Document ID: SEC-2006-0685-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2006-05-26T04:00Z

[Federal Register: May 26, 2006 (Volume 71, Number 102)]
[Notices]               
[Page 30458-30461]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26my06-136]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53840; File No. SR-NYSE-2005-58]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Relating to Exchange Rule 
312(f) Regarding Changes Within Member Organizations

May 19, 2006.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Exchange Act''), and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on August 15, 2005, the New York Stock Exchange, Inc. 
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or the ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. On May 5, 2006, NYSE filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the rule text in the original 
filing in its entirety and proposes to clarify that Rule 312(f) 
applies only to non-investment grade debt and equity securities. 
Amendment No. 1 also adds Material Associated Persons (``MAPs''), as 
that term is used in Rule 17h-1T of the Exchange Act, to the class 
of persons for whose securities the solicitation of trades is 
prohibited.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE is filing with the SEC the proposed amendment to Exchange 
Rule 312(f) to, among other changes, permit the recommendation of 
purchases and sales of shares of companies controlled and under common 
control with member organizations (other than MAPs),\4\ subject to 
appropriate customer disclosure of the relationship. Below is the text 
of the proposed rule change. Proposed new language is in italics; 
proposed deletions are in brackets.
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    \4\ Exchange Act Rule 17h-1T describes certain indicia of MAP 
status: (i) Legal relationship between the broker or dealer and the 
associated person; (ii) overall financing requirements of the broker 
or dealer and the associated person, and the degree, if any, to 
which the broker or dealer and the associated person are financially 
dependent on each other; (iii) degree, if any, to which the broker 
or dealer or its customers rely on the associated person for 
operational support or services in connection with the broker's or 
dealer's business; (iv) level of risk present in the activities of 
the broker's or dealer's associated persons; and (v) extent to which 
the associated person has the authority or the ability to cause a 
withdrawal of capital from the broker or dealer.
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Changes Within Member Organizations

    Rule 312(a) to (e) no changes.
* * * * *
    (f)(1) After the completion of a distribution of its equity or non-
investment grade debt securities or those of any organization 
controlling the member organization or of any Material Associated 
Person (as used in Rule 17h-1T of the Securities Exchange Act of 1934, 
as amended) of the member organization, no member [corporation] 
organization [which has any publicly held security outstanding] shall 
effect any transaction (except on an

[[Page 30459]]

unsolicited basis) for the account of any customer in, or make any 
recommendation with respect to, any such security [issued by such 
member corporation]. [or]
    (2) Any member organization that makes any recommendation of any 
[such] equity or non-investment grade debt security issued by any 
[corporation controlling] person controlled by or under common control 
with such member [corporation] organization (other than a Material 
Associated Person) [.], shall promptly disclose to such customer the 
existence and nature of such control at the time of recommendation and, 
if this disclosure is not made in writing, shall provide this 
disclosure in writing prior to the completion of the transaction.
    (3) No corporation which has any publicly held security outstanding 
shall, without the prior written approval of the Exchange, dispose of 
any such security for its own account and no member corporation shall 
acquire any such security for its own account or for the account of any 
corporation controlling, controlled by or under common control with 
such member corporation except with the prior written approval of the 
Exchange or pursuant to the terms and provisions of such security or of 
any agreement between the member corporation and the holder of such 
security, which agreement has previously been filed with and approved 
by the Exchange. The Exchange will approve such a disposition or 
acquisition of securities unless it determines that such action will 
impair the financial responsibility or operational capability of the 
member corporation.
* * * * *
    Remainder of Rule 312 unchanged.

A. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    a. Background. Rule 312(f) (the ``Rule'') was adopted in 1970 when 
public ownership of member corporations was first permitted in order to 
address what were perceived to be potential conflicts in such 
transactions. Experience during the intervening 35 years \5\ has 
indicated that certain potential conflicts can be effectively addressed 
by way of disclosure, rather than prohibition. Further, fundamental and 
wide-ranging changes in the securities industry since the Rule's 
introduction also contributed to rendering aspects of the Rule 
unnecessary, outdated and unnecessarily burdensome to member 
organizations.
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    \5\ NYSE previously proposed the amendment of Rule 312(f) 
(which, at the time was Rule 312(g)) in 1982 (See File No. SR-NYSE-
83-3). Exchange Act Release No. 19462 (January 28, 1983) (notice of 
filing of SR-NYSE-83-3). In the filing, NYSE stated that the rule 
created a ``burden on competition'' by placing ``NYSE members and 
their customers at a competitive disadvantage'' to similar 
organizations subject only to the SEC disclosure requirements. NYSE 
withdrew the proposal in 1994. That proposal differed from the 
present proposal in allowing the recommendation of the member 
organization's own publicly traded securities and those of its 
parent corporation, subject to appropriate disclosure of the 
relationship. The present proposal does not permit the 
recommendation of (or the solicited execution of trades in the 
shares of) a member organization or its parent following their 
initial distribution.
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    In the course of responding to Rule 312(f) interpretive requests 
over time, the Exchange has noted changes in the business and 
regulatory environment that warrant reconsideration of the scope of 
Rule 312(f)'s application. These changes include:
    (i) The wide diversification of business conducted by member 
organizations and other entities in the same control family; and
    (ii) The nature of new products that are created for investors.
    The Exchange's regulatory experience relative to Rule 312(f) has 
generally involved determinations as to the existence, or not, of a 
control relationship involving a member organization among the 
complicated interrelationships of, and equity investments by, financial 
organizations. The sole purpose of determining whether such a control 
relationship exists is to establish whether Rule 312(f) restrictions on 
the recommendation of stock issued by entities in the member 
organization's corporate family apply to the member organization. The 
term ``recommendation'' in this context has been interpreted by NYSE to 
include solicited transactions, the issuance of research or market 
letters, and the use of ``active'' market making tactics (i.e., 
actively buying and selling a stock from a proprietary account as 
opposed to ``passively'' standing ready to buy or sell).
    Typical member organization Rule 312(f) interpretive requests 
involve submission to the Exchange of intricate factual representations 
regarding board representation, equity ownership, and/or profit 
participation and will request concurrence with the opinion that no 
control relationship exists.\6\ Often, the request will involve one or 
more investment partnerships, affiliated with a member organization, 
that hold an interest in a subject security. An officer of the member 
organization may be a general partner or on the board of directors of 
the subject security's issuing company. The analysis to determine 
control of the subject security involves objective factors as well as 
consideration of the percentage of member organization personnel 
represented on the issuing company's board of directors and/or their 
ability to influence the issuing company. Such directors, while not 
participants in day-to-day management of the issuing company, may 
exercise a degree of control over it resulting either from their voting 
power, from specially granted powers, or from participation in 
committees. Ultimately, the determination of control is often, in good 
measure, a subjective one.
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    \6\ NYSE Rule 2 creates a presumption of control, in this 
context, where a person possesses the right to vote 25% or more of 
the voting securities, receives 25% or more of the net profits or is 
a director of the other person. Rule 2 defines a ``person'' as ``a 
natural person, corporation, partnership, association, joint stock 
company, trust, fund or any organized group of persons whether 
incorporated or not.''
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    b. Proposed Amendments. The Rule, in pertinent part, currently 
prohibits a member organization from soliciting transactions in its own 
publicly traded securities and from making any recommendations with 
respect to its publicly traded securities or the securities issued by 
any corporation controlling, controlled by or under common control with 
such member corporation (i.e., the securities of any parent, sister, or 
subsidiary corporation relative to the member organization). The intent 
of the Rule is to mitigate conflicts of interest that may arise when 
recommending the public securities of companies in which the member 
organization may have an interest.
    i. Proposed Codification to Exclude Investment Grade Debt from Rule 
312(f). NYSE has interpreted Rule 312(f) to apply only to non-
investment grade debt and equity securities.\7\ This proposal would 
codify that interpretation.
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    \7\ Another common interpretive inquiry with respect to Rule 
312(f) involves, and NYSE anticipates would continue to involve, a 
determination as to whether the security in question has ``debt-like 
characteristics.'' The Exchange has generally interpreted Rule 
312(f) restrictions to not apply to investment grade debt and 
securities that function as investment grade debt. The 
interpretation as to whether a security functions as investment 
grade debt is based on the totality of the circumstances, e.g., (1) 
whether the shares of stock have fixed dividends; (2) whether the 
shares of stock are non-participatory in common dividends; (3) 
whether the shares of stock have limited voting rights; and (4) 
whether the shares of stock are non-convertible into common stock.
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    ii. Proposed Expansion to Include All NNon-Investment Grade Debt 
and Equity Securities. The proposed rule change would also broaden the

