[Federal Register: August 1, 2007 (Volume 72, Number 147)]
[Notices]
[Page 42195-42210]
[DOCID:fr01au07-134]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56142; File No. SR-NYSE-2007-22]

Self-Regulatory Organizations; New York Stock Exchange, LLC.;
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto
Relating to the Harmonization of NYSE and NASD Regulatory Standards,
the Updating of Certain NYSE Terminology, and the Reorganization and
Clarification of Certain NYSE Rules in Connection With the
Harmonization Process

July 26, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 27, 2007, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by the Exchange. On July 26, 2007, NYSE filed Amendment No. 1
to the proposed rule change. The Commission is publishing this notice
to solicit comments on the proposed rule change, as amended, from
interested persons.
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    \1\ 15 U.S.C 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The proposed rule change consists of amendments to NYSE rules,
organized categorically, that would advance the process of harmonizing
the regulatory standards of the Exchange and the National Association
of Securities Dealers, Inc. (``NASD''). In addition, the proposed rule
change would update certain terminology and otherwise reorganize and
clarify current NYSE regulatory standards. The text of the proposed
rule change is available on the Exchange's Web site (http://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 NYSE 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 these statements may be examined at the places specified in
Item IV below. The NYSE has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects 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 is proposing amendments to certain NYSE Rules pursuant
to its SRO Rule Harmonization initiative. In connection with this
filing, the Exchange is also separately submitting to the Commission a
report that provides an overview of the Exchange's approach in this
regard.
Introduction
    Relative to the approval of the NYSE/ARCA merger,\3\ the Exchange
agreed to initiate a comparison of its regulatory requirements (as
prescribed by the NYSE Rulebook and associated interpretive materials)
to corresponding NASD regulatory provisions. The purpose of the process
was to achieve, to the extent practicable,\4\ substantive harmonization
of the two regulatory schemes. To that end, this filing proposes
amendments to an extensive range of NYSE rules which have been divided
into four categories. In addition to organizing the rules conceptually,
this serves to distinguish the review and recommendation process that
has been applied to each category, discussed more fully below.
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    \3\ See Securities Exchange Act Release No. 53382 (February 27,
2006) 71 FR 11251 (March 6, 2006) (order approving SR-NYSE-2005-77).
    \4\ The review process recognized the appropriateness of
differing standards based upon the differences between the markets
and membership of NYSE and NASD.
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    The categories are arranged as follows: Category 1 addresses Member
Firm Organization/Structure and Governance; Supervision; Registration,
Qualification and Continuing

Education; and Sales Practice (collectively, the ``Sales Practice
Rules''); Category 2 addresses the Financial/Operational Rules;
Category 3 addresses the Buy-In Rules; and Category 4 addresses the
selective deletion of the term ``member'' and the complete deletion of
the term ``allied member'' from the NYSE rules (``Member'' and ``Allied
Member'' Rules).
Global Amendments
    Category 4 includes rules for which the only substantive proposed
change is deletion of the terms ``member'' and/or ``allied member.''
Note, however, that the selective deletion of the term ``member'' and
the complete deletion of the term ``allied member'' is proposed
throughout the other three categories as well.
    These amendments are discussed more fully below under Category 4
(``Member'' and ``Allied Member'' Rules). In brief, the Exchange is
proposing to delete, where appropriate, the term ``member'' throughout
the NYSE rules to reflect its revised meaning in light of the recent
merger/reorganization of the Exchange. While ``member'' is still
recognized as a categorical designation, its current definition \5\ is
substantively different from its pre-merger definition, rendering its
use in many NYSE rules outdated. Thus, many regulatory requirements
that once pertained specifically to NYSE members no longer apply at
all, or apply to members only in their capacity as member organization
employees.
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    \5\ The term ``member'' currently refers to an employee of a
member organization authorized to effect transactions on the Floor
of the Exchange on behalf of such member organization, which holds a
license to so trade.
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    The ``allied member'' designation is a regulatory category based on
a person's ``control'' over a member organization.\6\ It is proposed
that the term be simply deleted in rules where a person's control
status is not relevant to the rule's application. In contexts where an
individual's status as a member organization ``control person'' has
regulatory relevance, the Exchange proposes to substitute the newly
defined category of ``principal executive'' (see proposed Rule 416A
amendments, below). Unlike the ``allied member'' designation, the
``principal executive'' designation would not require a registration
process, but would be used only for regulatory reporting and
notification purposes.
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    \6\ See subsection (b) of NYSE Rule 304 (``Allied Members and
Approved Persons'').
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Category 1 (``Sales Practice Rules'')
Background
    In order to initiate the rule harmonization process, the Exchange
enlisted, through its Compliance Advisory Group (``CAG''),\7\ the
assistance of several securities industry regulatory professionals from
member organizations who volunteered to participate in various
subcommittees in order to conduct an initial review of all relevant
materials and to report their findings and recommendations to the
Exchange and the NASD (collectively, the ``SROs''). The SROs were
charged with the responsibility of considering the appropriateness of
the committees' recommendations and working together to amend their
respective rules accordingly.
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    \7\ The Exchange's Compliance Advisory Group is a committee
consisting of representatives from the Exchange Member Firm
Regulation Division as well as legal and compliance personnel from a
cross-section of the NYSE member organization community. CAG meets
on a periodic basis, generally monthly, to discuss regulatory and
compliance matters of interest to the securities industry.
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    The review process formally began in February 2006 when the
Exchange's Member Firm Regulation (``MFR'') Division, in conjunction
with the CAG, organized four subcommittees and assigned each a group of
rules within a specified regulatory category. The following four
subcommittees were thus established: (1) Member Firm Organization/
Structure and Governance; (2) Supervision; (3) Registration,
Qualification and Continuing Education; and (4) Sales Practice.
Representatives from the Exchange, the NASD, and the Securities
Industry Association (``SIA'') \8\ participated throughout this review
process in a consultative role.\9\ The recommendations that resulted
from these subcommittees' comparison of NYSE and NASD rules are, in
large part, the basis for the Category 1 amendment proposals presented
herein.
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    \8\ Note that SIA has since combined with the Bond Market
Association to form the Securities Industry and Financial Markets
Association (``SIFMA'').
    \9\ NASD did not participate in the Member Firm Organization/
Structure and Governance Subcommittee.
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    The subcommittee review process essentially consisted of
identifying inconsistencies between the NYSE rules and the NASD rules,
determining which SRO standard made more regulatory sense, and then
recommending rule changes that would either conform an NYSE standard to
its NASD counterpart or vice versa. In some instances, the
subcommittees recommended a hybrid approach that included amendments to
corresponding rules of both SROs.
    Each of the recommendations has been reviewed with the CAG Group
and the NASD. These subsequent discussions allowed further exploration
of the issues raised by the subcommittees and provided a better sense
for which recommendations clearly warrant redress via the formal rule
amendment process and which require further consideration.\10\
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    \10\ See NYSE Report submitted in conjunction with this filing
for a further discussion and enumeration of such rules.
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    The Exchange has also taken the opportunity, where appropriate, to
reorganize and clarify rule text related to the subcommittees'
recommendations and to otherwise update, refine and clarify its
regulatory standards.
Rule 311 Formation of Member Organizations
    NYSE Rule 311 governs the formation and approval of member
organizations by the Exchange. The proposed amendments to Rule 311(b)
would extend the application of the rule, which currently addresses
partnerships and corporations, to include any type of entity (e.g., a
limited liability company) applying to the Exchange to become a member
organization.
    The proposed amendments would delete subsection (b)(7) of Rule 311
which requires every employee who is associated as a member with a
member organization to be designated with a title, such as vice
president, consistent with such person's responsibilities and the usage
of titles within such organization. Additionally, the amendments
propose the deletion of subsection (h) which prescribes the number of
partners to be named in a member organization in order for it to
conduct business. These two provisions are being deleted as they are
outdated and no longer necessary in light of the current spectrum of
NYSE member organizations business models.
Rule 313 Submission of Partnership Articles--Submission of Corporate
Documents
    NYSE Rule 313 requires member organizations to submit to the
Exchange for approval certain documents which establish a partnership's
or corporation's existence. The proposed amendments to Rule 313 add
limited liability agreements to the enumeration of documents required
to be submitted to and approved by the NYSE in order for an entity to
be a member organization. The proposed amendments to Rule 313 also
amend .23 of the supplementary material to provide that all
corporations, not just

