Document ID: SEC-2005-0319-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2005-12-05T05:00Z

[Federal Register: December 5, 2005 (Volume 70, Number 232)]
[Notices]               
[Page 72484-72486]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05de05-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52850; File No. SR-NYSE-2004-51]

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

November 29, 2005.

I. Introduction

    On September 3, 2004, the New York Stock Exchange, Inc. (``NYSE'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ 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 
(``RRs''). On September 28, 2005, the Exchange filed Amendment No. 1 to 
the proposed rule change, replacing the original filing in its 
entirety.\3\ The proposed rule change was published for comment in the 
Federal Register on October 25, 2005.\4\ The Commission received no 
comments regarding the proposal. This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 more fully describes the factors to be used 
in determining whether a location qualifies as a limited purpose 
office, as well as how those factors will be considered by the 
Exchange when examining an application for a limited purpose office 
status. The proposed rule change is described in its entirety in 
Section II below.
    \4\ See Securities Exchange Act Release No. 52640 (October 19, 
2005), 70 FR 61672 (October 25, 2005).
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II. Description of Proposed Rule Change

    Currently, except for ``small offices,'' \5\ all member and member 
organization branch offices are required to have an on-site qualified 
manager. According to the Exchange, member organizations with branch 
offices that have a limited scope of activities, but that do not meet 
the definition of ``small office'' under the Interpretation, have 
approached the

[[Page 72485]]

Exchange seeking relief from the requirement that such offices have a 
qualified branch office manager on-site. The Exchange explains that 
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. In 
fact, many banks and insurance companies with broker-dealer alliances 
or affiliates often ``dually employ'' their personnel with the 
registered broker-dealer. Because the dually employed persons often 
primarily conduct business (e.g., banking and insurance) other than 
broker or dealer activities, they typically physically remain on bank 
and insurance company premises. However, because they are employees of 
the registered broker-dealer as well, the location is considered a 
branch office pursuant to NYSE Rule 342 and must have an on-site 
qualified manager if more than three RRs are employed there.
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    \5\ The Interpretation of NYSE Rule 342.15 limits a small office 
to a total of three RRs. Small offices that serve an order-taking 
function only and have no operational facilities are not required to 
have a qualified manager on-site if they are under the close 
supervision of the main office or other designated branch offices. 
See NYSE Rule Interpretation 342.15/01-02. In addition, supervision 
and control procedures must be made part of the member's or member 
organization's written plan of supervision.
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    According to the Exchange, advances in technology have resulted in 
increasingly sophisticated surveillance capabilities that enable 
Exchange members and member organizations to more effectively supervise 
and control the business activities of their associated persons in 
branch offices from remote locations, such as another branch office or 
a firm's main office. For example, supervisors and firms use 
centralized communication networks to monitor their employees' 
activities and communication with customers, as well as the trading and 
handling of funds in customer accounts serviced in branch offices. The 
use of surveillance systems and exception reports that are linked to 
the broker-dealer's internal order management system further enhances 
this remote supervision.
    Given these surveillance and monitoring capabilities, and the 
often-limited scope of securities-related business activities conducted 
in many offices, the Exchange believes that the requirement to have an 
on-site qualified branch office manager may often be neither practical 
nor necessary for its members. Consequently, the Exchange re-examined 
its ``four-or-more'' standard for requiring on-site supervision, and 
proposed an alternative system for granting regulatory relief currently 
available only to small offices.
    The proposed rule change sets forth a process by which Exchange 
members and member organizations may seek a waiver of the on-site 
branch office manager requirement for ``limited purpose offices,'' 
which are a proposed new category of offices that have more than three 
RRs and conduct limited securities-related business activities. Under 
the proposed rule change, 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 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 that is reasonably designed to detect and prevent regulatory 
violations and that 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.
    In addition, 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 the proposed 
Interpretation

[[Page 72486]]

with respect to any location so approved and designated must be 
promptly brought to the attention of the Exchange for reconsideration.

III. Discussion and Findings

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to a national securities exchange.\8\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Exchange Act,\9\ which requires, 
among other things, that the rules of a national securities 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\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    According to the Exchange, many broker-dealer business models are 
becoming more reliant on offices of more than three RRs that service 
geographically isolated locations, but do not offer a full line of 
securities products and services. Given that the proposed safeguards 
are designed to promote effective supervisory procedures, the 
Commission believes it is reasonable for the Exchange to have more 
flexibility and discretion to determine whether a qualified on-site 
branch office manager is necessary for offices that engage in a limited 
scope of securities-related business activity. The Commission also 
believes that the proposed Interpretation strikes an appropriate 
balance between providing flexibility to the Exchange to accommodate 
the evolving business models of its members, while at the same time 
setting parameters to ensure that limited purpose offices will continue 
to be effectively supervised. To further ensure that such offices 
receive effective remote supervision, the Commission expects the 
Exchange to review plans of risk-based supervision and control for 
limited purpose offices and their implementation as part of the 
Exchange's regular examination of members and member organizations.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act \10\ that the proposed rule change (SR-NYSE-2004-51) be, 
and hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
Jonathan G. Katz,
Secretary.
[FR Doc. E5-6820 Filed 12-2-05; 8:45 am]

BILLING CODE 8010-01-P