Document ID: SEC-2006-0690-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2006-05-30T04:00Z

[Federal Register: May 30, 2006 (Volume 71, Number 103)]
[Notices]               
[Page 30705-30706]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30my06-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53848; File No. SR-NYSE-2005-78]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/
k/a New York Stock Exchange LLC); Order Approving a Proposed Rule 
Change Relating to Amendments to New York Stock Exchange Rules 35 
(``Floor Employees to be Registered'') and 301 (``Proposed Transfer or 
Lease of Membership'')

May 19, 2006.

I. Introduction

    On December 13, 2005, the New York Stock Exchange, Inc. (n/k/a New 
York Stock Exchange LLC) (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'' or ``SEC''), 
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
seeking to amend NYSE Rules 35 (``Floor Employees to be Registered'') 
and 301 (``Proposed Transfer or Lease of Membership'') which would 
limit access to the Exchange Floor until fingerprint reports have been 
properly processed and approved, require an alternative background 
check for persons whose fingerprints are deemed illegible, and clarify 
that the Exchange would no longer process fingerprint cards.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was noticed for comment in the Federal 
Register on December 29, 2005.\3\ The Commission received no comments 
on the proposed rule change. On March 20, 2006, the Exchange filed 
Amendment No. 1.\4\ On May 4, 2006, the Exchange filed Amendment No. 2 
to the proposed rule change. On May 10, 2006, the Exchange withdrew 
Amendment No. 2 and filed Amendment No. 3 to the proposed rule 
change.\5\ This order approves the proposed rule change.
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    \3\ See Securities Exchange Act Release No. 53018 (December 14, 
2005), 70 FR 77230 (December 29, 2005).
    \4\ In Amendment No. 1, the Exchange deleted Footnote 1 from the 
original filing and clarified that upon the cessation of the sale of 
memberships at the end of 2005, the Exchange would no longer provide 
fingerprinting services to any of its members. This amendment did 
not affect the substance of the proposed rule change; therefore, the 
Commission is not noticing this Amendment for public comment.
    \5\ In Amendment No. 3, the Exchange made technical changes to 
reflect modifications made to the format of NYSE Rule 301 that were 
approved as part of SR-NYSE-2005-77. See Securities Exchange Act 
Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006). 
Due to the purely technical nature of Amendment No. 3, the 
Commission is not noticing this Amendment for public comment.
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II. Description

    NYSE Rule 35 governs the issuance of Floor tickets (i.e., Regular 
Tickets and Special Tickets) to Floor employees, which enables them to 
enter upon the trading Floor. NYSE Rule 35.70 requires the 
fingerprinting of prospective employees of members and member 
organizations. Similarly, NYSE Rule 301(c) requires that prospective 
members be fingerprinted.
    Due to security concerns, the Exchange is proposing to tighten 
these rules by: (1) Denying access to the Floor for persons 
fingerprinted for the first time until the fingerprinting results have 
properly been processed and accepted; and (2) subjecting persons whose 
fingerprints cannot be read (i.e., are illegible) to an alternative 
background check acceptable to the Exchange that would cover the same 
criminal convictions included by a fingerprint background check. NYSE's 
proposed amendments also reflect that the Exchange no longer accepts 
fingerprint cards, but rather requires members and applicants for 
membership to be fingerprinted through an agent acceptable to the 
Exchange.

A. Background

    Rule 17f-2 under the Exchange Act \6\ sets out the requirements for 
the fingerprinting of persons employed in the securities industry. The 
Exchange has adopted procedures to comply with the regulations in order 
to assure that appropriate persons are fingerprinted and the results of 
the fingerprinting are reviewed.\7\ Specifically, prior to providing 
member firm employees with Floor ticket access to the Trading Floor and 
Exchange facilities, and pursuant to NYSE Rules 35 and 345.11 
(``Employees--Registration, Approval, Records''),\8\ a member firm must 
electronically submit a Form U4 \9\ via the Central Registration 
Depository system (``CRD'').\10\ The hiring member firm and the 
employee are responsible for confirming the accuracy of the information 
included on the Form U4.\11\
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    \6\ 17 CFR 240.17f-2.
    \7\ See NYSE Information Memos 76-30 dated June 25, 1976 and 76-
53, dated December 31, 1976, announcing, respectively, the adoption 
of Exchange Act Rule 17f-2 and SEC approval of the Exchange's plan 
for the processing of fingerprints. See also Securities Exchange Act 
Release No. 13105 (December 23, 1976), 42 FR 753 (January 4, 1977).
    \8\ NYSE Rule 345.11 requires, among other things, member firms 
to thoroughly investigate the previous record of persons whom they 
contemplate employing.
    \9\ Form U4 includes information such as an individual's ten-
year employment history, five-year residential history, education, 
disciplinary actions, disclosure information, and the SRO of 
registration.
    \10\ The CRD is a registration and licensing system for the U.S. 
securities industry, state and federal regulators, and SROs. The 
National Association of Securities Dealers, Inc. (``NASD'') operates 
the CRD pursuant to policies developed jointly with the North 
American Securities Administrators Association, Inc.
    \11\ Firms can use CRD to verify the accuracy of the disclosure 
portion (e.g., criminal disclosures, regulatory action disclosures) 
of Form U4 against previously submitted filings and fingerprint 
results.
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    Members and member organizations currently have up to 30 days from 
the date of the electronic filing of the Form U4 application in Web CRD 
for the fingerprints to be submitted. The Exchange has represented that 
applicants and member organizations sometimes wait until the end of the 
30-day period to submit fingerprints, although results from the Federal 
Bureau of Investigation (``FBI'') can be reported within 24-48 hours.