those organized under the laws of the State of New York, shall subject
themselves to the restrictions set forth in .23.
Rule 322 (Guarantees by, or Flow Through Benefits for Members or Member
Organizations)
    Rule 322.10 currently requires each member organization to provide
written notice to the Exchange prior to: (1) Guaranteeing, endorsing or
assuming, directly or indirectly, the obligations of another person or
(2) receiving flow-through capital benefits. The practice by member
organizations of guaranteeing the liabilities of other persons has long
been recognized as a matter that gives rise to special risks with
respect to the member organization's capital. Accordingly, as a matter
of practice, the Exchange has carefully reviewed and vetted such
submissions such that the ``prior notice'' requirement has effectively
been treated as a ``prior approval'' requirement.
    The proposed amendments would codify this well-established approach
by replacing the present requirement that ``notice'' of at least 10
business days be given to the Exchange prior to entering into an
arrangement prescribed by the rule with an explicit requirement that
written Exchange approval be obtained prior to the finalization of any
such arrangement.
    The NASD does not currently have an analogue to Rule 322. The
Member Firm Organization/Structure and Governance Subcommittee
recommended that NASD adopt a similar rule and NASD has taken the
recommendation under advisement.
Rule 342 (Offices--Approval, Supervision and Control) and its
Interpretation
Rule 342.13--Acceptability of Supervisors
    NYSE Rule 342.13(a) currently requires that persons who are to be
assigned certain prescribed supervisory responsibilities \11\ have a
``creditable'' three year record as a registered representative or have
three years of ``equivalent experience'' before functioning as a
supervisor.\12\
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    \11\ In this regard, Rule 342.13(a) references Rule 342(d) which
requires that ``[q]ualified persons acceptable to the Exchange shall
be in charge of: (1) Any office of a member or member organization,
(2) any regional or other group of offices, (3) any sales department
or activity.''
    \12\ Rule 342.13(a) also requires that persons assigned
supervisory responsibility pursuant to Rule 342(d) must pass a
qualification examination acceptable to the Exchange that
demonstrates competence relevant to assigned responsibilities.
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    The Exchange proposes that Rule 342.13(a) be amended to eliminate
the prescribed three-year experience requirement for supervisory
personnel and conform with the standard outlined in NASD Rule
1014(a)(10)(D) with respect to firms that are submitting an application
to become registered as a broker dealer. In addition, as under NASD
1014(a)(10)(D), the proposed amendments would require that supervisory
candidates have one year of ``direct experience'' or two years of
``related experience'' in the subject area to be supervised.
    With respect to existing broker dealers, the Exchange believes
that, given a member organizations' first hand knowledge of their
supervisory candidates, it is reasonable to provide greater flexibility
than Rule 342.13(a) currently allows. Accordingly, the proposed
amendments would allow member organizations to make informed
determinations, on a case-by-case basis, as to the length and type of
experience and training required for each supervisory candidate before
he or she is deemed sufficiently prepared to assume particular
responsibilities.
    In order to ensure regulatory jurisdiction over all principal
executives, and to more closely conform with the standard prescribed
under subsection (a) of NASD Rule 1021 (Registration Requirements) the
Exchange proposes new Rule 342.13(c) which would require each person
designated by a member organization as a ``principal executive,'' as
that term is defined in Rule 416A, to pass an examination appropriate
to the functions to be performed by such person.
Rule 342.19--Supervision of Producing Manager
    NYSE Rule 342.19 currently requires that a person designated to
supervise the business of a Producing Manager (a branch office manager,
regional/district sales manager, or a person who performs similar
functions and that conducts a public business) must be senior to, or
otherwise independent of, such Producing Manager. Currently, a
component of determining whether such designated person is ``otherwise
independent'' of a Producing Manager is whether the designated person
receives an override or other income derived from the Producing
Manager's customer activity that represents more than 10% of the
designated person's gross income derived from the member organization
over the course of a rolling twelve-month period. If the designated
person exceeds the 10% threshold, Rule 342.19 requires that ``alternate
senior or otherwise independent supervision'' of the Producing Manager
be established.
    Member organizations have indicated that the ``10% override''
standard is difficult to calculate within the context of certain
compensation models (e.g., where an override or other compensation may
be tied to a formula applicable to the business of the entire branch
office and not distinguishable from the Producing Manager's customer
activity).
    Consequently, the Exchange proposes to delete the current Rule
342.19 standard and offer the following alternative: If a designated
supervisor receives an override or other income from the production of
registered persons subject to his or her supervision, and the gross
revenues of any Producing Manager under his or her supervision exceed
10% of the total gross revenue of all registered persons subject to his
or her supervision, then the producing manager would be ``flagged'' for
either alternate supervision (as currently required by Rule 342.19) or
``heightened supervision,'' which is the standard currently utilized by
the NASD 3012(a)(C). The Exchange also proposes amending Rule 342.19(a)
to add the NASD Rule 3012(a)(2)(C) definition of ``heightened
supervision.'' Thus, proposed Rule 342.19(a) would define ``heightened
supervision'' to mean: ``those supervisory procedures that evidence
supervisory activities that are designed to avoid conflicts of interest
that serve to undermine complete and effective supervision because of
the economic, commercial, or financial interests that the supervisor
holds in the associated persons and businesses being supervised.''
Rule 342.23--Internal Controls
    The Exchange proposes repositioning text, from Rule 401 to Rule
342.23, which requires internal controls over certain prescribed
business activities (e.g., activities pertaining to the transmittal of
funds and securities from customer accounts, changes in customer
address, and changes in customer investment objectives). Since Rule 401
text currently refers back to requirements outlined in Rule 342.23, it
makes sense to integrate the Rule 401 text into Rule 342.23 for
purposes of easy reference and comprehension.
Rule 345 (Employees--Registration, Approval, Records) and its
Interpretation
Adoption of ``Assistant Representative'' Registration Category
    The Exchange is proposing amendments to Rule 345(a) and its
Interpretation to adopt ``assistant

representative'' as a registration category and to recognize the Series
11 as its prerequisite qualification examination.\13\ This is being
done to establish a registration category that would allow for the
performance of functions not permitted to be performed by a non-
registered sales assistant without requiring full Series 7
registration. Specifically, as defined in proposed Rule 345.10, a
person registered as an ``assistant representative'' would be a member
organization employee who could accept unsolicited orders for execution
by the member organization. An assistant representative would not be
permitted to solicit transactions or new accounts on behalf of the
member organization, render investment advice, make recommendations to
customers regarding the appropriateness of securities transaction, or
effect transactions in securities markets on behalf of the member
organization.
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    \13\ The Commission notes that NASD currently has a similar rule
that governs Assistant Representatives. See NASD Rules 1041
(Registration Requirements for Assistant Representatives) and 1042
(Restrictions for Assistant Representatives).
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    Further, persons registered in this category may not be registered
concurrently in any other category. Member organizations may only
compensate assistant representatives on an hourly wage and may not
directly or indirectly relate their compensation to the number or size
of customer transactions effected. This provision would also prohibit
assistant representatives from receiving bonuses or other like
compensation related to a member organization's transaction-based
activity.
Elimination of Prescribed Training Periods for Certain Registered
Persons
    NYSE Rule 345 currently prohibits member organization employees
from performing the functions of a registered representative unless
such employee is registered, qualified and meets a designated four-
month training period.\14\
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    \14\ See Rule 345(a) and Supplementary Material section
.15(b)(2).
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    Further, the Interpretation\15\ of Rule 345 currently provides that
exam-qualified ``registered representatives'' and ``registered options
representatives'' will not receive Exchange approval to perform
functions pursuant to such qualifications without first completing a
four-month training period. NASD Rules do not require such training
periods.
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    \15\ See Rule 345.15/2 (``Qualifications--Categories of
Registration'') in the NYSE Interpretation Handbook.
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    In order to harmonize Rule 345 with the NASD regulatory structure,
and to provide member organizations the flexibility to train their
registered personnel in a manner appropriate to the duties they will be
assuming, the Exchange is proposing amendments to Rule 345 and its
Interpretation to eliminate the prescribed four-month training period
for registered representatives and for registered options
representatives. The proposed amendments would allow member
organizations to make informed decisions as to the extent and duration
of training for such registered persons before they are permitted to
perform functions requiring registration.
    Similarly, the Exchange is also proposing the elimination of the
currently required two-month training period for ``limited
registration'' candidates.\16\
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    \16\ Limited registration candidates' activities are limited to
the solicitation or handling of the sale or purchase of instruments
such as investment company securities and variable contracts,
insurance premium finding programs, direct participation programs
and municipal securities. (See Rule 345.15/02 in the NYSE
Interpretation Handbook).
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Rule 345(b)
    Rule 345(b) currently prohibits any natural person, other than a
member or allied member, to assume the duties of an officer with the
power to legally bind such member or member organization unless such
member or member organization has filed an application with and
received the approval of the Exchange. The Exchange proposes to delete
Rule 345(b) in its entirety. Proposed amendments to Rule 416A (see
below) would require member organizations to notify the Exchange of all
principal executives (defined as the designated principal executive
officers of a member organization pursuant to NYSE Rule 311(b)(5) or
their functional equivalents). There would no longer be a requirement
that the Exchange approve such persons (which is consistent with NASD's
regulatory structure). New Rule 345(b) would clarify that no person
shall undertake any active duties whose performance requires a
qualification examination until such person has satisfactorily met such
examination requirement. This is included, in part, to reaffirm the
exam qualification requirements applicable to such control persons.\17\
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    \17\ See, for example, Rule 311 and its Interpretation.
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Training Requirement for Members and Substitute Members
    The Exchange is proposing new Rule 345(c) which would prohibit any
person from becoming active on the Floor as a member or a substitute
thereof unless such person has been sufficiently trained under the
guidance of an experienced member for such period of time as may be
necessary before being permitted to execute orders without supervision.
This requirement is proposed to help ensure that persons who will be
performing the duties of a member are sufficiently prepared to do so.
Adoption of ``Qualified Investor'' Standard
    The Interpretation of Rule 345 \18\ currently allows Floor members
and Floor clerks who have successfully completed the Series 7A
examination to conduct a public business limited to accepting orders
from ``professional customers'' as that term is defined in the
Interpretation. The Exchange is proposing substituting the more
generally recognized ``qualified investor'' standard, as that term is
defined under section 3(a)(54) \19\ of the Act.
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    \18\ See Rule 345.15/02 in the NYSE Interpretation Handbook.
    \19\ 15 U.S.C. 78c(a)(54).
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Clarification of Employee Background Check Requirements
    The Exchange is also proposing revised language \20\ that
reorganizes and clarifies member organization requirements with respect
to investigating the background of persons they contemplate employing.
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    \20\ See Rule 345.11 in the Supplementary Material.
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Rule 346 (Limitations--Employment and Association With Members and
Member Organizations)
Rule 346(b) Inclusion of Rule 407 Materials Related to ``Private
Securities Transactions''
    NYSE Rule 407 (Transactions--Employees of Members, Member
Organizations and the Exchange) provides, in part, that no employee of
a member organization shall establish or maintain a securities or
commodities account or enter into a private securities transaction
without the prior written consent of his or her member organization.
The Exchange is proposing amendments to 346 to more logically
reposition current Rule 407 requirements \21\ with respect to ``private
securities transactions'' (e.g., interests in oil or gas ventures, real
estate syndications, tax shelters, etc.) and to harmonize the standards
applicable to such transactions with those of NASD

