Document ID: SEC-2014-1978-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT LLC
Posted Date: 2014-11-25T05:00Z

[Federal Register Volume 79, Number 227 (Tuesday, November 25, 2014)]
[Notices]
[Pages 70237-70250]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27839]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73640; File No. SR-NYSEMKT-2014-93]

Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Its Rules 
Concerning Supervision To Harmonize the Rules With Certain Financial 
Industry Regulatory Authority, Inc. Rules and Making Other Conforming 
Changes

November 19, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 5, 2014, NYSE MKT LLC (``NYSE MKT'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or

[[Page 70238]]

``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been substantially prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. The Exchange has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under Rule 19b-4(f)(6) of the Act,\3\ which 
renders the proposal effective upon receipt of this filing by the 
Commission.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its NYSE MKT rules concerning 
supervision to harmonize the rules with certain Financial Industry 
Regulatory Authority, Inc. (``FINRA'') rules and make other conforming 
change. The text of the proposed rule change is available on the 
Exchange's Web site at www.nyse.com, at the principal office of the 
Exchange, and at 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 those 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 parts 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 proposes to amend its rules concerning supervision to 
harmonize them with certain FINRA rules and make other conforming 
changes. Set forth below are descriptions of the harmonization process, 
the current NYSE MKT rules, and the proposed NYSE MKT rules. 
Specifically, the Exchange proposes to: (1) Adopt new rule text that is 
substantially similar to FINRA Rules 3110, 3120, 3150, and 3170; (2) 
delete the following rules: Rule 342--Equities (except for certain text 
in Rule 342.13--Equities regarding qualifications and exam requirements 
for individuals with supervisory responsibilities), Rule 351(e)--
Equities, Rule 354--Equities, Rule 401--Equities, and Rule 401A--
Equities; and (3) make other conforming changes.\4\
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    \4\ References to rules are to NYSE MKT rules unless otherwise 
indicated.
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Background
    On July 30, 2007, FINRA's predecessor, the National Association of 
Securities Dealers, Inc. (``NASD''), and NYSE Regulation, Inc. 
(``NYSER'') consolidated their member firm regulation operations into a 
combined organization, FINRA. Pursuant to Rule 17d-2 under the Act, New 
York Stock Exchange LLC (``NYSE''), NYSER, and FINRA entered into an 
agreement (the ``Agreement'') to reduce regulatory duplication for 
their members by allocating to FINRA certain regulatory 
responsibilities for NYSE rules and rule interpretations (``FINRA 
Incorporated NYSE Rules'').\5\ The Exchange became a party to the 
Agreement effective December 15, 2008.\6\
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    \5\ See Exchange Act Release Nos. 56148 (Jul. 26, 2007), 72 FR 
42146 (Aug. 1, 2007) (File No. 4-544) (order approving the 
Agreement); 56147 (Jul. 26, 2007), 72 FR 42166 (Aug. 1, 2007) (SR-
NASD-2007-054) (order approving the incorporation of certain NYSE 
Rules as ``Common Rules'').
    \6\ See Exchange Act Release No. 60409 (Jul. 30, 2009), 74 FR 
39353 (Aug. 6, 2009) (File No. 4-587) (order approving the amended 
and restated Agreement, adding the Exchange as a party). Paragraph 
2(b) of the Agreement sets forth procedures regarding proposed 
changes by FINRA, NYSE or the Exchange to the substance of any of 
the Common Rules.
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    As part of its effort to reduce regulatory duplication and relieve 
firms that are members of FINRA, the Exchange, and NYSE of conflicting 
or unnecessary regulatory burdens, FINRA is now engaged in the process 
of reviewing and amending the NASD and FINRA Incorporated NYSE Rules in 
order to create a consolidated FINRA rulebook.\7\
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    \7\ FINRA's rulebook currently has three sets of rules: (1) NASD 
Rules, (2) FINRA Incorporated NYSE Rules, and (3) consolidated FINRA 
Rules. The FINRA Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''), while 
the consolidated FINRA Rules apply to all FINRA members. For more 
information about the FINRA rulebook consolidation process, see 
FINRA Information Notice, March 12, 2008.
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    FINRA recently harmonized NASD and FINRA Incorporated NYSE Rules 
and interpretations concerning supervision. More particularly, FINRA: 
(1) Adopted FINRA Rules 3110 and 3120 to largely replace NASD Rules 
3010 and 3012, respectively; (2) incorporated into FINRA Rule 3110 and 
its supplementary material the requirements of NASD IM-1000-4, NASD IM-
3010-1, FINRA Incorporated NYSE Rule 401A, and FINRA Incorporated NYSE 
Rule 342.21; (3) replaced NASD Rule 3010(b)(2) with new FINRA Rule 
3170; (4) replaced NASD Rule 3110(i) with new FINRA Rule 3150; and (5) 
deleted the following FINRA Incorporated NYSE Rules and NYSE Rule 
Interpretations: (i) NYSE Rule 342 and related NYSE Rule 
Interpretations; (ii) NYSE Rule 343 and related NYSE Rule 
Interpretations; (iii) NYSE Rule 351(e) and related NYSE Rule 
Interpretation; (iv) NYSE Rule 354; (v) NYSE Rule 401; and (vi) NYSE 
Rule 401A.\8\
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    \8\ See Exchange Act Release No. 71179 (Dec. 23, 2013), 78 FR 
79542 (Dec. 30, 2013) (SR-FINRA-2013-025).
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    FINRA has announced that the effective date for its rule change 
will be December 1, 2014. The Exchange proposes to make its proposed 
rule change effective on the same date as FINRA and will announce the 
effective date via an Information Memo.\9\
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    \9\ There is one exception. On April 22, 2014, the Commission 
issued an order approving proposed rule changes that coincided with 
related changes to Form BR. Specifically, the Exchange deleted Rule 
343--Equities, and FINRA deleted the related FINRA Incorporated NYSE 
Rule and NYSE Rule Interpretations. The proposed changes became 
effective as of April 7, 2014. See FINRA Regulatory Notices 14-10 
and 14-11 and Exchange Act Release No. 71988 (Apr. 22, 2014), 79 FR 
23393 (Apr. 28, 2014) (SR-NYSEMKT-2014-34). See also Exchange Act 
Release No. 73346 (Oct. 14, 2014), 79 FR 62693 (Oct. 20, 2014) (SR-
NYSEMKT-2014-88) (conforming amendments related to the deletion of 
NYSE MKT Rule 343--Equities).
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Current Supervision Rules
    Rule 342(a)--Equities requires each office, department or business 
activity of a member or member organization (including foreign 
incorporated branch offices) to be under the supervision and control of 
the member or member organization establishing it and of the personnel 
delegated such authority and responsibility. The person in charge of a 
group of employees must reasonably discharge his or her duties and 
obligations in connection with supervision and control of the 
activities of those employees related to the business of their employer 
and compliance with securities laws and regulations.
    Rule 342(b)--Equities provides that the general partners or 
directors of each member organization must provide for appropriate 
supervisory control and must designate a general partner or principal 
executive to assume overall authority and responsibility for internal 
supervision and control of the organization and compliance with 
securities laws and regulations. This person must:
     Delegate to qualified principals or employees 
responsibility and authority

[[Page 70239]]

