Document ID: SEC-2006-0786-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2006-06-21T04:00Z

[Federal Register: June 21, 2006 (Volume 71, Number 119)]
[Notices]               
[Page 35723-35724]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jn06-158]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53983; File No. SR-NYSE-2005-60]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/
k/a New York Stock Exchange LLC); Order Approving Proposed Rule Change 
and Amendment Nos. 2 and 3 Thereto Relating to Proposed New Rules 
342.24 (``Annual Branch Office Inspection'') and 342.25 (``Risk-Based 
Surveillance and Branch Office Identification'') To Permit Member 
Organizations To Classify Appropriate Branch Offices for Cyclical 
Inspections and Proposed New Rule 342.26 (``Criteria for Inspection 
Programs'')

June 14, 2006.
    On August 15, 2005, the New York Stock Exchange, Inc. (n/k/a New 
York Stock Exchange LLC) (``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposal to adopt Exchange Rules 342.24 
(``Annual Branch Office Inspection'') and 342.25 (``Risk-Based 
Surveillance and Branch Office Identification'') to permit 
organizations to classify appropriate branch offices for cyclical 
inspections and 342.26 (``Criteria for Inspection Programs''). The 
Exchange filed Amendment No. 2 to the proposed rule change on April 7, 
2006.\3\ The proposed rule change, as amended, was published for 
comment in the Federal Register on April 27, 2006.\4\ The Commission 
received no comments regarding the proposal, as amended. On June 12, 
2006, the Exchange filed Amendment No. 3 to the proposed rule 
change.\5\ This order approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed Amendment No. 1 to the proposed rule 
change on October 31, 2005 and withdrew Amendment No. 1 on April 7, 
2006.
    \4\ See Securities Exchange Act Release No. 53689 (April 20, 
2006), 71 FR 24881 (``Notice'').
    \5\ In Amendment No. 3, the Exchange made several non-
substantive clarifying changes to the rule text. This was a 
technical amendment and is not subject to notice and comment.
---------------------------------------------------------------------------

I. Description of Proposed Rule Change

    The proposed amendments would permit member organizations, with the 
written approval of the Exchange, to exempt certain branch offices from 
the general annual branch office inspection requirement of Exchange 
Rule 342 (``Offices--Approval, Supervision and Control''). Proposed 
Exchange Rules 342.24 and 342.25 would permit member organizations to 
submit to the Exchange, for approval, policies and procedures outlining 
a risk-based surveillance system that the firm would use to identify 
branch offices requiring less frequent than annual inspections.\6\ Such 
policies and procedures must reflect the member organization's business 
model and product mix, and must provide, at a minimum, for: (1) 
Flexibility to initiate ``for-cause'' inspections, when circumstances 
warrant, of any branch office that has been exempted from the standard 
annual inspection cycle; (2) inspection on an unannounced basis of no 
less than half of the branch offices inspected each year; and (3) a 
system to allow employees to report compliance issues on a confidential 
basis outside of the branch office chain of command. As discussed in 
the Notice and set forth in proposed Exchange Rule 342.25(B), certain 
prescribed criteria, applied to each branch office, also would be 
required of any acceptable risk-based surveillance system used to 
determine which branch offices could be exempted from annual 
inspection.
---------------------------------------------------------------------------

    \6\ In addition, a member organization would still be able to 
seek an exemption if it has demonstrated to the satisfaction of the 
Exchange that because of proximity, special reporting, or 
supervisory practice, other arrangements may satisfy the Exchange 
rule's requirements for a particular branch office. See proposed 
Exchange Rule 342.24(A)(1).
---------------------------------------------------------------------------

    The Rule states that certain branch offices would not be deemed 
appropriate for an exemption under the proposed amendments. 
Specifically, offices with one or more registered representatives 
subject to special supervision in the current or immediately preceding 
year, offices with 25 or more registered individuals, offices in the 
top 20% of production or customer assets at the member organization, 
and any branch offices exercising supervision over other branch offices 
or that have not been inspected within the previous two calendar years 
would not be eligible for exemption from the annual inspection 
requirement. In fact, the proposed amendments would require that all 
branch offices, without exception, be inspected at least once every 
three calendar years. Finally, the proposed amendments would re-
position language from Interpretation /03 of Exchange Rule 342(a)(b) 
into the text of Exchange Rule 342.

II. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\7\ 
In particular, the Commission finds that the proposal, as amended, is 
consistent with the provisions of Section 6(b)(5) of the Act,\8\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change, as amended, 
appropriately balances the need for firms to surveil and inspect their 
branch offices with the need to provide firms with some flexibility to 
adapt branch office inspections according to changing circumstances. 
Specifically, the proposal would allow member organizations to seek an 
exemption from the requirement to inspect branch offices annually based 
upon written policies and procedures that provide for a risk-based 
surveillance system. The policies and procedures would have to be 
submitted to and approved by the Exchange. The Commission believes that 
the ability to implement a limited risk-based surveillance system for 
certain branch offices should allow firms to concentrate their 
surveillance and compliance resources on those branch offices that 
require more frequent and thorough on-site inspections.
    Furthermore, the Exchange expressly sets forth in proposed Rule 
342.25 the risk factors and criteria that firms, at a minimum, should 
consider when developing their policies and procedures. The Commission 
believes that providing explicit factors and criteria to distinguish 
those offices that warrant annual inspection from those that might not 
should also enable member organizations to more effectively direct a 
firm's attention to those regulatory risk areas in need of closer 
scrutiny during the course of an

[[Page 35724]]

on-site inspection. The proposed criteria should provide a more uniform 
standard for firms seeking an exemption from the annual branch office 
inspection.
    Furthermore, the Commission believes that the proposed amendments 
contain appropriate limitations on a firm's ability to apply the 
exemption from the requirement to inspect branch offices every year. 
For instance, the proposal specifically excludes certain offices, given 
their size, scope of supervisory activities, or other factors, from 
eligibility for the exemption. The Rule requires firms to retain the 
ability to initiate ``for cause'' inspections of a branch office where 
developments during the year require a reconsideration of a branch's 
exemption. Requiring firms to use unannounced branch office inspections 
for no less than half of the branch offices inspected each year should 
provide additional incentive to branch office personnel to make 
compliance with the Exchange's rules and the securities laws a 
priority. Furthermore, the Commission believes that requiring firms to 
allow employees to report compliance issues on a confidential basis 
outside of the branch office chain of command and requiring branch 
office inspections to be carried out by a person independent of the 
branch office in question should encourage branch office employees to 
report issues of regulatory concern. The Commission also notes that the 
proposal would require every branch office, without exception, to be 
inspected at least once every three calendar years. The Commission 
emphasizes that, notwithstanding any exemption granted under the 
proposed rules, each member firm is subject to an ongoing duty to 
supervise each branch office and monitor for compliance with all 
applicable securities laws and regulations.\9\
---------------------------------------------------------------------------

    \9\ See Section 15(b)(4)(E) of the Act, 15 U.S.C. 78o(b)(4)(E).
---------------------------------------------------------------------------

III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-NYSE-2005-60), as amended, 
is hereby approved.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-9695 Filed 6-20-06; 8:45 am]

BILLING CODE 8010-01-P