials do not provide information reasonably sufficient upon which 
to base an investment decision (in which case, they would be deemed 
research) a prior-approval requirement is unwarranted in light of the 
sophistication and financial wherewithal of the recipients.
    According to the NYSE, it is also noted that, unlike research 
analysts, the preparers (e.g., trading desk personnel) of these types 
of communications are not generally subject to the same risk of 
pressure from investment bankers that could bias or compromise the 
integrity of the material. Accordingly, the NYSE notes that research 
reports, which require disclosure of such potential conflicts of 
interest, remain subject to pre-use review and approval by a 
supervisory analyst, and include all potential conflict of interest 
disclosures required by NYSE Rule 472.
    According to the NYSE, the proposed amendment recognizes an 
essential distinction, reflected in federal securities laws, between 
protections afforded retail investors and certain designated 
institutional/sophisticated investors. In this regard, the NYSE 
believes that many of the disclosure/review requirements in connection 
with the registration, sale, and/or re-sale of securities to the 
public, are not statutorily required when such offerings do not involve 
a public offering (e.g., private placements made in accordance with 
Regulation D \12\ under the Securities Act) or are limited to 
institutional investors (e.g., re-sales made in accordance with Rules 
144 \13\ and 144A \14\ under the Securities Act). NYSE believes that 
the proposed amendment also recognizes a similar distinction found in 
the rules of other self-regulatory organizations.\15\
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    \12\ 17 CFR 230.501-508.
    \13\ 17 CFR 230.144.
    \14\ 17 CFR 230.144A.
    \15\ The Securities and Exchange Commission approved amendments 
to NASD Rule 2210 and approved new Rule 2211 which, inter alia, 
exclude all communications to institutional investors from NASD 
member pre-use approval, from NASD filing requirements, and from 
many of NASD's content standards. See Release No. 34-47820 (May 9, 
2003), 68 FR 27116 (May 19, 2003) (SR-NASD-00-12).
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    According to the NYSE, as a safeguard, the proposed amendment makes 
clear that ``institutional sales materials'' (i.e., those sales 
materials other than advertisements and research) remain fully subject 
to supervisory requirements prescribed by NYSE Rule 342.17 which 
include: Appropriate written policies and procedures; provision for the 
education and training of employees with respect to such policies and 
procedures; documentation of such education and training; and 
surveillance and follow-up to ensure that such policies and procedures 
are implemented and adhered to.
    Also, notwithstanding the proposed exemptions, the NYSE believes 
that all communications remain subject to the general standards for all 
communications under NYSE Rule 472(i) which prohibit: Any untrue 
statement or omission of a material fact; a statement that is false or 
misleading; promises of specific results; exaggerated or unwarranted 
claims; opinions for which there is no reasonable basis; and 
projections or forecasts of future events which are not clearly labeled 
as forecasts.
    The proposed amendment further requires written policies and 
procedures relating to institutional sales material that include a 
risk-based system to conduct ``spot-check'' reviews of such material, 
prior to distribution or within a reasonable period of time thereafter,

[[Page 66885]]

for compliance with NYSE Rule 472. According to the NYSE, factors to be 
considered in conducting a risk-based review of institutional sales 
material must include, at minimum:
    (1) The source of the material (i.e., the department from which the 
material originates to identify possible inter-departmental conflicts 
of interest); \16\
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    \16\ See NYSE Information Memo No. 91-22, dated June 28, 1991 
for joint NYSE/NASD guidance on ``Chinese Wall'' policies and 
procedures with respect to material, non-public information.
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    (2) The functions and responsibilities of persons producing the 
material (to identify persons with access to sensitive information);
    (3) The quantity of material produced per person (to concentrate on 
those persons issuing the most material);
    (4) The disciplinary history of persons producing the material (a 
disciplinary history might warrant pre-use review, or other regulatory 
action in some instances);
    (5) The content and formatting of the material, to determine 
whether it qualifies for post-distribution review as institutional 
sales material under NYSE Rule 472 Supplementary Material .10(6) (i.e., 
to determine that it is not research or advertising), and to review for 
conflicts of interest (e.g., recommendations of securities in which the 
author or the firm holds a proprietary position); and
    (6) Whether the material complies with the content standards of 
NYSE Rule 472(i).
    In sum, the Exchange believes the proposed amendment would expedite 
the transmission of time-sensitive market materials to sophisticated 
customers, while retaining appropriate supervisory controls, follow-up, 
and review.
    It is also proposed that paragraph 472(a)(2) be repositioned and 
renumbered 472(a)(3) and that the reference to this paragraph in 
472.10(2) be likewise amended to reflect the change. The NYSE believes 
that these are non-substantive amendments.

(2) Statutory Basis

    The statutory basis for this proposed rule change is Section 
6(b)(5) of the Exchange Act \17\ which requires, among other things, 
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 
interests. The proposed rule is consistent with this section in that it 
would expedite transmission of time sensitive communication to 
sophisticated investors while retaining appropriate controls, follow-
up, and review of such materials and persons.
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    \17\ 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:
    (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 (http://www.sec.gov/rules/sro.shtml.
); or     Send e-mail to rule-comments@sec.gov. Please include File 

Number SR-NYSE-2005-17 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-2005-17. 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 (http://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 NYSE. 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-2005-17 and should be submitted on or before 
November 25, 2005.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6094 Filed 11-2-05; 8:45 am]

BILLING CODE 8010-01-P