for supervision and control of each office, department or business 
activity, and provide for appropriate procedures of supervision and 
control; and
     Establish a separate system of follow-up and review to 
determine that the delegated authority and responsibility is being 
properly exercised.
    Rule 342(c)--Equities provides that prior consent of the Exchange 
must be obtained for each office established by a member or member 
organization, other than a main office.
    Rule 342(d)--Equities provides that qualified persons acceptable to 
the Exchange must be in charge of:
     Any office of a member or member organization;
     Any regional or other group of offices; and
     Any sales department or activity.
    Rule 342(e)--Equities provides that the amounts and types of credit 
extended by a member organization must be supervised by members or 
principal executives qualified by experience for such control in the 
types of business in which the member organization extends credit.
    Supplementary Materials 342.10-.30--Equities provide additional 
guidance relating to the definition of branch offices, annual fees, 
foreign branch offices, the acceptability of supervisors, the 
experience of senior management, small offices, the supervision of 
registered representatives, the review of communications with the 
public, bookkeeping, the supervision of producing managers, information 
requests, trade review and investigation, the definition of related 
financial instrument, internal controls, annual branch office 
inspection, risk-based surveillance and branch office identification, 
criteria for inspection programs, and annual reports and 
certifications.
    Rule 351(e)--Equities provides that each member not associated with 
a member organization and a principal executive of each member 
organization must take one or both of the following two actions in 
relation to the trades that are subject to the review procedures 
required by Rule 342.21(a)--Equities:
     Sign a written statement in the form specified in the rule 
and deliver it to the Exchange by the 15th day of the month following 
the calendar quarter in which the trade occurred.
     As to any such trade that is the subject of an internal 
investigation pursuant to Rule 342.21(b)--Equities, but has not been 
both resolved and included in the written statement, report in writing 
to the Exchange:
      The commencement of the internal investigation, the 
identity of the trade and the reason why the trade could not be the 
subject of the written statement (report by the 15th day of the month, 
following the calendar quarter in which the trade occurred);
      the quarterly progress of each open investigation (report 
by the 15th day of the month following the quarter); and
      the completion of the investigation, detailing the 
methodology and results of the investigation, any internal disciplinary 
action taken, and any referral of the matter to the Exchange, another 
self-regulatory organization (``SRO''), the Commission or another 
federal agency, and including, where no internal disciplinary action 
has been taken and no such referral has been made, a written statement 
in relation to the trade in the form specified below (report within one 
week after completion of the investigation).
    Rule 351(e)--Equities also provides that when a statement pertains 
to one or more trades that have been the subject of an internal 
investigation pursuant to Rule 342.21(b)--Equities but as to which no 
internal disciplinary action has been taken and no referral of the 
matter to the Exchange, another SRO, or a federal agency has been made, 
the written statement must also refer to the particular trade(s) 
(rather than to the trades of a particular calendar quarter) and must 
omit the clause excepting trades reported as the subject of an 
investigation.
    Rule 354(a)--Equities provides that, by April 1 of each year, each 
member organization must submit a copy of its Rule 342.30--Equities 
annual report on supervision and compliance to its control person(s) 
or, if the member organization has no control person, to the audit 
committee of its Board of Directors or its equivalent committee or 
group. In the case of a control person that is an organization (a 
``controlling organization''), the member organization must submit the 
report to the general counsel of the controlling organization and to 
the audit committee of the controlling organization's Board of 
Directors or its equivalent committee or group.
    Rule 354(b)--Equities provides that, for the purpose of Rule 
354(a)--Equities, ``control person'' means a person who controls the 
member organization within the meaning of Rule 2--Equities otherwise 
than solely by virtue of being a director, general partner, or 
principal executive (or person occupying a similar status or performing 
similar functions) of the member organization.
    Rule 401(b)--Equities provides that each member and member 
organization must maintain written policies and procedures, 
administered pursuant to the internal control requirements prescribed 
under Rule 342.23--Equities, specifically with respect to the following 
activities:
     Transmittals of funds (e.g., wires, checks, etc.) or 
securities:
     from customer accounts to third-party accounts (i.e., a 
transmittal that would result in a change of beneficial ownership);
     from customer accounts to outside entities (e.g., banks, 
investment companies, etc.);
     from customer accounts to locations other than a 
customer's primary residence (e.g., post office box, ``in care of'' 
accounts, alternate address, etc.); and
     between customers and registered representatives 
(including the hand-delivery of checks).
     Customer changes of address.
     Customer changes of investment objectives.
    The policies and procedures required under Rule 401(b)(1), (2), and 
(3)--Equities must include a means/method of customer confirmation, 
notification, or follow-up that can be documented.
    Rule 401A(a)--Equities provides that, for every customer complaint 
they receive that is subject to the reporting requirements of Rule 
4530(d)--Equities,\10\ members and member organizations must:
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    \10\ Originally, firms had to acknowledge and respond to both 
written and oral customer complaints. However, as part of the effort 
to harmonize the NASD and NYSE MKT rules in the interim period 
before completion of the Consolidated FINRA Rulebook, current Rule 
4530(d)--Equities was amended to limit the definition of ``customer 
complaint'' to include only written complaints, thereby making the 
definition substantially similar to that in FINRA Rule 4530(d). The 
Exchange adopted the text of FINRA Rule 4530 to replace comparable 
provisions in Rule 351. See Exchange Act Release No. 64784 (Jun. 30, 
2011), 76 FR 39947 (Jul. 7, 2011) (SR-NYSEAmex-2011-42).
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     Acknowledge receipt of the complaint within 15 business 
days of receiving it, and
     Respond to the issues raised in the complaint within a 
reasonable period of time.
    Rule 401A(b)--Equities provides that each acknowledgement and 
response required by this rule must be conveyed to the complaining 
customer by an appropriate method. More specifically:
     Acknowledgements and responses to written complaints must 
be either:
     in writing, mailed to the complaining customer's last 
known address, or
     electronically transmitted to the email address from which 
the complaint

[[Page 70240]]

was sent (method only permissible for electronically transmitted 
complaints).
     Acknowledgements and responses to verbal complaints must 
be either:
     in writing, mailed to the complaining customer's last 
known address, or
     made verbally to the complaining customer, and recorded in 
a log of verbal acknowledgements and responses to customer complaints.
    Rule 401A(c)--Equities provides that written records of the 
acknowledgements, responses, and logs required by this rule must be 
retained in accordance with Rule 440--Equities.
Proposed Rule Change
    The Exchange proposes to delete the foregoing rules relating to 
supervision (except as noted below), which are, in main part, either 
duplicative of, or do not align with, the proposed supervision 
requirements discussed below, and adopt the text of FINRA Rules 3110, 
3120, 3150, and 3170, subject to certain technical and conforming 
changes.\11\ As noted in Rule 0--Equities, NYSE MKT rules that refer to 
NYSER, NYSER staff or departments, Exchange staff, and Exchange 
departments should be understood as also referring to FINRA staff and 
FINRA departments acting on behalf of the Exchange pursuant to the 
Agreement, as applicable.
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    \11\ The technical and conforming changes are that the Exchange 
would: (1) Substitute the term ``member organization'' for 
``member,'' (2) substitute the term ``Exchange'' for ``FINRA,'' (3) 
change certain cross-references to FINRA rules to cross-references 
to Exchange rules, and (4) add supplementary material to define the 
term ``associated person'' in proposed Rules 3110--Equities, 3120--
Equities, and 3150--Equities.
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    The Exchange proposes to retain the requirements contained in Rule 
342.13(a) and (b)--Equities regarding qualifications and exam 
requirements for individuals with supervisory responsibilities. The 
proposed new version of Rule 342(a)--Equities, corresponding to current 
Rule 342.13(a)--Equities, would provide that any member or employee 
identified as in charge of: (1) any office of a member or member 
organization, (2) any regional or other group of offices, or (3) any 
sales department or activity must have a creditable record and pass the 
General Securities Sales Supervisor Qualification Examination (Series 
9/10) or another examination acceptable to the Exchange. The proposed 
new version of Rule 342(a) would also adopt the current requirement 
contained in the Interpretation to NYSE Rule 342 \12\ that every branch 
office or sales manager must have at least three years' experience as a 
registered representative or substantial experience in a related sales 
or managerial position and must pass the Series 9/10.
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    \12\ Exchange Rule 342 is based on the counterpart rule of its 
NYSE affiliate, which recently amended its rules concerning 
supervision to harmonize with those of FINRA. See Exchange Act 
Release No. 73554 (Nov. 6, 2014), 79 FR 67508 (Nov. 13, 2014) (SR-
NYSE-2014-56) (incorporating into NYSE Rule 342 the requirement from 
the related NYSE Interpretation that every branch office or sales 
manager must have at least three years' experience as a registered 
representative or substantial experience in a related sales or 
managerial position and must pass the Series 9/10).
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    Further, the proposed new version of Rule 342(a)--Equities would 
adopt the current examples of a related sales or managerial position in 
the Interpretation to NYSE Rule 342 and the requirement that in order 
to qualify as a supervisory person, a principal executive \13\ should 
have at least three years' experience as a registered representative 
unless granted an exception. The proposed new version of Rule 342(a)--
Equities would also incorporate from the related NYSE Interpretation 
that the General Securities Principal Examination (Series 24) is an 
acceptable alternative for persons whose duties do not include the 
supervision of options or municipal securities sales activity and that 
the examination requirement may be waived at the discretion of the 
Exchange. Finally, the proposed new version of Rule 342(a)--Equities 
would incorporate the requirement from the NYSE Interpretation that in 
the case of a firm applying for registered broker-dealer status, the 
supervisory candidates must have at least one year of direct experience 
or two years of related experience in the subject area to be supervised 
in addition to the requirements outlined above.
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    \13\ The Interpretation to NYSE Rule 342 refers to ``allied 
members,'' a category the NYSE and the Exchange eliminated and 
replaced with ``principal executive,'' which has substantially the 
same meaning. See Exchange Act Release Nos. 58549 (Sept. 15, 2008), 
73 FR 54444 (Sept. 19, 2008) (SR-NYSE-2008-80); 559022 (Nov. 26, 
2008), 73 FR 73683 (Dec. 3, 2008) (SR-NYSEALTR-2008-10).
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    The proposed new version of Rule 342(b)--Equities, corresponding to 
current Rule 342.13(b)--Equities, would provide that the individuals 
designated as having day-to-day compliance responsibilities for their 
respective firms, or who supervise ten or more persons engaged in 
compliance activities, have the knowledge necessary to carry out their 
job responsibilities (i.e., overall knowledge of the securities laws 
and Exchange rules) and pass the Compliance Official Examination (the 
``Series 14'') or, in the case of compliance supervisors of member 
organizations that conduct a Designated Market Maker (``DMM'') 
business, the DMM Compliance Official Examination (the ``Series 14A''). 
The proposed new version of Rule 342(b)--Equities would also adopt the 
current requirement in the Interpretation to NYSE Rule 342 that member 
organizations engaged in a public business in addition to a DMM 
business must have a qualified compliance supervisor who has passed 
both the Series 14 and Series 14A Examinations. Finally, the proposed 
new version of Rule 342(b)--Equities would incorporate the following 
exemptions from the Series 14 Examination requirement contained in the 
Interpretation to NYSE Rule 342:
     Compliance supervisors at member organizations whose 
activities are solely related to execution of orders on the Exchange 
trading floor and who do not conduct any business with the public;
     Compliance supervisors at member organizations whose 
commissions and other fees from public business (retail and 
institutional) are under $500,000 in the preceding calendar year and 
who introduce to another broker-dealer; and
     Supervisors of ten or more persons whose compliance 
responsibilities are limited to the registration of member organization 
employees with the various regulators and SROs.
Proposed Rule 3110--Equities (Supervision)
    Proposed Rule 3110--Equities is based primarily on requirements in 
the FINRA rulebook and current Rule 342--Equities relating to, among 
other things, supervisory systems, written procedures, internal 
inspections, and review of correspondence.
Proposed Rule 3110(a)--Equities
    Proposed Rule 3110(a)--Equities would cover supervisory systems and 
would require each member organization to establish and maintain a 
system to supervise the activities of each associated person that is 
reasonably designed to achieve compliance with applicable securities 
laws and regulations, and with applicable Exchange rules. Under the 
proposed rule, final responsibility for proper supervision would rest 
with the member organization. In addition, a member organization's 
supervisory system would be required to provide, at a minimum, for the 
following:
     The establishment and maintenance of written procedures as 
required by proposed Rule 3110--Equities.
     The designation, where applicable, of an appropriately 
registered principal with authority to carry out the supervisory 
responsibilities of the member organization for each type of business 
in which it engages for which