Rule 3040 (Private Securities Transaction of an Associated Person).
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    \21\ See Rule 407(b) and section .11 in the Supplementary
Material.
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    Specifically, the Exchange proposes repositioning requirements
pertaining to ``private securities transactions'' from Rule 407 to Rule
346(b) since Rule 346 more directly addresses issues related to the
outside activities of registered persons. Further, definitions of the
terms ``private securities transactions'' and ``selling compensation''
are proposed that are substantially similar to the definitions found in
corresponding NASD Rule 3040.\22\
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    \22\ See Rule proposed Rule 346 Supplementary Material sections
.10, .11 and .12, respectively.
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Proposed Deletion of Rule 346(c)
    The Exchange proposes deleting Rule 346(c) which currently requires
that prompt written notice be given to the Exchange ``whenever any
member or member organization knows, or in the exercise of reasonable
care should know, that any person, other than a member, allied member
or employee, directly or indirectly, controls, is controlled by or is
under common control with such member or member organization.'' This
provision is redundant in light of the FORM BD requirement, pursuant to
its question number 10, that each broker dealer disclose such control
relationships. The proposed amendment would be consistent with the NASD
regulatory structure which has no corresponding requirement.
Proposed Amendments to Rule 346(e), Rule 346(f) and 476A (Imposition of
Fines for Minor Violation(s) of Rules)
    Rule 346(e) currently requires that persons who are assigned or
delegated supervisory authority pursuant to Rule 342 must devote their
entire time during business hours to their member organization, unless
otherwise permitted by the Exchange. Over the past several years, the
Exchange has had extensive experience reviewing and responding to
approval requests pursuant to Rule 346(e) and has noted an increasing
number of member organizations that have interrelated business
arrangements with sister corporations active in various areas of the
financial services industry. Also noted has been the corresponding
increase in experience member organizations have gained in the
allocation of supervisory responsibility when supervisory persons are
assigned functions across corporate lines.
    Accordingly, the Exchange proposes amendments to Rule 346 that
would eliminate the requirement of Exchange approval in order for
supervisory persons to devote less than their entire time to the
business of their member organization. In lieu thereof, the amended
rule would require the prior written approval of the member
organization, pursuant to the exercise of appropriate due diligence,
for such arrangements. The amendments recognize that member
organizations are best positioned to make such determinations.
    The proposed amendments \23\ would require the identification of
any entity for which the supervisory person will be performing services
during business hours and a description of such services. The member
organization's written approval would be required to set forth the
approximate amount of time the supervisory person is expected to devote
to each entity, with particular attention paid to the approximate time
expected for the person, based upon qualifications and experience, to
be able to effectively discharge his or her supervisory
responsibilities on behalf of the member organization. In addition, the
amendments would require documentation that the member organization has
made a good faith determination that the arrangement will not
compromise the protection of investors or the public interest,
compromise the supervisor's duties at the member organization, or give
rise to a material conflict of interest. These provisions have been
repositioned from Rule 346(e) to Rule 346(c).
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    \23\ See proposed Rule 346(c).
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    The nearest corresponding NASD requirement is found in NASD Rule
3030 (Outside Business Activities of an Associated Person) which
generally states that no registered associated person of a member shall
be employed by, or accept compensation from, any other person as a
result of any other business activity without providing prompt written
notice to the member. This standard is similar to that currently
outlined in NYSE Rule 346(b) which applies only to non-supervisory
member organization employees. While this standard continues to be
appropriate for non-supervisory persons, the Exchange believes that,
given the responsibilities attendant to persons who have been delegated
supervisory duties, a heightened standard of control such as that
prescribed by the proposed amendments remains advisable.
    It is proposed that the Interpretation of Rule 346(e) be deleted
since its application is specific to the regulatory standard being
deleted, and would thus be rendered irrelevant upon approval of the
proposed amendments to the Rule.
    Further, Rule 476A, which lists violations of Exchange rules that
are subject to a fine not to exceed $5,000, includes Rule 346(e) as a
``failure to obtain Exchange approval'' violation. Since the Exchange
is proposing the elimination of the Exchange approval requirement under
this provision (and since Rule 346, as amended, no longer contains a
subsection (e), it is proposed that the reference to Rule 346(e) within
Rule 476A be deleted as well.
Proposed Amendments to Rule 346(f)
    Rule 346(f) currently requires that, except as otherwise permitted
by the Exchange, ``no member, allied member, approved person, employee
or any person directly or indirectly controlling, controlled by or
under common control with a member or member organization shall have
associated with him or it any person who is known, or in the exercise
of reasonable care should be known, to be subject to any `statutory
disqualification.''' \24\ As written, this provision is overly broad in
that its prohibitive reach ostensibly extends to persons not subject to
the jurisdiction of the Exchange. Thus, amendments are proposed to Rule
346(f) to reasonably clarify that its reach is limited to persons
subject to the Exchange's jurisdiction. The amended language has also
been repositioned as Rule 346(d). As violations of current Rule 346(f)
are subject to Rule 476A, corresponding amendments to that rule that
reflect this repositioning are proposed as well.
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    \24\ See Section 3(a) (39) of the Act for the definition of
statutory disqualification.
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Rules 351 (Reporting Requirements) and 401A (Customer Complaints)
    NYSE Rule 351(d) requires each member organization to report to the
Exchange statistical information regarding customer complaints relating
to such matters as may be specified by the Exchange.\25\ Current
Exchange policy requires that all complaints, including oral
complaints, be reported pursuant to this provision.\26\
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    \25\ See NYSE Information Memo Nos. 06-28 (May 4, 2006), 05-29
(April 22, 2005), 04-11 (March 9, 2004), 03-38 (September 19, 2003),
03-36 (August 25, 2003), and 98-16 (April 14, 1998).
    \26\ See NYSE Information Memo No. 03-38 dated September 19,
2003.
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    Amendments to Rule 351(d) are proposed that would limit reportable
complaints to those that are ``written,'' consistent with NASD Rule
3070(c). Furthermore, proposed new NYSE Rule 351.15 limits the
definition of the term ``customer complaint'' to written statements of
a customer, or any person acting on behalf of a customer, other than a
broker or dealer, alleging a

grievance involving the activities of those persons under the control
of a member organization.
    NYSE Rule 401A currently requires that member organizations
acknowledge and respond to all complaints subject to the reporting
requirements of Rule 351(d). As noted above, the Exchange is proposing
to limit Rule 351(d) reportable complaints to those that are written.
However, the Exchange believes that both written and oral complaints
should be acknowledged and responded to pursuant to Rule 401A. Thus, it
is proposed that the Rule 401A reference to Rule 351(d) be deleted to
clarify that verbal complaints remain within the scope of Rule 401A.
Note that Rule 401A requires member organizations to maintain written
records of such acknowledgements, responses and other prescribed
complaint-related follow-up activities, and further requires that such
records be retained in accordance with NYSE Rule 440 (Books and
Records).
Rule 352 (Guarantees, Sharing in Accounts, and Loan Arrangements)
    Rule 352 restricts the extent to which member organization
personnel may share in customer account profits or losses. Rule 352(b)
generally prohibits member organizations, allied members and registered
representatives from sharing profits or losses in any customer account.
However, Rule 352(c) permits such sharing in proportion to financial
contributions made to a joint account.
Rule 352(c)
    The Exchange proposes to amend Rule 352(c) to exempt from the
proportional contribution requirement joint accounts with immediate
family members held by principal executives or registered
representatives of a member organization. This amendment would avoid
intrusive regulation into accounts that may naturally entail profit and
loss participation on a disproportionate basis, as with joint accounts
between husband and wife, while retaining coverage of the rule for
other accounts. Similarly, NASD Rule 2330(f)(1)(A) generally permits an
NASD member or a person associated with an NASD member to share in
profits and losses with a customer, provided such sharing is
proportionate to the financial contributions of each account holder
while NASD Rule 2330(f)(1)(B) exempts from this proportionality
requirement accounts shared between an associated person and a customer
who is an immediate family member of such associated person.
    The amendments make clear that any sharing arrangement entered into
pursuant to Rule 352(c) is subject to the Rule 352(a) provision that no
member organization shall guarantee or in any way represent that it
will guarantee any customer against loss in any account or on any
transaction; and no employee of such member organization shall
guarantee or in any way represent that either he or she, or his or her
employer, will guarantee any customer against loss in any customer
account or on any customer transaction.
    The amendments define the term ``immediate family'' in Rule 352(c)
to include parents, mother-in-law or father-in-law, husband or wife,
children or any relative to whose support the principal executive or
registered representative contributes directly or indirectly. This
definition harmonizes with the standard under NASD Rule 2330(f)(1)(B).
The existing definition of ``immediate family'' in Rule 352(g) is
retained for other provisions in the Rule, essentially allowing persons
acting in the capacity of a registered representative or principal
executives to lend to or borrow from a more extensive range of family
members. Accordingly, it is proposed that Rule 352(g) be amended to
confirm that its provisions are not applicable to Rule 352(c). The
broader Rule 352(g) standard is also consistent with the corresponding
NASD standard.\27\
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    \27\ See subsection (c) of NASD Rule 2370 (Borrowing From or
Lending to Customers).
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Rule 352(d)
    The Exchange is also proposing non-substantive amendments to Rule
352(d) that streamline the reference to the exemption from the rule's
general prohibition against sharing in profits. Specifically the
revised provision would read that, notwithstanding the general
prohibition against sharing in profits under paragraph (b), a person
acting as an investment adviser (whether or not registered as such) may
receive compensation based on a share of profits or gains in an account
if all of the conditions in Rule 205-3 of the Investment Advisers act
of 1940 (as may be amended from time to time) are satisfied. The
provision retains its notice that all advisory compensation
arrangements should be reviewed by member organizations and their
counsel in light of applicable State and Federal law (e.g., ERISA).
Rule 353 (Rebates and Compensation)
    First proposed in 1978 and adopted in 1979,\28\ Rule 353(a) enacted
into Exchange regulations anti-rebate provisions which had previously
been contained in the Registered Representative Agreement.\29\ In
pertinent part, the Rule provides:

    \28\ See Securities Exchange Act Release No. 15811 (May 11,
1979).
    \29\ See NYSE Information Memo 79-42 (July 16, 1979).

    No member, allied member, registered representative or officer
shall, directly or indirectly, rebate to any person, firm, or
corporation, any part of the compensation he receives for the
solicitation of orders for the purchase or sale of securities or
other similar instruments for the accounts of customers of his
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member organization employer * * *

    The Rule has for some time been consistently interpreted by the
Exchange to prohibit rebate arrangements directly between natural
persons (without the knowledge or involvement of the broker dealers
carrying such persons' registration) but not to prohibit arrangements
when payments are made broker dealer to broker dealer and remitted to
duly registered individuals. The Exchange has, upon request, provided
``good business practice'' safeguards regarding how to best structure
such arrangements pursuant to Rule 353.
    Amendments to the Rule are proposed that would incorporate those
safeguards and clarify relevant regulatory requirements applicable to
these arrangements. The amendments would also re-title the rule from
``Rebates and Compensation'' to ``Rebates and Commission Sharing
Arrangements'' to better reflect the focus of the amended text. NASD
has no analogue to Rule 353.\30\
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    \30\ NASD Rule 2420 (Dealing with Non-Members) states that no
member may deal with a non-member unless at the same prices, for the
same commissions or fees, and on the same terms and conditions as
are by such member accorded to the general public. NASD IM-2420-2
(Continuing Commissions Policy) states that continuing commissions
are permitted so long as the person receiving them is registered
with the NASD.
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    Proposed amendments to Rule 353(a) would reaffirm that the rule
prohibits rebate arrangements ``directly'' to natural persons.
Specifically, the revised text states that ``[n]o employee of any
member organization shall, directly remit to or receive from any
person, firm, or corporation, any part of the compensation received for
effecting transactions in securities or other similar instruments for a
customer account, or directly pay or receive such compensation, or any
part thereof, as a bonus, commission, fee or other consideration for
business sought or procured for the employee or for any member
organization of the Exchange.''
    Proposed Rule 353(b) would clarify that registered employees of
member organizations may participate in the remittance or receipt of
such