[[Page 30460]]

application of the Rule to all non-investment grade debt and equity 
securities, including privately placed issues. The current Rule's 
prohibition applies only to publicly traded securities.
    The Rule currently prohibits effecting solicited transactions only 
as to the securities of member organizations. The proposed rule change 
would extend that prohibition to the non-investment grade debt and 
equity securities of companies controlling member organizations (e.g., 
parent companies) and MAPs. By their nature, MAPs can substantially 
influence a registered broker-dealer, and the inclusion of such 
entities along with controlling organizations \8\ acts to limit 
inevitable conflicts of interest.
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    \8\ See NYSE Rule 2.
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    iii. Proposed Amendment to Permit Certain Recommendations If 
Disclosed. The Exchange also proposes to amend the Rule to permit the 
recommendation of purchases and sales of shares of companies controlled 
by and under common control with member organizations (other than 
MAPs), subject to appropriate customer disclosure of the 
relationship.\9\ Given the varied and numerous sister corporations that 
a member organization owned by a diversified holding company may have, 
the Rule 312(f) restrictions on recommendations of securities issued by 
all such corporations can sometimes be an unnecessary burden to 
legitimate business activity. The rule has had the unintended impact of 
affecting the way merger and acquisition deals are structured, in that 
unnecessarily complex and unwieldy ownership models are developed 
primarily to avoid the 25% voting or profit presumption of control 
established by NYSE Rule 2.
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    \9\  See proposed Rule 312(f)(2).
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    To alleviate these unintended burdens, the Exchange proposes 
amendments to Rule 312(f) that would permit member organizations to 
recommend equity or non-investment grade debt securities \10\ issued by 
any person controlled by, or under common control with, a member 
organization (other than a MAP); however, any such recommendation would 
be subject to a requirement to disclose to the customer the existence 
and nature of such control at the time of recommendation. If the 
disclosure at the time of the recommendation is not made in writing, 
then the member must also provide this disclosure in writing prior to 
the completion of the transaction.\11\ This proposal is consistent with 
and similar to other Exchange regulations such as Rule 472, which 
addresses the issue of research analysts' conflicts, in part, through 
disclosure of potential conflicts involving ownership of equity that is 
the subject of research and market making activity involving the 
subject equity.
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    \10\ As previously noted, the proposed change would broaden the 
application of the Rule to all securities including privately placed 
issues. The current Rule applies only to publicly traded securities.
    \11\ See proposed Rule 312(f)(2).
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    While the Exchange believes that disclosure is adequate to address 
certain conflicts of interest that could arise with respect to a 
member's recommendation to buy or sell securities of many affiliated 
entities, the Exchange believes that it is warranted to retain the 
prohibition on the solicitation of purchases in the securities of the 
member organization, any controlling organization or a MAP, given the 
greater potential for a conflict of interest inherent in such 
relationships. For instance, an employee of a member organization could 
act on material non-public information in connection with either the 
member organization or its parent. Of special concern is stock issued 
by the member organization itself, as a registered representative/
employee may attempt to drive up the price to increase the value of his 
or her company stock plan portfolio. To address these potential abuses, 
the Exchange is proposing to preserve the prohibition on making a 
recommendation or otherwise acting on such information in these 
contexts.
(2) Statutory Basis
    The proposed rule change is consistent with the requirements of the 
Exchange Act, and the rules and regulations thereunder applicable to a 
national securities exchange, and in particular, with the requirements 
of section 6(b)(5) \12\ of the Exchange Act. Section 6(b)(5) 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 national 
market system, and in general, to protect investors and the public 
interest. In addition section 3(f) of the Exchange Act requires, among 
other things, whenever there is a requirement to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to also consider, in addition to the protection of investors, whether 
the action will promote efficiency, competition, and capital formation. 
The proposed change in Rule 312(f) will act to assure adequate and 
continuing protection for investors while promoting efficiency, 
competition, and capital formation by permitting the recommendation of 
purchases and sales of shares of companies controlled and under common 
control with member organizations (other than MAPs), subject to 
appropriate customer disclosure of the relationship, by expanding 
certain restrictions on effecting solicited transactions, and by 
codifying NYSE interpretations.
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    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposal does not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Exchange 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-NYSE-2005-58 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary,

[[Page 30461]]

Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-9303.

All submissions should refer to File Number SR-NYSE-2005-58. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the NYSE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to the File Number SR-NYSE-2005-58 and should 
be submitted on or before June 16, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-8096 Filed 5-25-06; 8:45 am]

BILLING CODE 8010-01-P