[[Page 70241]]

registration as a broker-dealer is required.
     The registration and designation as a branch office or an 
office of supervisory jurisdiction (``OSJ'') of each location, 
including the main office, that meets the definitions contained in 
proposed Rule 3110(e)--Equities.\14\
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    \14\ Although to date the Exchange and FINRA have used the same 
definition for ``branch office,'' the Exchange has not previously 
designated OSJs. As such, the requirements relating to OSJs 
described hereinafter would be new for member organizations.
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     The designation of one or more appropriately registered 
principals in each OSJ and one or more appropriately registered 
representatives or principals in each non-OSJ branch office with 
authority to carry out the supervisory responsibilities assigned to 
that office by the member organization.
     The assignment of each registered person to an 
appropriately registered representative or principal who would be 
responsible for supervising that person's activities.
     The use of reasonable efforts to determine that all 
supervisory personnel are qualified, either by virtue of experience or 
training, to carry out their assigned responsibilities.
     The participation of each registered representative and 
registered principal, either individually or collectively, no less than 
annually, in an interview or meeting conducted by persons designated by 
the member organization at which compliance matters relevant to the 
activities of the representative and principal are discussed, which may 
occur in conjunction with the discussion of other matters and may be 
conducted at a central or regional location or at the representative's 
or principal's place of business.
Proposed Rule 3110(b)--Equities
    In proposed Rule 3110(b)--Equities, the Exchange proposes to 
consolidate provisions from current Rule 401A--Equities relating to the 
review of customer complaints, with various provisions and rules from 
the FINRA rulebook that currently require written procedures, including 
provisions relating to the supervision and review of registered 
representatives' transactions and correspondence. In addition, proposed 
supplementary material, which is discussed in detail below, would 
codify and expand guidance in these areas.
    Proposed Rule 3110(b)(1)--Equities would address written procedures 
and would require each member organization to establish, maintain, and 
enforce written procedures to supervise the types of business in which 
it engages and the activities of its associated persons that are 
reasonably designed to achieve compliance with applicable securities 
laws and regulations and applicable Exchange rules.
    Under proposed Rule 3110(b)(2)--Equities, the supervisory 
procedures required by proposed Rule 3110(b)--Equities would include 
procedures for the review by a registered principal, evidenced in 
writing, of all transactions relating to the investment banking or 
securities business of the member organization. Consistent with FINRA 
Rule 3110(b)(3), proposed Rule 3110(b)(3)--Equities would be marked 
``Reserved.''
    Under proposed Rule 3110(b)(4)--Equities, the supervisory 
procedures required by proposed Rule 3110(b)--Equities would also 
include procedures for the review of incoming and outgoing written 
(including electronic) correspondence and internal communications 
relating to the member organization's investment banking or securities 
business and be appropriate for the member organization's business, 
size, structure, and customers. The supervisory procedures would 
require the member organization's review of:
     Incoming and outgoing written (including electronic) 
correspondence to properly identify and handle in accordance with firm 
procedures, customer complaints, instructions, funds and securities, 
and communications that are of a subject matter that require review 
under Exchange rules and federal securities laws; and
     Internal communications to properly identify those 
communications that are of a subject matter that require review under 
Exchange rules and federal securities laws.
    Such reviews must be conducted by a registered principal and must 
be evidenced in writing, either electronically or on paper. Those 
communications include (without limitation):
     Communications between non-research and research 
departments concerning a research report's contents (Rule 472(b)(3)--
Equities);
     Certain communications with the public that require a 
principal's pre-approval (Rule 2210--Equities); and
     The identification and reporting to the Exchange of 
customer complaints (Rule 4530--Equities).\15\
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    \15\ With respect to customer complaints, proposed Rule 
3110(b)(5)--Equities also would affirmatively require members to 
capture, acknowledge, and respond to all written (including 
electronic) customer complaints.
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    Proposed Rule 3110(b)(5)--Equities, would require a member 
organization's supervisory procedures to include procedures to capture, 
acknowledge, and respond to all written (including electronic) customer 
complaints, essentially incorporating the customer complaint 
requirement in current Rule 401A--Equities, including the limitation on 
including only written (including electronic) customer complaints. The 
Exchange believes that oral complaints are difficult to capture and 
assess, and that they raise competing views as to the substance of the 
complaint being alleged. Consequently, the Exchange believes that oral 
complaints do not lend themselves as effectively to a review program as 
written complaints, which are more readily documented and retained. 
However, the Exchange reminds member organizations that the failure to 
address any customer complaint, written or oral, may be a violation of 
Rule 2010--Equities.
    Under proposed Rule 3110(b)(6)--Equities, the supervisory 
procedures required by proposed Rule 3110(b)--Equities must set forth 
the supervisory system established by the member organization pursuant 
to proposed Rule 3110(a)--Equities, and would include:
     The titles, registration status, and locations of the 
required supervisory personnel and the responsibilities of each 
supervisory person as these relate to the types of business engaged in, 
applicable securities laws and regulations, and Exchange rules.
     A record, preserved by the member organization for a 
period of not less than three years, the first two years in an easily 
accessible place, of the names of all persons who are designated as 
supervisory personnel and the dates for which such designation is or 
was effective.
     Procedures prohibiting associated persons who perform a 
supervisory function from:
     Supervising their own activities; and
     Reporting to, or having their compensation or continued 
employment determined by, a person or persons they are supervising.
     If a member organization determines, with respect to any 
of its supervisory personnel, that compliance with the preceding two 
bullets is not possible because of the member organization's size or a 
supervisory personnel's position within the firm, the member 
organization would be required to document:
     The factors the member organization used to reach such 
determination; and

[[Page 70242]]