compensation pursuant to an agreement which provides that:
    (1) All remittances or payments to or from the registered employee
are made pursuant an arrangement between the member organization and
another registered broker-dealer;
    (2) the terms of the payment arrangement are memorialized in a
written agreement signed by authorized officers of both broker dealers;
    (3) all such remittances or payments are duly recorded on the
respective organizations' books and records; and
    (4) affected customers receive prior, specific, plain language
written disclosure of the payment arrangement. (Such disclosure must
provide payment parameters and methods; mere ``boiler plate''
disclosure would not satisfy the provisions of this subsection).
    These provisions are intended to prevent improper payment
arrangements between individuals that are under the broker dealers'
``regulatory radar.'' They are further meant to assure that sharing in
commission-based income is limited to registered persons, as well as to
assure the transparency of such arrangements not only to the broker
dealers but also to affected customers.
    Proposed Rule 353.10 distinguishes other permissible arrangements
that could be interpreted as types of commission sharing. Specifically
noted are payments made pursuant to a carrying agreement under Rule
382, since such agreements: May involve netting of commissions by the
carrying firm; are by definition limited to broker-dealers; are made
under an arrangement disclosed to the customers; and are in writing.
Also included is a reference to Section 28(e) of the Act which provides
a safe harbor that protects money managers from liability for breach of
fiduciary duty solely on the basis that they paid more than the lowest
commission rate in order to receive brokerage and research services
provided by a broker-dealer if a manager determines in good faith that
the amount of commissions was reasonable in relation to the brokerage
and research services received.
    Proposed Rule 353.10 also makes clear that any commission-sharing
arrangements established pursuant to Rule 353 must comply with all
other applicable SRO rules and federal regulations and may not
otherwise compromise services to affected customers (e.g., with respect
to ``best execution'' obligations).
Rule 388 (Prohibition Against Fixed Rates of Commission)
    Rule 388 currently states that the Exchange does not require its
members to charge fixed or minimum rates of commission, and provides
that nothing in the Rules of the Exchange shall be construed as
authorizing the charging of fixed rates.
    The Exchange adopted Rule 388 on April 3, 1975 in response to Rule
19b-3 \31\ of the Act and in conjunction with the Securities Acts
Amendments of 1975,\32\ which moved the securities industry toward
fully negotiated commission rates. The Commission rescinded Rule 19b-3
in 1988 upon the enactment of Section 6(e)(1) \33\ of the Act which
specifically prohibited exchanges from imposing fixed rates of
commissions. Since the purpose of Rule 388 has been achieved by Section
6(e)(1), it has been rendered redundant and serves no practical
purpose. Accordingly, it is proposed that it be rescinded. The NASD has
no comparable rule.
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    \31\ 17 CFR 240.19b-3.
    \32\ Elements of the SEC rule were enacted in amendments to the
Act at Section 6(e)(1).
    \33\ 15 U.S.C. 78f(e)(1).
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Rule 401 (Business Conduct) \34\
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    \34\ See also discussion under ``Rule 342'' above of the
repositioning of Rule 401(b) text into Rule 342.23.
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    Rule 401 states, in part, that each member organizations shall at
all times adhere to the principles of good business practice in the
conduct of its business affairs. The Exchange is proposing to add
supplementary material to Rule 401 \35\ that would codify the
understanding that principles of good business conduct extend to
compliance with all regulatory provisions to which a member
organization is subject (including applicable provisions of federal
securities law, the rules and regulations of any SRO of which a member
organization is a member, state securities law, ERISA, etc.). This
would clarify that the principles of good business practice required by
Rule 401 extend, for example, to the product-specific provisions of
NASD Rule 2210 (Communications with the Public) and its interpretive
material \36\ which are not specifically addressed in corresponding
NYSE Rule 472 (Communications with the Public) as well as to NASD Rule
2440 (Fair Prices and Commissions) and NASD IM-2440 (Mark-up Policy).
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    \35\ See proposed Rule 401.10.
    \36\ For example, unlike NYSE Rule 472 and its interpretation,
NASD IM-2210-2 addresses ``communication with the public'' issues
specific to Variable Life Insurance and Variable Annuities.
Likewise, NASD IM-2210-8 addresses communications issues specific to
Collateralized Mortgage Obligations.
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Rule 407 (Transactions--Employees of Members, Member Organizations and
the Exchange)
    The proposed amendments to Rule 407 are discussed above in the
context of the ``Rule 346'' amendments.
Rule 408 (Discretionary Power in Customers'' Accounts)
    NYSE Rule 408 provides, in part, that no employee of a member
organization shall exercise discretionary power in any customer's
account or accept orders for an account other than the customer without
first obtaining written authorization of the customer. The Exchange is
proposing amendments to Rule 408(a) that would require member
organizations to obtain the signature of any person or persons
authorized to exercise discretion in such accounts, of any substitute
so authorized, and the date such discretionary authority was granted.
The proposed amendment would conform Rule 408(a) to corresponding
requirements in NASD Rule 3110(c) and would promote better member
organization controls to ensure that exercise of discretionary power
over accounts is properly authorized.
    Rule 408(c) prohibits effecting purchases or sales which are
excessive in size or frequency in view of the financial resources of
such customer. It is proposed that Rule 408(c) be amended to harmonize
it with NASD 2510(a) which prohibits transactions that are excessive in
size or frequency in light of the ``financial resources and character''
of the account. Specifically, the Exchange proposes amending Rule
408(c) to take into consideration the ``character'' of an account by
requiring consideration of the customer's ``account history, investment
objectives and age.''
    In addition, The Exchange proposes amendments to Rules 408(d) and
408.11 that would delete the term, ``institutional account'' and
replace it with the term, ``qualified investors'' as the latter is a
readily identifiable standard under the federal securities laws.
Rules 409A (SIPC Disclosures) and 436 (Interest on Credit Balances)
    The Exchange is proposing the deletion of Rule 436 and its
Interpretation and the repositioning of their substance into Rule 409A.
The purpose is to both clarify the intent of Rule 436 and place the
revised text in a more suitable context.
    Rule 409A currently provides, in part, that member organizations
must advise

each customer in writing, upon the opening of an account and at least
annually thereafter, that they may obtain information about the
Securities Investor Protection Corporation (SIPC), including the SIPC
Brochure, by contacting SIPC, and shall provide the Web site address
and telephone number of SIPC. The proposed amendments to Rule 409A
would add that member organization account statements must contain a
disclosure to the effect that free credit balances not maintained for
purposes of reinvestment in securities will be ineligible for SIPC
coverage.
    The purpose of consolidating Rule 436 and its Interpretation into
Rule 409A is to position all of our provisions relating to SIPC and its
consequences for customers in one rule for easier application and more
logical placement. During the course of our rule review, we have
attempted to align kindred and related rules into a more coherent
structure. Rule 436, as it presently exists, was created to implement
certain aspects of the Banking Act of 1933 (generally referred to as
the Glass Stiegel Act). Specifically, Rule 436 and its Interpretation
436/01 provide that no member organization, unless subject to
supervision by State banking authorities, shall pay interest on any
credit balance created for the purpose of receiving interest thereon,
however, interest may be paid on ``free'' credit balances left with a
member organization for the purpose of reinvestment or temporarily
being held awaiting investment. Accordingly, the Interpretation
provides that member organizations should devise a method for
determining whether the credit balance is left for investment or
reinvestment purposes to ensure that such funds are fully protected by
SIPC. Rule 436 has been interpreted to mean that free credit balances
are to be used for reinvestment purposes, which falls fore square to
the proposed change in Rule 409A(2) regarding SIPC not covering
balances that are not being used for reinvestment purposes.
Rule 412 (Customer Account Transfer Contracts)
Background
    NYSE Rule 412 regulates the process by which member organizations
transfer customer accounts through the Automated Customer Account
Transfer Service (``ACATS'').\37\ NYSE Rule 412 generally requires
that, in order for a customer's account to be transferred to another
firm through ACATS, the customer must formally initiate the transfer
process by providing ``authorized notice'' to the receiving
organization. In the context of Rule 412, authorized notice means the
customer's signature on a transfer initiation form (i.e., a signed
``TIF''). However, in certain circumstances (notably, bulk transfers)
obtaining a signed TIF from each and every customer may not be
practicable. Thus, Rule 412(f) permits member organizations to seek an
exemption from the authorized notice requirement and to effect bulk
transfers using ``negative consent letter'' notice to affected
customers in lieu of individually executed TIFs. Currently, such
exemptions are granted by the Exchange on a case-by-case basis.
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    \37\ ACATS is an automated system, administered by the National
Securities Clearing Corporation (``NSCC'') that standardizes the
transfer of customer accounts from one broker dealer to another. See
also NYSE Information Memo No. 04-20 (April 8, 2004).
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Proposed Amendments
    Amendments to NYSE Rule 412(f) are proposed that would allow member
organizations to effect a bulk transfer of customer accounts through
the use of negative consent letters without first obtaining approval
from the NYSE. The standards the Exchange proposes to codify and apply
to this process are the same as those currently applied by the Exchange
pursuant to its case-by-case review procedures and are essentially
consistent with the NASD's regulatory guidance in this area.\38\ The
Exchange believes that codification of bulk transfer standards will
better enable membership to standardize and coordinate their bulk
transfer procedures. Exchange staff will, of course, remain available
to provide interpretive guidance and practical advice when needed.
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    \38\ See NASD Notice to Members 02-57 (Bulk Transfer of Customer
Accounts).
---------------------------------------------------------------------------

    In order for a member organization to qualify for the proposed
``bulk transfer'' exemption, two sets of standards must be met. First,
the transfer in question must involve a large enough number of accounts
such that it would be impracticable to obtain each customer's
authorized notice as otherwise required by NYSE Rule 412(a). In
addition, the circumstances necessitating the transfer must be an
extraordinary, firm-driven corporate event outside the delivering \39\
firm's ordinary course of business (e.g., a merger, the sale of a
branch office or business division from one firm to another, an
introducing firm moving their business to a new clearing firm, etc.).
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    \39\ In the context of Rule 412(f), the term ``delivering firm''
refers to the broker-dealer with which the customer has a direct
business relationship (i.e., the ``introducing'' or
``correspondent'' firm if the delivering firm is not self-clearing.)
Likewise, in the context of Rule 412(f), the term ``receiving firm''
refers to the ``introducing'' or ``correspondent'' firm (or self-
clearing firm) on the receiving end of the transfer.
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    Second, the delivering firm would be required to provide affected
customers with notice regarding the prospective bulk transfer through
the use of a negative consent letter.\40\ The proposed amendments set
forth the disclosure requirements to be contained in such letters.
Specifically, an acceptable negative consent letter would be required
to include: A synopsis of the circumstances necessitating the transfer
(a merger, the sale of a branch office from one firm to another, an
introducing firm moving their business to a new clearing firm, etc.);
notification of the customer's right to opt out of the transfer;
sufficient notice (generally, a minimum of 30 calendar days) for
customers to opt out of the transfer; disclosure of any previously
established fees associated with the transfer; information explaining
the manner in which the customer can effect a transfer to another
broker-dealer, if the customer so chooses; and a statement regarding
the compliance of both the delivering and receiving firm with SEC
Regulation S-P.\41\
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    \40\ The rationale behind requiring that the negative consent
letter be sent by the delivering firm is that it is the organization
that the customers ``know'' (i.e., the firm most prominently
featured on the customers'' statements and with whose personnel
(e.g., their registered representative) they generally interact. The
presumption is that customers are more likely to open mail from a
firm they know rather than from a firm with which the customer has
no business relationship (the ``receiving firm''), in which case the
mail might be disregarded as an advertisement or solicitation.
    \41\ See Securities Exchange Act Release No. 42974 (June 22,
2000), 65 FR 40334 (June 29, 2000) (``Privacy of Consumer Financial
Information'').
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    The proposed amendments would also require that both the delivering
and the receiving firms agree in writing to any bulk transfer pursuant
to Rule 412(f). This is to ensure that the proposed provisions are not
used, for example, by a registered representative who is moving to
another firm to take his customers with him via bulk transfer without
the knowledge or consent of the delivering firm. Absent the explicit
approval of both firms, any transfer of customer accounts under such
circumstances must be effected pursuant to each customer's authorized
notice and would be fully subject to the provisions of Rule 412. As
noted above, only extraordinary, firm-driven corporate events outside
the delivering firm's ordinary course of business can serve as the
basis for a Rule 412(f) exemption. The proposed amendments would
preclude member organizations from transferring customer accounts