B. NYSE's Proposed Rule Change

1. Access to Exchange Floor
    NYSE is proposing that prospective Floor employees not be admitted 
to the Floor until the results of the applicant's fingerprinting have 
been posted to the CRD, reviewed and approved. NYSE, however, would 
grant conditional approval to an applicant who had been fingerprinted 
previously in connection with employment by another member or 
registered broker-dealer, pending review of the fingerprint results 
submitted by the current employer, if the prior employment was within 
ninety days of the application.
2. Illegible Fingerprints--Alternative Background Checks
    The Exchange also is proposing to address its concern about 
applicants that submit fingerprints which cannot be read (i.e., 
illegible fingerprints). Under Exchange Act Rule 17f-2(a)(l)(iv),\12\ 
when fingerprints are rejected three times as ``illegible'' by the FBI, 
the individual is exempt from further fingerprinting.\13\ Exchange Act

[[Page 30706]]

Rule 17f-2 does not require an alternate means of conducting a 
background check. To address this possible gap in the background check, 
NYSE is proposing to require that members and member organizations 
conduct an alternative background check acceptable to the Exchange when 
an individual's fingerprints are deemed illegible.
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    \12\ 17 CFR 240.17f-2(a)(1)(iv).
    \13\ In this instance, CRD also conducts a ``name check.''
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    In order to be acceptable to the Exchange, any such background 
check would have to cover the same criminal convictions included by 
fingerprint type on a fifty state basis and, if the applicant is 
foreign, an Interpol or other multi-national database check. 
Conditional approval would be available to persons previously the 
subject of a background check, provided employment with a member or 
registered broker-dealer terminated within ninety days of the 
application.
3. Acceptance of Fingerprint Cards
    Lastly, the Exchange is proposing revisions to NYSE Rules 35.70 and 
301(c) to reflect the fact that the Exchange no longer receives 
fingerprint cards directly but does so through agents of the 
Exchange.\14\ However, the Exchange's Membership Services Department 
will process the fingerprints of member applicants not associated with 
broker-dealers (not required to be registered on CRD).
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    \14\ NYSE Rule 345.18 (``Employees--Registration, Approval, 
Records'') provides that any filing or submission to be made with 
the Exchange under that rule, where appropriate, may be made with a 
properly authorized agent acting on behalf of the Exchange and shall 
be deemed to be a filing with the Exchange.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\15\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of section 6(b)(5) of 
the Act \16\ which requires, among other things, that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market, and to protect investors and the public interest.
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    \15\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change should 
strengthen the security of the Exchange Floor by not permitting new 
Floor employees to be admitted to the Floor until the results of their 
fingerprint checks have been posted to the CRD, reviewed and approved. 
The Exchange, however, would grant conditional approval to persons 
previously fingerprinted, or subject to a background check with a 
member or registered broker-dealer, where such prior employment was 
within ninety days of the application. The Commission believes that 
permitting conditional approval under those conditions is acceptable 
given that any such applicant would be under a duty to disclose to the 
Exchange any reportable events during such employment to a supervising 
broker-dealer who was charged with a duty to report statutory 
disqualifications. In addition, the applicant would, of course, have a 
duty to disclose any reportable events during the intervening period in 
his or her application.
    The Commission also believes that requiring an alternative 
background check in the event that an applicant's fingerprints are 
deemed illegible and therefore, a fingerprint check is not performed on 
an applicant, should strengthen the security of the NYSE Floor. The 
Commission notes that in order for an alternative background check to 
be acceptable to the Exchange, the background check would, at a 
minimum, have to disclose the same arrest records as a fingerprint 
check would for all fifty states and, where the applicant is foreign, 
through the records of Interpol. Member organizations would be expected 
to use appropriate diligence in the selection of investigative agencies 
for such background checks, assuring their ability to satisfactorily 
research all pertinent databases. The Commission believes that these 
standards should ensure that an adequate background check is performed 
on all applicants.
    Finally, the Commission believes that is it acceptable for the 
Exchange to no longer accept fingerprint cards, and for NYSE Rules 35 
and 301 to provide that any individual who is required to submit to a 
fingerprint-based background check, have such a check performed by an 
agent acceptable to the Exchange. The Exchange has represented that it 
believes that the NASD or another self-regulatory organization should 
be able to provide these services to any member or applicant that 
requires fingerprinting.\17\ Therefore, the Commission believes that 
individuals who need to obtain access to fingerprinting services in 
order to gain access to the Exchange floor should not be adversely 
affected by the proposed rule change.
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    \17\ Telephone conference among Jennifer Colihan, Special 
Counsel, Division of Market Regulation (``Division''), Commission, 
Kristie Diemer, Attorney, Division, Commission, and Gregory Taylor, 
Senior Special Counsel, Exchange, on March 22, 2006.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NYSE-2005-78) is approved.
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    \18\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).

Nancy M. Morris,
Secretary.
[FR Doc. E6-8235 Filed 5-26-06; 8:45 am]

BILLING CODE 8010-01-P