     How the supervisory arrangement with respect to such 
supervisory personnel otherwise complies with proposed Rule 3110(a)--
Equities.
     Procedures reasonably designed to prevent the supervisory 
system required pursuant to proposed Rule 3110(a)--Equities from being 
compromised due to the conflicts of interest that may be present with 
respect to the associated person being supervised, including the 
position of such person, the revenue such person generates for the 
firm, or any compensation that the associated person conducting the 
supervision may derive from the associated person being supervised.\16\
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    \16\ The Exchange currently does not have a comparable rule.
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    Proposed Rule 3110(b)(7)--Equities would require a member 
organization to keep and maintain a copy of its written supervisory 
procedures, or such relevant portions, in each OSJ and at each location 
where supervisory activities are conducted on behalf of the member 
organization. Each member organization would be required to promptly 
amend its written supervisory procedures to reflect changes in 
applicable securities laws or regulations, including Exchange rules, 
and as changes occur in its supervisory system. Each member 
organization would be responsible for promptly communicating its 
written supervisory procedures and amendments to all associated persons 
to whom such written supervisory procedures and amendments are relevant 
based on their activities and responsibilities.
Proposed Rule 3110(c)--Equities
    Proposed Rule 3110(c)--Equities would cover internal inspections. 
Proposed Rule 3110(c)(1)--Equities would require each member 
organization to conduct a review, at least annually (on a calendar-year 
basis), of the businesses in which it engages. The review must be 
reasonably designed to assist the member organization in detecting and 
preventing violations of, and achieving compliance with, applicable 
securities laws and regulations, and with applicable Exchange rules. 
Each member organization would be required to review the activities of 
each office, which would include the periodic examination of customer 
accounts to detect and prevent irregularities or abuses. Each member 
organization would also be required to retain a written record of the 
date upon which each review and inspection is conducted.
    In addition, proposed Rule 3110(c)(1)--Equities would require each 
member organization to inspect at least annually (on a calendar-year 
basis) every OSJ and any branch office that supervises one or more non-
branch locations. Each member organization would also be required to 
inspect at least every three years every branch office that does not 
supervise one or more non-branch locations. In establishing how often 
to inspect each non-supervisory branch office, the member organization 
would be required to consider whether the nature and complexity of the 
securities activities for which the location is responsible, the volume 
of business done at the location, and the number of associated persons 
assigned to the location require the non-supervisory branch office to 
be inspected more frequently than every three years. If a member 
organization establishes a more frequent inspection cycle, the member 
organization would be required to ensure that at least every three 
years, the inspection requirements enumerated in proposed Rule 
3110(c)(2)--Equities have been met. The member organization's written 
supervisory and inspection procedures would have to set forth the non-
supervisory branch office examination cycle, an explanation of the 
factors the member organization used in determining the frequency of 
the examinations in the cycle, and the manner in which a member 
organization would comply with proposed Rule 3110(c)(2)--Equities if 
using more frequent inspections than every three years.
    Under proposed Rule 3110(c)(1)--Equities, each member organization 
would also be required to inspect every non-branch location on a 
regular, periodic schedule. In establishing such schedule, the member 
organization would be required to consider the nature and complexity of 
the securities activities for which the location is responsible and the 
nature and extent of contact with customers. The member organization's 
written supervisory and inspection procedures would have to set forth 
the schedule and an explanation regarding how the member organization 
determined the frequency of the examination.
    Proposed Rule 3110(c)(2)--Equities would require that the 
inspection and review by a member organization pursuant to proposed 
Rule 3110(c)(1)--Equities be reduced to a written report and kept on 
file by the member organization for a minimum of three years, unless 
the inspection is being conducted pursuant to proposed Rule 
3110(c)(1)(C)--Equities and the regular periodic schedule is longer 
than a three-year cycle, in which case the report would have to be kept 
on file at least until the next inspection report has been written. If 
applicable to the location being inspected, proposed Rule 
3110(c)(2)(A)--Equities would require that location's written 
inspection report to include, without limitation, the testing and 
verification of the member organization's policies and procedures, 
including supervisory policies and procedures in the following areas:
     Safeguarding of customer funds and securities;
     Maintaining books and records;
     Supervision of supervisory personnel;
     Transmittals of funds (e.g., wires or checks, etc.) or 
securities from customers to third-party accounts; from customer 
accounts to outside entities (e.g., banks, investment companies, etc.); 
from customer accounts to locations other than a customer's primary 
residence (e.g., post office box, ``in care of'' accounts, alternate 
address, etc.); and between customers and registered representatives, 
including the hand-delivery of checks; and
     Changes of customer account information, including address 
and investment objectives changes and validation of such changes.
    Under proposed Rule 3110(c)(2)(B)--Equities, the policies and 
procedures regarding transmittals of funds must include a means or 
method of customer confirmation, notification, or follow-up that can be 
documented. Member organizations could use reasonable risk-based 
criteria to determine the authenticity of the transmittal instructions. 
Under proposed Rule 3110(c)(2)(C)--Equities, the policies and 
procedures regarding changes in customer account information would have 
to include, for each change processed, a means or method of customer 
confirmation, notification, or follow-up that can be documented and 
that complies with Rules 17a-3(a)(17)(i)(B)(2) and 17a-
3(a)(17)(i)(B)(3) under the Act.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17a-3(a)(17)(i)(B)(2) and 17 CFR 240.17a-
3(a)(17)(i)(B)(3).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 3110(c)(2)(D)--Equities, if a member 
organization does not engage in all of the activities enumerated in the 
bullets immediately above at the location being inspected, the member 
organization would be required to identify those activities in the 
member organization's written supervisory procedures or the location's 
written inspection report and document in the member organization's 
written supervisory procedures or the

[[Page 70243]]

location's written inspection report that supervisory policies and 
procedures for such activities must be in place at that location before 
the member organization can engage in them.
    Under proposed Rule 3110(c)(3)--Equities, for each inspection 
conducted pursuant to the proposed rule, a member organization would be 
required to:
     Have procedures reasonably designed to prevent the 
effectiveness of inspections from being compromised due to conflicts of 
interest that may be present with respect to the location being 
inspected, including but not limited to, economic, commercial, or 
financial interests in the associated persons and businesses being 
inspected; and
     Ensure that the person conducting an inspection is not an 
associated person assigned to the location or is not directly or 
indirectly supervised by, or otherwise reporting to, an associated 
person assigned to the location.\18\
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    \18\ If a member organization determines that compliance with 
this requirement is not possible either because of a member 
organization's size or its business model, the member organization 
would be required to document in the inspection report both the 
factors the member organization used to make its determination and 
how the inspection otherwise complies with proposed Rule 
3110(c)(1)--Equities.
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    By way of comparison, under current Rules 342.24--Equities and 
342.25--Equities, each branch office must be inspected annually, unless 
the member organization obtained an exemption by submitting to the 
Exchange written policies and procedures for systematic risk-based 
surveillance of its branch offices, in which case each branch office 
must be inspected at least every three years. The proposed subject 
matter requirements for inspection reports are substantially the same 
as the current subject matter requirements.
Proposed Rule 3110(d)--Equities
    Section 15(g) of the Act, adopted as part of the Insider Trading 
and Securities Fraud Enforcement Act of 1988,\19\ requires every 
registered broker or dealer to establish, maintain, and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
material, non-public information by the broker or dealer or any 
associated person of the broker or dealer.\20\ Current Rule 342.21--
Equities sets forth specific supervisory procedures for compliance with 
Section 15(g) by requiring firms to review trades in Exchange-listed or 
Exchange-traded securities and related financial instruments that are 
effected for the member organization's account or for the accounts of 
the member organization's employees and family members. Current Rule 
342.21--Equities also requires member organizations to promptly conduct 
an internal investigation into any trade the firm identifies that may 
have violated insider trading laws or rules.
---------------------------------------------------------------------------

    \19\ See Insider Trading and Securities Fraud Enforcement Act of 
1988, Pub. L. 100-704, 102 Stat. 4677.
    \20\ 15 U.S.C. 78o(g).
---------------------------------------------------------------------------