pursuant to Rule 412(f) at the behest of individual brokers who have
been terminated or who have resigned from the firm. Any such customer
account transfer would require the affirmative consent of each customer
pursuant to a duly executed TIF and would be fully subject to Rule 412
and its Interpretation.\42\
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    \42\ See proposed Rule 412.40.
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Rule 416A (Member and Member Organization Profile Information Updates
and Quarterly Certifications Via the Electronic Filing Platform
    Rule 416A requires member organizations to establish and regularly
maintain firm profile information via the Exchange's Electronic Filing
Platform (``EFP''). It further requires member organizations to comply
with any Exchange request for such information. Information is recorded
on an EFP template.
    In light of the proposed elimination of the ``allied member''
designation, the Exchange proposes amending Rule 416A to create a new
reporting designation to be known as ``principal executives'' which
would capture each member organization's control persons. The proposed
\43\ designation would be defined to include persons designated by a
member organization as a ``principal executive officer,'' as such terms
is defined in subsection (b)(5) of NYSE Rule 311 (Formation and
Approval of Member Organizations), or their functional equivalents.
Thus, the ``principal executives'' designation would encompass each
Chief Executive Officer, Chief Financial Officer, Chief Operations
Officer, Chief Compliance Officer, Chief Legal Officer, or any person
assigned comparable functions or responsibilities (e.g., a person in a
Limited Liability Company with principal executive responsibilities but
with other than a principal executive title).
---------------------------------------------------------------------------

    \43\ See proposed .10 of the rule's ``Supplementary Material.''
---------------------------------------------------------------------------

    The proposed amendments would essentially codify existing Exchange
EFP reporting requirements \44\ with respect to these key personnel
contacts, which are also required to be reported via FORM BD.\45\ A key
benefit of reporting these key contact persons to the Exchange as well
as on FORM BD is that the EFP system has interactive functionalities
that allow the Exchange to specifically target one or more contact
persons to receive ``e-mail blasts'' with time-sensitive instructions
or regulatory information. The proposed rule would also allow for
requiring the designation of other categories of persons as otherwise
directed by the Exchange.
---------------------------------------------------------------------------

    \44\ See NYSE Information Memo No. 01-11, dated June 19, 2001.
    \45\ See item 2(a) in Schedule A of FORM BD (Direct Owners and
Executive Officers).
---------------------------------------------------------------------------

    Unlike the ``allied member'' designation, there would be no exam
qualification requirement particular to the ``principal executive''
designation per se (see also the deletion of ``allied member''
examination requirement from Rule 304A) though, of course, each
principal executive would be required to take and pass any
qualification examinations necessary to perform their assigned
functions.
Rule 445 (Anti-Money Laundering Compliance Program)
Background
    NYSE Rule 445 requires each member organization to develop and
implement an anti-money laundering (``AML'') program consistent with
ongoing obligations under the Bank Secrecy Act.\46\ The prescribed AML
program obligations include the development of internal policies,
procedures and controls; the designation of a person or persons to
implement and monitor the day-to-day operations and internal controls
of the program (commonly referred to as the ``AML Officer''); ongoing
training for appropriate persons; and an independent testing function
for overall compliance.
---------------------------------------------------------------------------

    \46\ 31 U.S.C. 5311 et seq.
---------------------------------------------------------------------------

    The Exchange is proposing amendments to NYSE Rule 445 to clarify
the term ``prompt notice'' and to harmonize other aspects of its AML
program requirements with those prescribed by NASD.\47\
---------------------------------------------------------------------------

    \47\ See NASD Rules 3011, IM-3011-2 and IM-3011-2.
---------------------------------------------------------------------------

Proposed Amendments
Prompt Notice
    In addition to requiring that each member organization designate a
person or persons to implement and monitor the day-to-day operations
and internal controls of its AML compliance program, NYSE Rule 445(4)
further requires that ``prompt notice'' be given to the Exchange
regarding any change in such designation. The Exchange proposes
amending NYSE Rule 445(4) to clarify that the term ``prompt notice''
means not later than 30 days following any change in such information,
consistent with the requirements prescribed under NYSE Rule
416A(b).\48\ NASD IM-3011-2 (``Review of Anti-Money Laundering
Compliance Person Information'') requires that the updating of such
designation be within ``17 business days after the end of each calendar
quarter. * * *'' The Exchange believes that the more stringent
requirement herein proposed is reasonable and will provide more current
information regarding AML contact persons.
---------------------------------------------------------------------------

    \48\ See section (b) of NYSE Rule 416A (``Member and Member
Organization Profile Information Updates and Quarterly
Certifications Via the Electronic Filing Platform''), which requires
member organizations to update their required membership profile
information promptly, but in any event not later than thirty days
following any change in such information.
---------------------------------------------------------------------------

Prior Written Approval
    The Exchange proposes deleting the first sentence of NYSE Rule
445(4)(C), which sets forth a ``prior written approval requirement''
for member organizations in instances where the designated person under
Rule 445(4) is employed not by the member organization, but by an
affiliate of the member organization.\49\ NASD Rules do not have a
comparable approval requirement.\50\ Similarly, the Exchange proposes
deletion of Rule 445.30, as this section, which provides an exemption
to the approval requirement, would be rendered irrelevant.
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    \49\ See NYSE Rule 445(4) (B), which provides that a person may
be designated under 445(4) when the person is employed by an entity
that directly or indirectly controls, or is controlled by, or is
under common control with the member organization.
    \50\ See also NASD IM-3011-2. See also NASD Notice to Members
06-07.
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Independent Testing
    NYSE Rule 445.20 sets forth three categories of persons who are
currently deemed insufficiently independent to conduct the required
testing requirement pursuant to NYSE Rule 445(3). Specifically, the
Rule prohibits such testing from being conducted by (1) A person who
performs the functions being tested, or (2) the designated AML
compliance officer, or (3) a person who reports to either the person
performing the functions being tested or the AML compliance officer.
    The Exchange proposes to amend NYSE Rule 445.20 to harmonize it
with corresponding NASD IM 3011-1 \51\ by adding an exception which
would allow a person categorized in subsections (1) or (2) to conduct
the testing when four conditions are satisfied. First, the member
organization must have no other qualified internal personnel to conduct
the testing. Second, the member organization must establish written
policies and procedures to address conflicts that may arise from
allowing the testing to be conducted by a person who reports to the
person(s) whose activities are the subject of the

testing. Third, the person who conducts the testing must, to the extent
possible, report the test results to a person at the member
organization who is senior to the person described in Rule subsections
(1) and (2). If the person does not report the results consistent with
this provision, the member organization must document a reasonable
explanation for not doing so. Fourth, the member organization must
document its rationale, which is required to be reasonable, for
determining that it has no alternative than reliance on these
conditions to comply with the testing requirement.
---------------------------------------------------------------------------

    \51\ See also NASD Notice to Members 06-07.
---------------------------------------------------------------------------

    This exception to the general ``independent testing'' standard is
proposed to allow small firms the flexibility to use appropriate
internal personnel to conduct the testing required by Rule 445, while
requiring that controls be in place to retain the effectiveness of the
testing process.
Category 2 (``Financial/Operational Rules'')
Background
    In order to address certain Financial/Operational Rules not
encompassed by the CAG subcommittee review process, the Exchange
organized an in-house Financial/Operations Rule Committee and enlisted
the participation of volunteers from SIFMA's Capital, Operations and
Clearing Firms Committees and the NASD.
Proposed Amendments
Rule 325 (Capital Requirements for Member Organizations)
Restructuring of the Rule
    NYSE Rule 325 requires member organizations subject to Rule 15c3-1
\52\ under the Act to comply with the capital requirements prescribed
therein and with the additional net capital requirements established by
the NYSE. The Exchange is proposing to restructure the text of Rule 325
into two separate sections: General Provisions \53\ and Notification
Provisions.\54\ This non-substantive change will separate the net
capital notification requirements contained in current Rule 325(b)(1)
and (b)(2) from the other provisions of Rule 325.
---------------------------------------------------------------------------

    \52\ 17 CFR 240.15c3-1.
    \53\ See proposed Rule 325(a), (b) and (c).
    \54\ See proposed Rule 325(e).
---------------------------------------------------------------------------

Rule 325(c)
    NYSE Rule 325(c)(1) currently provides that a long put option or a
long call option, which is not an obligation of a clearing agency or
has not been endorsed or guaranteed by a member organization, has no
net capital value under any provision of Rule 325. The Exchange is
proposing to rescind this provision because the substance of this
requirement is covered in Rule 15c3-1 under the Act.
    Subsection (c)(2) of current Rule 325 provides for net capital
requirements on certain proprietary day trading positions subject to a
special margin requirement. The Exchange is proposing to rescind Rule
325(c)(2). This provision is no longer necessary because the SEC's
capital rule requires firms to be in compliance on a moment to moment
basis.
    Additionally, the Exchange is proposing to adopt, as new Rule
325(c), a provision from NASD Rule 3130(e) which will require a member
organization to suspend all business operations during any period of
time during which the member organization is not in compliance with
applicable net capital requirements as set forth in Rule 15c3-1 under
the Act.
Rule 326 (Growth Capital Requirement, Business Reduction Capital
Requirement, Unsecured Loans and Advances)
    NYSE Rule 326(a) currently sets forth the conditions that trigger
restrictions on business growth for member organizations. NYSE Rule
326(b) requires reduction of business by member organizations if
certain conditions exist, as prescribed by the rule. The Exchange is
proposing to expand the application of Rule 326(a) and (b) to apply to
all broker-dealers, not just those which carry customer accounts.
However, the proposed amendments clarify that non-carrying firms will
not be subject to the automatic and self operative Rule 326(a) and (b),
unless specifically directed by the Exchange.
    The Exchange is also proposing to amend Rule 326(a)(1) and (b)(1).
The current provisions require a condition triggering a growth
restriction or business reduction to be known to the Exchange for five
consecutive business days. The five day period is intended to provide
breathing room so that these conditions can be corrected. The proposed
amendments to Rule 326(a)(1) and (b)(1) provide that the condition must
be known to either the member organization or the Exchange for five
consecutive business days. The Exchange is proposing this change so
that there is no benefit in not advising the Exchange about these
conditions.
    NYSE Rule 326(a)(2) provides for restrictions on the growth of a
member organization's business at the discretion of the Exchange, much
as subsection (b)(2) of Rule 326 allows for the mandated reduction in
business at the discretion of the Exchange. Amendments to these
provisions are proposed to clarify that the Exchange may exercise its
discretion with respect to financial or operational conditions relating
to a member organization's business.
    Further, the proposed new Rule 326(a)(3) clarifies that ``expansion
of business'' may include: Net increase in the number of registered
representatives or other producing personnel; exceeding average
commitments over the previous three months for market making or block
positioning; initiation of market making in new securities or any new
firm trading or other commitment in securities or commodities in which
a market is not made (other than riskless trades associated with
customer orders); exceeding average commitments over the previous three
months for underwritings; opening of new branch offices; entering into
any new line of business or deliberately promoting or expanding any
present lines of business; making unsecured or partially secured loans,
advances, drawings, guarantees or other similar receivables; and such
other measures as the Exchange deems appropriate under the
circumstances in the public interest or for the protection of investors
and member organizations.
    The Exchange proposes to reposition the provisions in current Rule
326.10 which define ``expansion of business'' into subsection (a)(3) of
Rule 326. In addition, the Exchange is proposing to reposition the
provisions of current Rule 326.11, which define ``Business Reduction,''
into subsection (b)(3) of the rule. The Exchange is also proposing to
add certain conditions contained in NASD IM-3130(e) into new subsection
(b)(3) to harmonize the SROs' examples of business reductions by member
organizations. The additions include: Promptly paying all free credit
balances to customers; promptly effecting delivery to customers of all
fully-paid securities in the member's possession or control; accepting
no new customer accounts; restricting the payment of salaries or other
sums to partners, officers, directors, shareholders, or associated
persons of the member; and accepting unsolicited customer orders only.
    Current NYSE Rule 326(c) restricts all member organizations from
making unsecured loans or advances to certain individuals or entities
associated with the member organization when certain conditions are
met. Current Rule 326(d) requires all member organizations to recall
unsecured loans or advances when certain business reduction criteria

are met. The Exchange is proposing to reposition the requirements in
current Rule 326(c) and (d) regarding unsecured loans and advances in
subsections (a)(3) and (b)(3), as part of the enumeration of examples
of ``expansion of business'' and ``business reduction,'' and to afford
their application to all such loans regardless of counterparties.
    Current NYSE Rule 326.12 imposes an automatic restriction on member
organizations that introduce accounts on a fully disclosed basis to, or
clear on an omnibus basis through, a restricted member organization.
The Exchange is proposing to reposition Rule 326.12 into 326.10 in
light of other proposed amendments to the rule and to amend this
provision so that the restrictions will not flow automatically to the
introducing firm when its clearing firm is restricted. The proposed
rule provides that the Exchange may apply this requirement at its
discretion.
    NYSE Rule 326.13 currently allows member organizations to enter
into subordination agreements, which are not allowable as good capital
under NYSE Rule 325, to increase the member organization's total
subordinated liabilities and capital available, and for the protection
of customers. The Exchange is proposing to rescind .13 inasmuch as
recourse to non-allowable capital has not been utilized.
    The Exchange is proposing to add new Rule 326.11 that illustrates
conditions under which the Exchange may exercise its discretion to
reduce or limit a member organization's business. These conditions are
contained in NASD IM-3130(e) and include situations such as non-current
and/or inaccurate books and records, lack of full compliance with Rule
15c3-3 \55\ under the Act and the inability to promptly clear and
settle transactions.
---------------------------------------------------------------------------

    \55\ 17 CFR 240.15c3-3.
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    Lastly, the Exchange is proposing to change the title of Rule 326
to ``Business Growth Restrictions and Business Reduction Requirements''
and to make certain changes to the subheadings within the Rule.
Rule 382 (Carrying Agreements)
    NYSE Rule 382 governs Exchange requirements for carrying agreements
and provides for the contractual allocation of key functions involved
in the opening and operation of customer accounts and the settlement
and clearance of transactions in such accounts.
    The Exchange is proposing to amend subsection (a) to provide that
standardized forms of agreements between member organizations and
introducing firms that are registered broker-dealers, which have been
previously approved by the Exchange, need not be submitted to the
Exchange for approval.
    Additionally, the Exchange is proposing to amend Rule 382(a) to
provide that carrying arrangements previously approved by another SRO
with a comparable rule to NYSE Rule 382, e.g., NASD Rule 3230, will not
require submission to and approval by the Exchange.
    The Exchange is proposing amendments to Rule 382(b) to address
third party piggy-back arrangements by requiring that carrying
agreements for accounts held on a fully disclosed basis specifically
identify and allocate respective functions and responsibilities of each
introducing and carrying organization that is directly or indirectly a
party to such agreements.
    Amendments to Rule 382(b) are proposed that will clearly delineate
which functions and responsibilities must be allocated to the carrying
organization and will require that the carrying agreements so state.
    Amendments to Rule 382(b) are also proposed to state that the
carrying agreement may provide that the opening and approval of
accounts in a manner consistent with NYSE Rule 405, the maintenance of
books and records in a manner consistent with Rules 17a-3 and 17a-4
under the Act and the transmission of orders to the carrying
organization for execution may be allocated to an introducing
organization, which is other than a registered broker or dealer. Such
amendments would, in recognition of present industry practice, permit
entities which are other than registered brokers or dealers, as the
introducing party which directly interfaces with the customer, to
undertake the mechanical aspects of order transmission and the
ministerial aspects of bookkeeping and of opening and approving
accounts.
    The term ``opening and approving'' is intended to limit the scope
of the amended rule to the acceptance of new accounts, but only in
circumstances where it has gathered sufficient information to satisfy
the Exchange's Rule 405 precept as the standard for recording
investment objectives and other basic documentation. By establishing
Rule 405 as the norm to follow (even by a person not formally subject
to its fiat) and by asserting it as a prerequisite to an acceptable
Rule 382 agreement, it is believed that investor protection is
reasonably served. Under the proposed amendments, more continuous and
stringent regulatory requirements such as ``monitoring of accounts''
would not be permitted to be allocated to an entity which is not a
registered broker or dealer.
    The Exchange is proposing to add to current Rule 382(c), which
requires written notification to customers whose accounts are held on a
fully disclosed basis, that upon the opening of such account, the
customer shall be notified in writing by the party designated by the
agreement to make such notification of the responsibilities allocated
to each respective party, and of any subsequent material change to such
allocation or to the relationship of the parties, if any, promptly upon
the occurrence of any such change. The proposed amendments to the Rule
reposition this provision into new subsection (b)(4).
    The Exchange is proposing to add Rule 382(e)(2) which provides that
carrying agreements may provide for the receipt of customer funds or
securities by the introducing organization and delivery thereof to the
carrying organization in a manner consistent with Rules 15c3-1 and
15c3-3 under the Act, provided that the introducing organization
maintains appropriate procedures and systems for the receipt and
delivery of such funds or securities to ensure compliance with all
relevant rules under the Act.
    Additionally, amendments are proposed to codify current Exchange
practice by adding a new subsection (f) to Rule 382 to require that
each carrying organization provide the Exchange with written notice 10
business days prior to its commencement of the carrying the accounts of
any new correspondents, identifying such new correspondents and
furnishing such additional information as may be requested by the
Exchange. Moreover, each such carrying organization must,
contemporaneously, represent to the Exchange that it has the financial
and operational resources and support staff to take on such additional
correspondent activity.
    The proposed amendments also codify the principle that, to the
extent that a particular function is allocated to one of the parties,
the other parties to the agreement shall supply to the responsible
organization all data in its possession pertinent to the proper
performance and supervision of that function. The agreement shall
include an acknowledgement by each relevant party of this obligation.
Rule 416 (Questionnaires and Reports)
    NYSE Rule 416(b) requires that, unless a specific temporary
extension of time has been granted, a fee of $500 shall be imposed for
each day that such report is not filed in the prescribed time. Requests
for such extensions of time

must be submitted to the Exchange at least three business days prior to
the due date. The Exchange is proposing to amend subsection (b) to
clarify that each ``day'' means each ``business day'' for purposes of
determining whether a report is filed in the prescribed time. The
proposed amendments also provide that the fee imposed by the Exchange
when reports are not filed on time may be waived by the Exchange, in
whole or in part.
    The Exchange is proposing to add a new subsection .25 to the
Supplementary Material of Rule 416 which will consist of language moved
from current NYSE Rule 418.25.\56\ This provision requires member
organizations, approved to use an alternative method of computing net
capital under Appendix E of Rule 15c3-1 under the Act, to file
supplemental and alternative reports, as may be prescribed by the
Exchange. The NASD does not currently have such a provision but stated
that it may propose to adopt a similar requirement.
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    \56\ See Securities Exchange Act Release No. 52269 (August 16,
2005) 70 FR 49349 (August 23, 2005) (SR-NYSE-2005-19). See also NYSE
Information Memo 05-62.
---------------------------------------------------------------------------

Rule 418 (Audit)
    Under current NYSE Rule 418, the Exchange may require member
organizations, at any time, to conduct an audit of its financial
statements in accordance with Exchange Rules and Rule 17a-5 under the
Act.\57\ The Exchange is proposing to amend this provision by removing
the reference to Exchange Rules and replacing it with language that
allows the Exchange to require an audit or other similar procedure as
the Exchange may deem necessary for the protection of investors or in
the public interest. The Exchange is also proposing to rescind
subsection .10 of Rule 418, which requires member organizations that
are subject to this rule to file with the Exchange an agreement
covering its annual audit during the following year because the
substance of this provision is covered by Rule 17a-5 under the Act.
---------------------------------------------------------------------------

    \57\ 17 CFR 240.17a-5.
---------------------------------------------------------------------------

    NYSE Rule 418.12 requires member organizations that fail to file an
audited financial and operational report in the time period prescribed
by the Exchange to pay a $200 penalty for each day of delayed filing.
The Exchange is proposing to amend this provision to clarify that each
``day'' means each ``business day.''
    In light of proposed amendments to the NYSE Rules to remove the
terms ``allied member'' and ``member'' (where appropriate) from the
rulebook, the Exchange is proposing to amend Rule 418.15 to require
that the financial statements be signed by two principal executives of
the member organization and that such financial statements be made
available to all principal executives of the member organization. NASD
has expressed that it may propose to adopt a similar provision to NYSE
Rule 418.15.
    The Exchange is proposing to rescind Rule 418.20 which requires, in
part, that all pertinent audit working papers and underlying
documentation be retained for at least three years and that it be
available for review by a representative of the Exchange at the office
of the respondent or at the office of the independent public
accountant. This provision is not required under Act rules and the NASD
does not have a similar provision in their rules. Further, this
provision has not been exercised during the time that this rule has
been in effect. As noted above, Rule 418.25 has been repositioned into
.25 of Rule 416.
Rule 420 (Reports on Borrowing and Subordinated Loans for Capital
Purposes)
    Currently, the NYSE and the NASD use subordinated loan forms which
reflect the requirements of Appendix D to Rule 15c3-1 under the Act but
differ in minor provisions and in certain procedural ways. The Exchange
is proposing to unify the procedures of NYSE and NASD in this area.
Specifically, the Exchange is proposing to consolidate paragraphs (a)
and (b) of Rule 420 to combine the subordination agreement requirements
for the lending of both cash and notes collateralized by securities.
The proposed amendments also add that loans of cash or collateralized
notes made to a member organization are subject to the requirements of
Rule 420(a). In addition, Rule 420(a)(2), which calls for an opinion of
counsel as required by NYSE Rule 313(d), will be modified to provide
that an opinion will no longer be required when the loan is made by a
holding company or principal executive of a member organization or by a
bank, as defined in Section (3)(a)(6) \58\ of the Act, unless so
directed by the Exchange.
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    \58\ 15 U.S.C. 78c(3)(a)(6).
---------------------------------------------------------------------------