    Proposed Rule 3110(d)--Equities incorporates provisions of current 
Rule 342.21--Equities, with some modifications, and extends the 
requirement beyond Exchange-listed and Exchange-traded securities and 
related financial instruments to cover all securities.
    Proposed Rule 3110(d)--Equities would cover transaction reviews and 
investigations. Proposed Rule 3110(d)(1)--Equities would require each 
member organization to include in its supervisory procedures a process 
for the review of securities transactions reasonably designed to 
identify trades that may violate the provisions of the Act, the rules 
thereunder, or Exchange rules prohibiting insider trading and 
manipulative and deceptive devices that are effected for the:
     Accounts of the member organization;
     Accounts introduced or carried by the member organization 
in which a person associated with the member organization has a 
beneficial interest or the authority to make investment decisions;
     Accounts of a person associated with the member 
organization that are disclosed to the member organization pursuant to 
Rule 407--Equities or NASD Rule 3050, as applicable; and
     Covered accounts.
    Under proposed Rule 3110(d)(2)--Equities, each member organization 
would be required to promptly conduct an internal investigation into 
any such trade to determine whether a violation of those laws or rules 
has occurred.
    In addition, under proposed Rule 3110(d)(3)--Equities, a member 
organization engaging in investment banking services would be required 
to file written reports with the Exchange, signed by a senior officer 
of the member organization, at such times and, without limitation, 
including such content, as follows:
     Within ten business days of the end of each calendar 
quarter, a written report describing each internal investigation 
initiated in the previous calendar quarter pursuant to proposed Rule 
3110(d)(2)--Equities, including the identity of the member 
organization, the date each internal investigation commenced, the 
status of each open internal investigation, the resolution of any 
internal investigation reached during the previous calendar quarter, 
and, with respect to each internal investigation, the identity of the 
security, trades, accounts, associated persons of the member 
organization, or associated person of the member organization's family 
members holding a covered account, under review, and that includes a 
copy of the member organization's policies and procedures required by 
proposed Rule 3110(d)(1)--Equities.
     Within five business days of completion of an internal 
investigation pursuant to proposed Rule 3110(d)(2)--Equities in which 
it was determined that a violation of the provisions of the Act, the 
rules thereunder, or Exchange rules prohibiting insider trading and 
manipulative and deceptive devices had occurred, a written report 
detailing the completion of the investigation, including the results of 
the investigation, any internal disciplinary action taken, and any 
referral of the matter to the Exchange, another SRO, the SEC, or any 
other federal, state, or international regulatory authority.
    For purposes of proposed Rule 3110(d)(4)--Equities, the following 
definitions would apply:
     The term ``covered account'' would include any account 
introduced or carried by the member organization that is held by:
     The spouse of a person associated with the member 
organization;
     A child of the person associated with the member 
organization or such person's spouse, provided that the child resides 
in the same household as or is financially dependent upon the person 
associated with the member organization;
     Any other related individual over whose account the person 
associated with the member organization has control; or
     Any other individual over whose account the associated 
person of the member organization has control and to whose financial 
support such person materially contributes.
     The term ``investment banking services'' would include, 
without limitation, acting as an underwriter, participating in a 
selling group in an offering for the issuer, or otherwise acting in 
furtherance of a public offering of the issuer; acting as a financial 
adviser in a merger or acquisition; providing venture capital or equity 
lines of credit or serving as placement agent for the issuer or 
otherwise acting in furtherance of a private offering of the issuer.

[[Page 70244]]

Proposed Rule 3110(e)--Equities
    Proposed Rule 3110(e)--Equities would define ``OSJ'' and ``branch 
office.'' As noted above, ``OSJ'' would be a new designation for the 
Exchange and the definition of the term would substantially mirror 
FINRA's definition. The term ``OSJ'' would mean any office of a member 
organization at which any one or more of the following functions take 
place:
     Order execution or market making;
     Structuring of public offerings or private placements;
     Maintaining custody of customers' funds or securities;
     Final acceptance (approval) of new accounts on behalf of 
the member organization;
     Review and endorsement of customer orders;
     Final approval of retail communications for use by persons 
associated with the member organization, pursuant to Rule 2210(b)(1)--
Equities, except for an office that solely conducts final approval of 
research reports; or
     Responsibility for supervising the activities of persons 
associated with the member organization at one or more other branch 
offices of the member organization.
    The definition of ``branch office'' would be substantially the same 
as current Rule 342.10--Equities. It would mean any location where one 
or more associated persons of a member organization regularly conducts 
the business of effecting any transactions in, or inducing or 
attempting to induce the purchase or sale of, any security, or is held 
out as such, excluding:
     Any location that is established solely for customer 
service or back office type functions where no sales activities are 
conducted and that is not held out to the public as a branch office;
     Any location that is the associated person's primary 
residence, provided that:
      Only one associated person, or multiple associated 
persons who reside at that location and are members of the same 
immediate family, conduct business at the location;
      The location is not held out to the public as an office 
and the associated person does not meet with customers at the location;
      Neither customer funds nor securities are handled at that 
location;
      The associated person is assigned to a designated branch 
office, and such designated branch office is reflected on all business 
cards, stationery, retail communications and other communications to 
the public by such associated person;
      The associated person's correspondence and communications 
with the public are subject to the firm's supervision in accordance 
with proposed Rule 3110--Equities;
      Electronic communications (e.g., email) are made through 
the member organization's electronic system;
      All orders are entered through the designated branch 
office or an electronic system established by the member organization 
that is reviewable at the branch office;
      Written supervisory procedures pertaining to supervision 
of sales activities conducted at the residence are maintained by the 
member organization; and
      A list of the residence locations is maintained by the 
member organization.
     Any location, other than a primary residence, that is used 
for securities business for less than 30 business days \21\ in any one 
calendar year, provided the member organization complies with the first 
eight of the nine immediately preceding bullet points;
---------------------------------------------------------------------------

    \21\ The term ``business day'' would not include any partial 
business day provided that the associated person spends at least 
four hours on such business day at his or her designated branch 
office during the hours that such office is normally open for 
business.
---------------------------------------------------------------------------

     Any office of convenience, where associated persons 
occasionally and exclusively by appointment meet with customers, which 
is not held out to the public as an office; \22\
---------------------------------------------------------------------------

    \22\ Where such office of convenience is located on bank 
premises, signage necessary to comply with applicable federal and 
state laws, rules and regulations and applicable rules and 
regulations of other SROs, and securities and banking regulators 
could be displayed and would not be deemed ``holding out'' for 
purposes of this section.
---------------------------------------------------------------------------

     Any location that is used primarily to engage in non-
securities activities and from which the associated person(s) effects 
no more than 25 securities transactions in any one calendar year; 
provided that any retail communication identifying such location also 
sets forth the address and telephone number of the location from which 
the associated person(s) conducting business at the non-branch 
locations are directly supervised;
     The floor of a registered national securities exchange 
where a member organization conducts a direct access business with 
public customers; or
     A temporary location established in response to the 
implementation of a business continuity plan.
    Notwithstanding the exclusions for branch offices described above, 
any location that is responsible for supervising the activities of 
persons associated with the member organization at one or more non-
branch locations of the member organization would be considered a 
branch office.
Proposed Supplementary Materials to Proposed Rule 3110--Equities
    Proposed Supplementary Material .01 to Rule 3110--Equities would 
require a member organization's main office location to be registered 
and designated as a branch office or OSJ if it meets the definitions of 
a ``branch office'' or ``office of supervisory jurisdiction'' as set 
forth in proposed Rule 3110(e)--Equities. In general, the nature of 
activities conducted at a main office will satisfy the requirements of 
such terms.
    Proposed Supplementary Material .02 to Rule 3110--Equities would 
provide that, in addition to the locations that meet the definition of 
OSJ in proposed Rule 3110(e)--Equities, each member organization must 
also register and designate other offices as OSJs as is necessary to 
supervise its associated persons in accordance with the standards set 
forth in proposed Rule 3110--Equities. In making a determination as to 
whether to designate a location as an OSJ, the member organization 
should consider the following factors:
     Whether registered persons at the location engage in 
retail sales or other activities involving regular contact with public 
customers;
     Whether a substantial number of registered persons conduct 
securities activities at, or are otherwise supervised from, such 
location;
     Whether the location is geographically distant from 
another OSJ of the firm;
     Whether the member organization's registered persons are 
geographically dispersed; and
     Whether the securities activities at such location are 
diverse or complex.
    Proposed Supplementary Material .03 to Rule 3110--Equities would 
provide additional guidance relating to proposed Rule 3110(a)(4)--
Equities, which would require a member organization to designate one or 
more appropriately registered principals in each OSJ with the authority 
to carry out the supervisory responsibilities assigned to that office 
(``on-site principal''). The proposed Supplementary Material would 
provide that the designated on-site principal for each OSJ must have a 
physical presence, on a regular and routine basis, at each OSJ for 
which the principal has supervisory responsibilities. Consequently, 
there would be a general presumption that a principal will not be 
designated and assigned to be the on-site principal pursuant to 
proposed Rule 3110(a)(4)--

[[Page 70245]]