    NYSE Rule 420(c) requires a general partner of a member
organization to promptly report to the NYSE any borrowings of cash or
securities, the proceeds of which will be contributed to the net
capital of the member organization. The rule further imposes certain
standards for the documents evidencing such borrowings as the Exchange
deems appropriate and requires that such documents be submitted to and
approved by the Exchange before the cash or securities involved may
qualify as net capital. The Exchange is proposing to codify current
Exchange practice by amending this provision to apply to borrowings of
participants in LLC's. The NASD does not have a similar rule to NYSE
Rule 420 but has indicated it may propose to adopt similar requirements
for carrying firms only.
Rule 422 (Loans of and to Directors, etc.)
    NYSE Rule 422 prohibits unsecured loans between members of the
Board or of employees of the NYSE and member organizations, absent the
prior consent of the NYSE board of directors. This provision was
amended post-merger to include subsidiaries of NYSE Group. The Exchange
is proposing to rescind Rule 422 in its entirety because the substance
of this provision is contained in the supplementary guidelines to
NYSE's internal ethics code.
Rule 431 (Margin Requirements)
    Staff is proposing to amend Rule 431(e)(8)(C)(ii) to clarify that,
for purposes of this subsection, amounts agreed to be extended by a
member organization shall be deducted in determining capital under Rule
326 if the loan commitment is irrevocable; amounts agreed to be
extended shall be presumed irrevocable commitments, unless a broker-
dealer can evidence otherwise.
Rule 440 (Books and Records)
    NYSE Rule 440 requires member organizations to make and preserve
books and records as the Exchange may prescribe, and as prescribed by
Rule 17a-3 \59\ under the Act. The recordkeeping format, medium and
retention period is to comply with Rule 17a-4 under the Act.\60\ The
Exchange is proposing to rescind Rule 440.10(2), which requires member
organizations, at a minimum of once per month, to account for all U.S.
government bearer instruments by physical examination and comparison
with its books and records. This provision is outdated, as there are
few, if any, U.S. government instruments in bearer form and the
requirement to account for any physical instruments is included in Rule
17a-13 \61\ under the Act and is generally referenced in subsection .10
of the rule.
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17a-3.
    \60\ 17 CFR 240.17a-4.
    \61\ 17 CFR 240.17a-13.

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Category 3 (``Buy-In Rules'')
Background
    In order to address the operational ``Buy-In Rules'' not
encompassed by the CAG subcommittee review process, the Exchange
organized an in-house committee and enlisted the participation of the
NASD and the Ad Hoc Buy-in Subcommittee of the SIFMA Securities
Operations Division. The SIFMA subcommittee, which predates the SRO
Rule Harmonization Initiative, was established to identify and
standardize various Buy-in rules and procedures in conjunction with
Street Side contracts including Stock Loans.\62\ The proposed
amendments discussed below result from the combined recommendations of
these participants.
---------------------------------------------------------------------------

    \62\ The Exchange previously worked with this committee to amend
and harmonize its rules with those of other SROs. See Securities
Exchange Release No. 52842 (November 28, 2005), 70 FR 72321
(December 2, 2005) (SR-NYSE-2005-50). See also NYSE Information Memo
05-100.
---------------------------------------------------------------------------

    The NYSE Buy-In Rules apply to transactions in Exchange-listed
securities that are not subject to the rules of a Qualified Clearing
Agency such as the Depository Trust Clearing Corporation (``DTCC'')
\63\ or the National Securities Clearing Corporation (``NSCC''),\64\
including the Continuous Net Settlement (``CNS'') \65\ transactions
that settle through them.
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    \63\ The Depository Trust Clearing Corporation is a member of
the U.S. Federal Reserve System, a limited-purpose trust company
under New York State banking law and a registered clearing agency
with the SEC.
    \64\ NSCC, is a central counterparty that provides centralized
clearance, settlement and information services for broker-to-broker
equity, corporate bond and municipal bond, exchange-traded funds and
unit investment trust trades in the United States. NSCC provides
clearing and settlement, risk management, central counterparty
services and a guarantee of completion for trades. NSCC also nets
trades and payments among its participants, reducing the volume of
securities and payments that need to be exchanged each day.
    \65\ CNS is an automated accounting system that centralizes the
settlement of compared security transactions and maintains an
orderly flow of security and money balances. CNS nets daily
transactions, including open positions to create a single long or
short position for each participant, minimizing security movements
and associated costs.
---------------------------------------------------------------------------

    In an effort to promote harmonization of the SRO Operational,
Clearing and Settlement Rules (collectively referred to as the ``Buy-In
Rules) the Exchange is proposing amendments to NYSE Rules 140 (Members
Closing Contracts--Conditions), 282 (Buy-in Procedures); 283 (Members
Closing Contracts--Procedure); 285 (Notice of Intention to Successive
Parties); 286 (Closing Portion of Contract); 287 (Liability of
Succeeding Parties); 288 (Notice of Closing to Successive Parties); 289
(Must Receive Delivery); and 290 (Defaulting Party May Deliver After
`Buy-in' Notice).
Proposed Amendments
    The Exchange proposes to reposition Rules 140, 283, 285, 286, 287,
288, 289, and 290 into Rule 282 so that Rule 282 will serve as a
complete repository for all requirements and procedures related to buy-
ins.\66\ The substance of the repositioned rules is not being altered.
In addition to making these requirements more readily accessible, the
amendments will bring the rule closer to the format of its NASD Rule
11810 (Buying-In) and IM-11810 (Sample Buy-In Forms).
---------------------------------------------------------------------------

    \66\ See proposed Rules 282.25, .30, .35, .40, .45, .50, and
.55.
---------------------------------------------------------------------------

    In addition to this consolidation, the following amendments to Rule
282 are proposed in order to clarify certain technical requirements
with respect to buy-in processes:
    Rule 282(1)(b) requires that the defaulting member organization
receiving a buy-in notice must send a signed, written response to the
initiating organization stating its position with respect to the
resolution of the item no later than 5 p.m. ET on the date of issuance
of the buy-in notice. The Exchange proposes the addition of
Supplementary Material section .15 that would clarify that ``[f]or
purposes of Rule 282(b), e-mail and electronic systems shall be
acceptable as the functional equivalent of a writing, in lieu of paper
form, provided that it is retainable and susceptible of acknowledgement
to the same degree and extent as the written response.'' \67\
---------------------------------------------------------------------------

    \67\ See Rules 17a-3 and 17a-4 under the Act and NYSE Rules 440
(Books and Records).
---------------------------------------------------------------------------

    NYSE Rule 282(c) states that if the ``buy-in'' notice has not been
returned by 5 p.m. ET on the ``buy-in'' notice date, or the ``buy-in''
notice is returned as ``DK'd,'' or the ``buy-in'' notice is returned
with the indication that the contract is known but that delivery cannot
be made, a ``buy-in'' shall be executed on the ``effective date'' by
the initiating member organization by purchasing all or part of the
securities necessary to satisfy the amount requested in the ``buy-in''
notice. Proposed amendments to Rule 282(c) would clarify that if a
notice of buy-in is not acknowledged by the failing party by 5 p.m. ET
on the day of issuance, the notice will be deemed accepted. However,
prior to the proposed execution date, the seller has a right to request
proof of fail obligation in order to prove otherwise. This conforms
with the NASD's current requirement.
    Rule 282(1)(h) requires that the initiating member organization
executing the buy-in shall immediately upon execution, but no later
than 5 p.m. ET, notify the defaulting member organization as to the
quantity purchased and the price paid. The Exchange is proposing to
amend Rule 282(1)(h) to clarify that if there is a system outage at the
Clearing Firm or the Depository, then notification by the initiating
member organization executing a buy-in must take place prior to the
opening on the next business day.
    The Exchange proposes the addition of provision Rule 282(2) to
clarify that fails that are subject to the rules of a Qualified
Clearing Agency must comply with the procedures or requirements of the
Qualified Clearing Agency.''
    It is also proposed that Rule 282 be amended to adopt certain
provisions of NASD IM 11810 (Sample Buy-In Forms) because these
provisions are applicable to both NYSE and NASD membership.
Specifically, the Exchange proposes adding section (f) (Securities in
Transit) as new Rule 282.60; section (h) (`Close-Out' Under Committee
or Exchange Rulings) as new Rule 282.65; section (i) (Failure to
Deliver and Liability Notice Procedures) as new Rule 282.70; section
(j) (Contracts Made for Cash) as new Rule 282.75; section (l) (Buy-In'
Desk Required) as new Rule 282.80; and section (m) (Buy-In of Accrued
Securities) as new Rule 282.85.
Background/Reference Rule Synopses
Rule 140 (``Members Closing Contracts--Conditions'')
    Rule 140 states that a member organization may close a contract as
provided in Rule 283 in the event that the other party to the contract
does not recognize the contract or the other party to the contract
neglects or refuses to exchange written contracts pursuant to Rule 137.
Rule 283 (``Members Closing Contracts--Procedure'')
    Rule 283 refers to the procedure for closing contracts. According
to Rule 283, oral or written notice must be provided to the other party
at least thirty minutes prior to closing.
Rule 285 (``Notice of Intention to Successive Parties'')
    According to Rule 285, a member organization that receives notice
that a contract is to be closed for its account for non-delivery shall
immediately re-transmit notice to any other member organization from
whom the securities involved are due.