Equities to supervise more than one OSJ. If a member organization 
determines it is necessary to designate and assign one appropriately 
registered principal to be the on-site principal pursuant to proposed 
Rule 3110(a)(4)--Equities to supervise two or more OSJs, the member 
organization would be required to take into consideration, among 
others, the following factors:
     Whether the on-site principal is qualified by virtue of 
experience and training to supervise the activities and associated 
persons in each location;
     Whether the on-site principal has the capacity and time to 
supervise the activities and associated persons in each location;
     Whether the on-site principal is a producing registered 
representative;
     Whether the OSJ locations are in sufficiently close 
proximity to ensure that the on-site principal is physically present at 
each location on a regular and routine basis; and
     The nature of activities at each location, including size 
and number of associated persons, scope of business activities, the 
nature and complexity of products and services offered, volume of 
business done, the disciplinary history of persons assigned to such 
locations, and any other indicators of irregularities or misconduct.
    The proposed Supplementary Material would provide that a member 
organization must establish, maintain, and enforce written supervisory 
procedures regarding the supervision of all OSJs. In all cases where a 
member organization designates and assigns one on-site principal to 
supervise more than one OSJ, the member organization would be required 
to document in the member organization's written supervisory and 
inspection procedures the factors used to determine why the member 
organization considers such supervisory structure to be reasonable, and 
the determination by the member organization will be subject to 
scrutiny.
    Proposed Supplementary Material .04 to Rule 3110--Equities would 
provide that a member organization is not required to conduct in-person 
meetings with each registered person or group of registered persons to 
comply with the annual compliance meeting (or interview) required by 
proposed Rule 3110(a)(7)--Equities. A member organization that chooses 
to conduct compliance meetings using other methods (e.g., on-demand 
webcast or course, video conference, interactive classroom setting, 
telephone, or other electronic means) would be required to ensure, at a 
minimum, that each registered person attends the entire meeting (e.g., 
an on-demand annual compliance webcast would require each registered 
person to use a unique user ID and password to gain access and use a 
technology platform to track the time spent on the webcast, provide 
click-as-you go confirmation, and have an attestation of completion at 
the end of a webcast) and is able to ask questions regarding the 
presentation and receive answers in a timely fashion (e.g., an on-
demand annual compliance webcast that allows registered persons to ask 
questions via an email to a presenter or a centralized address or via a 
telephone hotline and receive timely responses directly or view such 
responses on the member organization's intranet site).
    Proposed Supplementary Material .05 to Rule 3110--Equities would 
provide that a member organization could use a risk-based review system 
to comply with proposed Rule 3110(b)(2)--Equities' requirement that a 
registered principal review all transactions relating to the investment 
banking or securities business of the member organization. A member 
organization would not be required to conduct detailed reviews of each 
transaction if it is using a reasonably designed risk-based review 
system that provides the member organization with sufficient 
information that permits it to focus on the areas that pose the 
greatest numbers and risks of violation.
    Proposed Supplementary Material .06 to Rule 3110--Equities would 
provide that, by employing risk-based principles, a member organization 
must decide the extent to which additional policies and procedures for 
the review of:
     Incoming and outgoing written (including electronic) 
correspondence that fall outside of the subject matters listed in 
proposed Rule 3110(b)(4)--Equities are necessary for its business and 
structure. If a member organization's procedures do not require that 
all correspondence be reviewed before use or distribution, the 
procedures must provide for:
      The education and training of associated persons 
regarding the firm's procedures governing correspondence;
      The documentation of such education and training; and
      Surveillance and follow-up to ensure that such procedures 
are implemented and followed.
     Internal communications that are not of a subject matter 
that require review under Exchange rules and federal securities laws 
are necessary for its business and structure.
    Proposed Supplementary Material .07 to Rule 3110--Equities would 
provide that the evidence of review required in proposed Rule 
3110(b)(4)--Equities must be chronicled either electronically or on 
paper and must clearly identify the reviewer, the internal 
communication or correspondence that was reviewed, the date of review, 
and the actions taken by the member organization as a result of any 
significant regulatory issues identified during the review. Merely 
opening a communication would not be sufficient review.
    Proposed Supplementary Material .08 to Rule 3110--Equities would 
provide that, in the course of the supervision and review of 
correspondence and internal communications required by proposed Rule 
3110(b)(4)--Equities, a supervisor/principal may delegate certain 
functions to persons who need not be registered. However, the 
supervisor/principal would remain ultimately responsible for the 
performance of all necessary supervisory reviews, irrespective of 
whether he or she delegates functions related to the review. 
Accordingly, supervisors/principals would have to take reasonable and 
appropriate action to ensure delegated functions are properly executed 
and would be required to evidence performance of their procedures 
sufficiently to demonstrate overall supervisory control.
    Proposed Supplementary Material .09 to Rule 3110--Equities would 
provide that each member organization must retain the internal 
communications and correspondence of associated persons relating to the 
member organization's investment banking or securities business for the 
period of time and accessibility specified in Rule 17a-4(b) under the 
Act. The names of the persons who prepared outgoing correspondence and 
who reviewed the correspondence would have to be ascertainable from the 
retained records, and the retained records would have to be readily 
available to the Exchange, upon request.
    Proposed Supplementary Material .10 to Rule 3110--Equities would 
provide that a member organization's determination that it is not 
possible to comply with proposed Rules 3110(b)(6)(C)(i)--Equities or 
(b)(6)(C)(ii)--Equities prohibiting supervisory personnel from 
supervising their own activities and from reporting to, or otherwise 
having compensation or continued employment determined by, a person or 
persons they are supervising generally will arise in instances where:
     The member organization is a sole proprietor in a single-
person firm;
     A registered person is the member organization's most 
senior executive officer (or similar position); or
     A registered person is one of several of the member 
organization's most

[[Page 70246]]

senior executive officers (or similar positions).
    Proposed Supplementary Material .11 to Rule 3110--Equities would 
provide that a member organization may use electronic media to satisfy 
its obligation to communicate its written supervisory procedures, and 
any amendment thereto, pursuant to proposed Rule 3110(b)(7)--Equities, 
provided that:
     The written supervisory procedures have been promptly 
communicated to, and are readily accessible by, all associated persons 
to whom such supervisory procedures apply based on their activities and 
responsibilities through, for example, the member organization's 
intranet system;
     All amendments to the written supervisory procedures are 
promptly posted to the member organization's electronic media;
     Associated persons are notified when amendments relevant 
to their activities and responsibilities have been made to the written 
supervisory procedures;
     The member organization has reasonable procedures to 
monitor and maintain the security of the material posted to ensure that 
it cannot be altered by unauthorized persons; and
     The member organization retains current and prior versions 
of its written supervisory procedures in compliance with the applicable 
record retention requirements of Rule 17a-4(e)(7) under the Act.
    Proposed Supplementary Material .12 to Rule 3110--Equities would 
provide that, in fulfilling its obligations under proposed Rule 
3110(c)--Equities, each member organization must conduct a review, at 
least annually, of the businesses in which it engages. The review would 
have to be reasonably designed to assist in detecting and preventing 
violations of and achieving compliance with applicable securities laws 
and regulations and with Exchange rules. Each member organization would 
be required to establish and maintain supervisory procedures that must 
take into consideration, among other things, the firm's size, 
organizational structure, scope of business activities, number and 
location of the firm's offices, the nature and complexity of the 
products and services offered by the firm, the volume of business done, 
the number of associated persons assigned to a location, the 
disciplinary history of registered representatives or associated 
persons, and any indicators of irregularities or misconduct (i.e., 
``red flags''), etc. The procedures established and reviews conducted 
would have to provide that the quality of supervision at remote 
locations is sufficient to ensure compliance with applicable securities 
laws and regulations and with Exchange rules. A member organization 
would have to be especially diligent in establishing procedures and 
conducting reasonable reviews with respect to a non-branch location 
where a registered representative engages in securities activities. 
Based on the factors outlined above, member organizations might need to 
impose reasonably designed supervisory procedures for certain locations 
or may need to provide for more frequent reviews of certain locations.
    Proposed Supplementary Material .13 to Rule 3110--Equities would 
provide additional guidance to proposed Rule 3110(c)(1)(C)--Equities, 
which would require a member organization to inspect on a regular 
periodic schedule every non-branch location. In establishing a non-
branch location inspection schedule, there would be a general 
presumption that a non-branch location will be inspected at least every 
three years, even in the absence of any indicators of irregularities or 
misconduct (i.e., ``red flags''). If a member organization establishes 
a longer periodic inspection schedule, the member organization would be 
required to document in its written supervisory and inspection 
procedures the factors used in determining that a longer periodic 
inspection cycle is appropriate.
    Proposed Supplementary Material .14 to Rule 3110--Equities would 
provide that a member organization's determination that it is not 
possible to comply with proposed Rule 3110(c)(3)(B)--Equities with 
respect to who is not allowed to conduct a location's inspection will 
generally arise in instances where:
     The member organization has only one office; or
     The member organization has a business model where small 
or single-person offices report directly to an OSJ manager who is also 
considered the offices' branch office manager.
    Proposed Supplementary Material .15 to Rule 3110--Equities would 
provide a definition for ``associated person'' for the purposes of 
proposed Rule 3110--Equities.
Proposed Rule 3120--Equities (Supervisory Control System)
    Proposed Rule 3120(a)--Equities, which is based on FINRA Rule 
3120(a), would provide that each member organization must designate and 
specifically identify to the Exchange one or more principals who must 
establish, maintain, and enforce a system of supervisory control 
policies and procedures that:
     Test and verify that the member organization's supervisory 
procedures are reasonably designed with respect to the activities of 
the member organization and its associated persons, to achieve 
compliance with applicable securities laws and regulations, and with 
applicable Exchange rules; and
     Create additional or amend supervisory procedures where 
the need is identified by such testing and verification.
    Similar to the requirements of current Rule 342.30--Equities, the 
designated principal or principals would be required to submit to the 
member organization's senior management no less than annually, a report 
detailing each member organization's system of supervisory controls, 
the summary of the test results and significant identified exceptions, 
and any additional or amended supervisory procedures created in 
response to the test results.
    Proposed Rule 3120(b)--Equities would provide that each report 
provided to senior management pursuant to proposed Rule 3120(a)--
Equities in the calendar year following a calendar year in which a 
member organization reported $200 million or more in gross revenue must 
include, to the extent applicable to the member organization's 
business:
     A tabulation of the reports pertaining to customer 
complaints and internal investigations made to the Exchange during the 
preceding year; and
     Discussion of the preceding year's compliance efforts, 
including procedures and educational programs, in each of the following 
areas:
      Trading and market activities;
      Investment banking activities;
      Antifraud and sales practices;
      Finance and operations;
      Supervision; and
      Anti-money laundering.
    The categories listed above are incorporated from the annual report 
content requirements of current Rule 342.30--Equities, which apply to 
all member organizations regardless of revenue. The proposed rule 
change seeks to mitigate compliance costs and burdens with respect to 
proposed Rule 3120--Equities' annual reporting requirements by 
requiring that only member organizations reporting $200 million or more 
in gross revenues in the preceding year include in their annual reports 
supplemental information from current Rule 342.30--Equities' annual 
report content requirements. The Exchange also believes that the 
proposed threshold strikes the appropriate balance as it encompasses 
larger member organizations, member

[[Page 70247]]

organizations engaged in significant underwriting activities and 
substantial trading activities or market making business, and member 
organizations with extensive sales platforms.
    Proposed Rule 3120(c)--Equities would provide that, for purposes of 
proposed Rule 3120(b)--Equities, ``gross revenue'' is defined as:
     Total revenue as reported on FOCUS Form Part II or IIA 
(line item 4030) less commodities revenue (line item 3990), if 
applicable; or
     Total revenue as reported on FOCUS Form Part II CSE (line 
item 4030) less, if applicable:
      Commissions on commodity transactions (line item 3991); 
and
      Commodities gains or losses (line items 3924 and 3904).
    Proposed Supplementary Material .01 to Rule 3120--Equities would 
provide a definition for ``associated person'' for the purposes of 
proposed Rule 3120--Equities.
Proposed Rule 3150--Equities (Holding of Customer Mail)
    Proposed Rule 3150(a)--Equities would provide that a member 
organization may hold mail for a customer who will not be receiving 
mail at his or her usual address, provided that:
     The member organization receives written instructions from 
the customer that include the time period during which the member 
organization is requested to hold the customer's mail. If the requested 
time period included in the instructions is longer than three 
consecutive months (including any aggregation of time periods from 
prior requests), the customer's instructions must include an acceptable 
reason for the request (e.g., safety or security concerns). Convenience 
is not an acceptable reason for holding mail longer than three months;
     The member organization:
      Informs the customer in writing of any alternate methods, 
such as email or access through the member organization's Web site, 
that the customer may use to receive or monitor account activity and 
information; and
      Obtains the customer's confirmation of the receipt of 
such information; and
     The member organization verifies at reasonable intervals 
that the customer's instructions still apply.
    Proposed Rule 3150(b)--Equities would provide that, during the time 
that a member organization is holding mail for a customer, the member 
organization must be able to communicate with the customer in a timely 
manner to provide important account information (e.g., privacy notices 
and the Securities Investor Protection Corporation information 
disclosures required by Rule 2266--Equities), as necessary.
    Proposed Rule 3150(c)--Equities would provide that a member 
organization holding a customer's mail pursuant to proposed Rule 3150--
Equities must take actions reasonably designed to ensure that the 
customer's mail is not tampered with, held without the customer's 
consent, or used by an associated person of the member organization in 
any manner that would violate Exchange rules or the federal securities 
laws.
    The Exchange currently does not have a rule comparable to proposed 
Rule 3150--Equities. The Exchange believes that adding proposed Rule 
3150--Equities would help protect customers.
    Proposed Supplementary Material .01 to Rule 3150--Equities would 
provide a definition for ``associated person'' for the purposes of 
proposed Rule 3150--Equities.
Proposed Rule 3170--Equities (Tape Recording of Registered Persons by 
Certain Firms)
    Proposed Rule 3170(a)--Equities would provide the following 
definitions for purposes of proposed Rule 3170--Equities:
     The term ``registered person'' would mean any person 
registered with the Exchange.
     The term ``disciplined firm'' would mean:
      A member organization that, in connection with sales 
practices involving the offer, purchase, or sale of any security, has 
been expelled from membership or participation in any securities 
industry SRO or is subject to an order of the SEC revoking its 
registration as a broker-dealer;
      A futures commission merchant or introducing broker that 
has been formally charged by either the Commodity Futures Trading 
Commission or a registered futures association with deceptive 
telemarketing practices or promotional material relating to security 
futures, those charges have been resolved, and the futures commission 
merchant or introducing broker has been closed down and permanently 
barred from the futures industry as a result of those charges; or
      A futures commission merchant or introducing broker that, 
in connection with sales practices involving the offer, purchase, or 
sale of security futures is subject to an order of the SEC revoking its 
registration as a broker or dealer.
     The term ``disciplinary history'' would mean a finding of 
a violation by a registered person in the past five years by the SEC, 
an SRO, or a foreign financial regulatory authority of one or more of 
the following provisions (or comparable foreign provision) or rules or 
regulations thereunder:
      Violations of the types enumerated in Section 15(b)(4)(E) 
of the Act;
      Section 15(c) of the Act;
      Section 17(a) of the Securities Act of 1933;
      Rules 10b-5 and 15g-1 through 15g-9 under the Act;
      NASD Rule 2110 (Standards of Commercial Honor and 
Principles of Trade) or FINRA Rule 2010 (Standards of Commercial Honor 
and Principles of Trade) or Rule 2010--Equities (Standards of 
Commercial Honor and Principles of Trade) or NYSE MKT Rule 476(a)(6) 
(Failure to Observe High Standards of Commercial Honor and Just and 
Equitable Principles of Trade) (only if the finding of a violation of 
NASD Rule 2110, FINRA Rule 2010, Rule 2010--Equities or NYSE MKT Rule 
476(a)(6) is for unauthorized trading, churning, conversion, material 
misrepresentations or omissions to a customer, front-running, trading 
ahead of research reports or excessive markups), FINRA Rule 5280 
(Trading Ahead of Research Reports), NASD Rule 2120 (Use of 
Manipulative, Deceptive or Other Fraudulent Devices) or FINRA Rule 2020 
(Use of Manipulative, Deceptive or Other Fraudulent Devices) or Rule 
2020--Equities (Use of Manipulative, Deceptive or Other Fraudulent 
Devices) or NYSE MKT Rule 476(a)(5) (effecting any transaction in, or 
inducing the purchase or sale of, any security by means of any 
manipulative, deceptive or other fraudulent device or contrivance), 
NASD Rule 2310 (Recommendations to Customers (Suitability)) or FINRA 
Rule 2111 (Suitability) or Rule 405--Equities (Diligence as to 
Accounts), NASD Rule 2330 (Customers' Securities or Funds) or FINRA 
Rule 2150 (Improper Use of Customers' Securities or Funds; Prohibition 
Against Guarantees and Sharing in Accounts) or Rule 2150--Equities 
(Improper Use of Customers' Securities or Funds; Prohibition Against 
Guarantees and Sharing in Accounts), NASD Rule 2440 (Fair Prices and 
Commissions), NASD Rule 3010 (Supervision) or FINRA Rule 3110 
(Supervision) or Rule 3110--Equities (Supervision) or NYSE MKT Rule 342 
(Offices--Approval, Supervision and Control) (failure to supervise only 
for both NASD Rule 3010, FINRA Rule 3110, Rule 3110--Equities or NYSE

[[Page 70248]]

MKT Rule 342), NASD Rule 3310 (Publication of Transactions and 
Quotations) or FINRA Rule 5210 (Publication of Transactions and 
Quotations), and NASD Rule 3330 (Payment Designed to Influence Market 
Prices, Other than Paid Advertising) or FINRA Rule 5230 (Payments 
Involving Publications that Influence the Market Price of a Security), 
and MSRB Rules G-19, G-30, and G-37(b) & (c).
     The term ``tape recording'' would include without 
limitation, any electronic or digital recording that meets the 
requirements of proposed Rule 3170--Equities.
     The term ``taping firm'' would mean:
      A member organization with at least five but fewer than 
ten registered persons, where 40% or more of its registered persons 
have been associated with one or more disciplined firms in a registered 
capacity within the last three years;
      A member organization with at least ten but fewer than 
twenty registered persons, where four or more of its registered persons 
have been associated with one or more disciplined firms in a registered 
capacity within the last three years;
      A member organization with at least twenty registered 
persons where 20% or more of its registered persons have been 
associated with one or more disciplined firms in a registered capacity 
within the last three years.
     For purposes of calculating the number of registered 
persons who have been associated with one or more disciplined firms in 
a registered capacity within the last three years pursuant to proposed 
Rule 3170(a)(5)--Equities, member organizations should not include 
registered persons who:
      Have been registered for an aggregate total of 90 days or 
less with one or more disciplined firms within the past three years; 
and
      Do not have a disciplinary history.
    Proposed Rule 3170(b)--Equities would provide that each member 
organization that either is notified by the Exchange or otherwise has 
actual knowledge that it is a taping firm must establish, maintain, and 
enforce special written procedures for supervising the telemarketing 
activities of all of its registered persons. A taping firm required to 
establish, maintain, and enforce special written procedures pursuant to 
proposed Rule 3170(b)--Equities would have to establish and implement 
the procedures within 60 days of receiving notice from the Exchange or 
obtaining actual knowledge that it is a taping firm.
    The procedures required by proposed Rule 3170(b)--Equities would 
include procedures for tape recording all telephone conversations 
between the taping firm's registered persons and both existing and 
potential customers and for reviewing the tape recordings to ensure 
compliance with applicable securities laws and regulations and 
applicable Exchange rules. The procedures would have to be appropriate 
for the taping firm's business, size, structure, and customers, and 
must be maintained for a period of three years from the date that the 
taping firm establishes and implements the procedures. All tape 
recordings made pursuant to the requirements of proposed Rule 3170(b)--
Equities would have to be retained for a period of not less than three 
years from the date the tape was created, the first two years in an 
easily accessible place. Each taping firm would be required to catalog 
the retained tapes by registered person and date. By the 30th day of 
the month following the end of each calendar quarter, each taping firm 
subject to the requirements of proposed Rule 3170(b)--Equities would 
have to submit to the Exchange a report on the taping firm's 
supervision of the telemarketing activities of its registered persons.
    Proposed Rule 3170(c)--Equities would provide that a member 
organization that becomes a taping firm for the first time may reduce 
its staffing levels to fall below the threshold levels within 30 days 
after receiving notice from the Exchange pursuant to the provisions of 
proposed Rule 3170(b)(1)--Equities or obtaining actual knowledge that 
it is a taping firm, provided the member organization promptly notifies 
the Exchange's Department of Member Regulation in writing of its 
becoming subject to the rule. Once the member organization has reduced 
its staffing levels to fall below the threshold levels, it could not 
rehire a person terminated to accomplish the staff reduction for a 
period of 180 days. On or prior to reducing staffing levels pursuant to 
proposed Rule 3170(c)--Equities, a member organization would be 
required to provide the Exchange's Department of Member Regulation with 
written notice identifying the terminated person(s).
    Proposed Rule 3170(d)--Equities would provide that the Exchange 
may, in exceptional circumstances, taking into consideration all 
relevant factors, exempt any taping firm unconditionally or on 
specified terms and conditions from the requirements of proposed Rule 
3170--Equities. A taping firm seeking an exemption would be required to 
file a written application with the Exchange \23\ within 30 days after 
receiving notice from the Exchange or obtaining actual knowledge that 
it is a taping firm. A member organization that becomes a taping firm 
for the first time could elect to reduce its staffing levels pursuant 
to the provisions of proposed Rule 3170(c)--Equities or, alternatively, 
could seek an exemption pursuant to proposed Rule 3170(d)--Equities, as 
appropriate. A taping firm could not seek relief from proposed Rule 
3170--Equities by both reducing its staffing levels pursuant to 
proposed Rule 3170(c)--Equities and requesting an exemption.
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    \23\ FINRA Rule 3170(d) requires written applications for an 
exemption to be made pursuant to the FINRA Rule 9600 Series, which 
sets forth the procedures for seeking exemptive relief. The Exchange 
has not adopted the FINRA Rule 9600 Series, and therefore proposes 
that a taping firm seeking an exemption file a written application 
with the Exchange within 30 days after receiving notice from the 
Exchange or obtaining actual knowledge that it is a taping firm.
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    The Exchange does not currently have a rule comparable to proposed 
Rule 3170-Equities. The Exchange believes that adopting proposed Rule 
3170-Equities would provide for more effective supervision of member 
organizations that have a significant number of registered persons with 
disciplinary history, thereby resulting is enhanced customer 
protection.
Conforming Changes
    The Exchange also proposes to make certain conforming changes to 
Rules 476A, 36-Equities, 70-Equities, 86-Equities, 345-Equities, 405-
Equities, 407-Equities, 408-Equities, 410-Equities, 416A-Equities, 472-
Equities, and 2210-Equities to delete or update cross-references to the 
proposed rules as applicable. The Exchange also proposes certain 
technical changes within Rule 86-Equities, which are unrelated to this 
proposal.\24\
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    \24\ The Exchange proposes to update a cross reference in Rule 
86--Equities, which should refer to Rule 4522--Equities instead of 
Rule 440--Equities. See Exchange Act Release No. 64887 (Jul. 14, 
2011), 76 FR 43357 (Jul. 20, 2011) (SR-NYSEAmex-2011-51). NYSE 
submitted a similar proposal at that time, which included the change 
to NYSE Rule 86 that the Exchange is proposing herein. See Exchange 
Act Release No. 64888 (Jul. 14, 2011), 76 FR 43366 (Jul. 20, 2011) 
(SR-NYSE-2011-33). The Exchange also proposes to update a reference 
to Rules 17a-3 and 17a-4 of the Act.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\25\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\26\ in particular, because it 
is designed to promote just and equitable

[[Page 70249]]

principles of trade and to remove impediments to and perfect the 
mechanism of a free and open market and a national market system. 
Specifically, the Exchange believes that the proposed rule change 
supports the objectives of the Act by providing greater harmonization 
between Exchange rules and FINRA rules of similar purpose, resulting in 
less burdensome and more efficient regulatory compliance. In 
particular, Exchange member organizations that are also FINRA members 
are subject to Exchange supervisory rules and FINRA Rules 3110, 3120, 
3150, and 3170, and harmonizing these rules by adopting proposed Rules 
3110-Equities, 3120-Equities, 3150-Equities, and 3170-Equities would 
promote just and equitable principles of trade by requiring a single 
standard for supervision. The Exchange believes that to the extent it 
has proposed changes that differ from the FINRA version of the Exchange 
rules, such changes are generally technical in nature and do not change 
the substance of the proposed rules. The Exchange also believes that 
the proposed rule change would update and add specificity to the 
requirements governing supervision, which would promote just and 
equitable principles of trade and help to protect investors. As such 
the Exchange believes that the proposed rule change meets the 
requirements of Section 6(b)(5) of the Act.
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    \25\ 15 U.S.C. 78f(b).
    \26\ 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 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
believes that the proposed rule change is not intended to address 
competitive issues but rather to achieve greater consistency between 
the Exchange's rules and FINRA's rules concerning supervision.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \27\ and Rule 19b-4(f)(6) thereunder.\28\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \27\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \28\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of the filing.\29\ 
However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter period of time if such action is consistent with 
the protection of investors and the public interest.\30\ The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing.
---------------------------------------------------------------------------

    \29\ Id.
    \30\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, 
because it allows the Exchange to immediately conform its supervision 
rules to corresponding FINRA rules. This will ensure that dual members 
of the Exchange and FINRA generally will be subject to a single set of 
rules governing supervision. As noted by the Exchange, the proposal 
will harmonize NYSE MKT and FINRA rules, resulting in less burdensome 
and more efficient regulatory compliance. In addition, the proposal 
will update and add specificity to the Exchange's requirements 
governing supervision, which will promote just and equitable principles 
of trade and help to protect investors. For these reasons, the 
Commission designates the proposed rule change to be operative upon 
filing.\31\
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    \31\ For purposes of waiving the 30-day operative delay, the SEC 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) of the Act to determine whether the proposed rule 
change should be approved or disapproved.\32\
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    \32\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEMKT-2014-93 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEMKT-2014-93. This 
file number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549-1090 on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be 
available for inspection and copying at the NYSE's principal office. 
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-NYSEMKT-2014-
93 and should be submitted on or before December 16, 2014.

[[Page 70250]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
Kevin M. O'Neill,
Deputy Secretary.
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    \33\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-27839 Filed 11-24-14; 8:45 am]
BILLING CODE 8011-01-P