Rule 286 (``Closing Portion of Contract'')
    According to Rule 286, when notice of intention to close a
contract, or re-transmitted notice thereof, is given for less than the
full amount due, it shall be for not less than one trading unit.
Rule 287 (``Liability of Succeeding Parties'')
    According to Rule 287, the closing of a contract must be for the
account and liability of each succeeding party in interest, and, if
notice of such contract being closed is transmitted, then such closing
shall automatically close all contracts with respect to which such re-
transmitted notice shall have been delivered prior to the closing.
Rule 288 (``Notice of Closing to Successive Parties'')
    Under Rule 288, if a contract, other than a contract the close-out
of which is governed by the rules of a Qualified Clearing Agency, has
been closed, the member organization who closed, or gave order to
close, the contract shall notify the member organization for whose
account the contract was closed. In addition, the rule requires the
member organization receiving such a notification, or receiving such
notice that a contract has been closed pursuant to the rules of a
Qualified Clearing Agency, shall immediately notify each succeeding
party in interest and other member organizations to which re-
transmitted notice pursuant to Rule 285 has been sent. The rule also
requires any statements of resulting money differences to be rendered
immediately.
Rules 289 (``Must Receive Delivery'') and 290 (``Defaulting Party May
Deliver After `Buy-in' Notice'')
    Rules 289 and 290 clarify the requirements and timeframes upon
which a defaulting member organization may deliver against a ``buy-in''
notice. Rule 289 requires an initiating member organization to accept
physical delivery of some or all of the securities that are the subject
of a buy-in, thereby halting the buy-in execution for those securities
if those securities are tendered prior to the buy-in. Rule 290 permits
a defaulting member organization to deliver securities subject to a
notice of buy-in until 3 p.m. Eastern Time on the day of the execution
of the buy-in.
Rule 282 (``Buy-in Procedures'')
    Rule 282 describes procedures to be followed when a securities
contract, except a contract where its close-out is governed by the
rules of a Qualified Clearing Agency (such as DTC and NSCC), which has
not been completed by the seller in accordance with its terms, may be
closed-out by the buyer (i.e., the initiating member organization).
According to the Rule, the close-out may not be sooner than three
business days after the due date for delivery. Rule 282 allows the
member organization failing to receive the securities to execute the
buy-in.
    The Supplementary Material of Rule 282 is intended to ensure that
member organizations comply with the closeout requirements of
Regulation SHO.\68\ Specifically, member organizations are obligated to
comply with the marking, locate, and delivery requirements of
Regulation SHO for sales of equity securities under the Act. Member
organizations are required to have policies and procedures in place to
comply with these rules, including closeout procedures.\69\
---------------------------------------------------------------------------

    \68\ 17 CFR 242.200 through 242.203.
    \68\ At the same time the changes noted above were being
developed, the SEC implemented Regulation SHO--Regulation of Short
Sales, which shares a similar purpose with the buy-in rules--the
reduction of fails to deliver. Rule 203 to Regulation SHO imposes
locate and borrowing/delivery requirements on broker-dealers that
sell equity securities, including closeout requirements on certain
open fail to deliver positions.
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Rule 430 (Partial Delivery of Securities to Customers on C.O.D
Purchases)
    Rule 430 prescribes that no member organization ``may accept for a
customer a purchase order for any security, other than obligations of
the United States Government, unless it has first ascertained that the
customer placing the order or its agent will receive against payment
securities in an amount equal to any execution confirmed to the
customer, even though such an execution may represent the purchase of
only a part of a larger order.'' The Exchange proposes deleting Rule
430 in its entirety as the substance of the rule is incorporated in
NYSE Rule 387(a)(4).
    Rule 387(a)(4) prohibits a member organization from accepting an
order from a customer pursuant to an arrangement whereby payment for
securities purchased or delivery of securities sold is to be made to or
by an agent of the customer unless the member organization ``has
obtained an agreement from the customer that the customer will furnish
his agent instructions with respect to the receipt or delivery of the
securities involved in the transaction promptly upon receipt by the
customer of each confirmation, or the relevant data as to each
execution, relating to such order (even though such execution
represents the purchase or sale of only a part of the order)'' and that
in any event the customer will assure that such instructions are
delivered to his agent no later than as prescribed by Rule 387(a)(4).
Category 4 (``Member'' and ``Allied Member'' Rules)
    As noted above, amendments are proposed throughout this filing that
update terminology in light of the Exchange's current organizational
structure. Of particular significance is the proposed deletion, where
appropriate, of the term ``member'' and the elimination of the term
``allied member'' as a regulatory category.\70\ The selective deletion
of the term ``member'' reflects the fact that it has been redefined in
the context of the NYSE/ARCA business model.\71\ The term ``allied
member,'' which is a regulatory category based on a person's
``control'' over a member organization is being eliminated because it,
has likewise been rendered outdated. Category 4 includes those rules
for which the only proposed substantive change is the deletion of
either or both of these terms.
---------------------------------------------------------------------------

    \70\ Note that there are pending amendments to certain NYSE
Rules which propose deletion of the terms ``allied member'' and/or
``member'' and thus, are not included in this filing (SR-NYSE-2006-
50 deletes term ``member'' from NYSE Rules 726 and 791; SR-NYSE-
2006-111 deletes the terms ``allied member'' and ``member'' from
NYSE Rule 421; and SR-NYSE-2007-06 deletes the terms ``allied
member'' and ``member'' from NYSE Rule 440A.
    \71\ For additional information, see Securities Exchange Act
Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006)
(Order Approving SR-NYSE-2005-77).
---------------------------------------------------------------------------

Member
    NYSE Rule 2(a) provides that the term ``member,'' when used to
denote a natural person approved by the Exchange, means a natural
person associated with a member organization who has been approved by
the Exchange and designated by such member organization to effect
transactions on the Floor of the Exchange or any facility thereof.
    This definition reflects the fact that, since the creation of NYSE
Group, Inc. in 2006, ``members'' are not, by virtue of their
membership, equity owners of NYSE Group or any of its subsidiaries.
Thus, the term ``member'' no longer has the same regulatory meaning in
the context of the NYSE/ARCA business model.
Background
    Following the NYSE/ARCA merger, NYSE Market issued Trading Licenses
that entitled their holders to have physical and electronic access to
the trading facilities of NYSE Market, subject to the limitations and
requirements specified in the rules of the Exchange. An organization
may

acquire and hold a Trading License only if and for so long as such
organization is qualified and approved to be a member organization of
the Exchange. Organizations that obtain licenses to trade on NYSE
Market (``Trading Licenses'') are member organizations. In addition,
broker-dealers that submit to the jurisdiction and rules of the
Exchange, without obtaining a Trading License and thus without having
rights to directly access the trading facilities of NYSE Market, will
be member organizations.\72\
---------------------------------------------------------------------------

    \72\ See Footnote 71, supra.
---------------------------------------------------------------------------

    A member organization holding a Trading License may designate a
natural person, known as a member, to effect transactions on its behalf
on the floor of NYSE Market, subject to such qualification and
approvals as may be required in the rules of the Exchange.
Proposed Amendments
    The Exchange is proposing, where applicable, to delete references
to the term ``member'' as a category of Exchange association except to
the extent its usage distinguishes, from a regulatory perspective, a
natural person who is licensed to trade on the Floor of the Exchange on
behalf of a member organization. All other references to members will
be deleted. If necessary, the term ``employee'' is added to rules where
the current text does not otherwise capture persons acting as members.
Allied Member
Background
    In 1939, the Exchange created the category of ``allied member'' to
make a non-member general partner of a member organization directly
responsible to the Exchange and directly subject to Exchange control
and discipline. The allied member designation identifies an individual
who is a ``control'' person, including but not limited to, a principal
executive officer of the member organization. Allied membership status
was intended to remedy situations where disciplinary action was taken
by the Exchange against member organizations because of actions of
their non-member general partners for which the member organization was
not entirely responsible, and over which they could not have exercised
full control.
    NYSE Rule 2(c) currently defines the term ``allied member'' as a
natural person who is a general partner of a member organization or
other employee of a member organization who controls,\73\ or is a
principal executive officer of, such member organization and who has
been approved by the Exchange as an allied member.\74\ There currently
are approximately 1,393 allied members of the Exchange. Allied
membership, especially as presently administered, has no direct
analogue at the NASD.
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    \73\ See NYSE Rule 2(f). The term ``control'' means the power to
direct or cause the direction of the management or policies of a
person whether through ownership of securities, by contract or
otherwise. A person shall be presumed to control another person if
such person, directly or indirectly: (i) Has the right to vote 25
percent or more of the voting securities; (ii) is entitled to
receive 25 percent or more of the net profits; or (iii) is a
director, general partner or principal executive officer (or person
occupying a similar status or performing similar functions) of the
other person. Any person who does not so own voting securities,
participate in profits or function as a director, general partner or
principal executive officer of another person shall be presumed not
to control such other person. Any presumption may be rebutted by
evidence, but shall continue until a determination to the contrary
has been made by the Exchange.
    \74\ NYSE Rule 304 sets forth the eligibility requirements for
allied membership. NYSE Rule 304A sets forth the examination/
registration requirements for allied membership.
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Proposed Amendments
    The Exchange is proposing that the term ``allied member'' be
deleted from both the NYSE rulebook and as a category of Exchange
association as it has become outdated within the context of the new
NYSE corporate structure. The Exchange is proposing to replace the term
in the NYSE rulebook with the term ``principal executive'' to retain a
means of identifying each member organization's control ``persons.''
The proposed designation would be defined to include persons designated
by a member organization as a ``principal executive officer,'' as such
terms is defined in subsection (b)(5) of NYSE Rule 311 (Formation and
Approval of Member Organizations) or their functional equivalents.\75\
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    \75\ See also proposed new Rule 416A.10 which defines the term
``principal executive.''
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    Rule 311(b)(5) currently states that a member organization may not
be approved by the NYSE Board of Directors unless, among other things,
the Board of Directors of such member organization designates its
principal executive officers who shall be members or allied members and
shall exercise senior principal executive responsibility over the
various areas of business of such corporation in such areas that the
rules of the Exchange shall prescribe, including: Operations,
compliance with rules and regulations of regulatory bodies, finances
and credit, sales, underwriting, research and administration.
    The Exchange is proposing to modify the Rule 311(b)(5) definition
of principal executive officer by deleting the requirement that a
principal executive officer be a member or allied member of the
Exchange.
    Generally, throughout this filing, in instances where the
provisions of a rule apply to an allied member in his or her capacity
as a principal executive officer (or functional equivalent, e.g.,
``senior officer'' or ``partner'') of the member organization, it is
proposed that the term ``principal executive'' be substituted. In
instances where the provisions of a rule apply to an allied member in
his or her capacity as an employee of a member organization, it is
proposed that the rule text be amended accordingly.
    The Exchange is aware that the elimination of the allied member
designation raises certain issues with respect to Exchange registration
requirements as well as its jurisdiction over certain member
organization personnel. Specifically, once the allied member category
is eliminated, the Chief Financial Officer (CFO) and Chief Operations
Officer (COO), designations which require qualification pursuant to the
Series 27 (Financial and Operations Principal) or Series 28 (Broker/
Dealer Financial and Operations Principal) examinations, may not be
registered with the Exchange because the Exchange does not have a
registration category for the Series 27 or Series 28.\76\ In order to
address this concern, the Exchange is proposing to recognize the NASD's
requirement to use the Financial and Operations Principal CRD
registration categories, Series 27/28,\77\ for such exam-qualified
individuals.
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    \76\ Rule 345(b) requires natural persons other than members or
allied members who assume the duties of an officer with the power to
bind the member or member organization to file Form U4 and receive
approval of the Exchange.
    \77\ See Rule 311(b)(5) interpretation in the NYSE
Interpretation Handbook which delineates the requirements for CFO/
COO of Introducing and Clearing Firms.
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    Further, Chief Executive Officers (CEO) are not required by
Exchange rules to pass an examination; their only current qualification
requirement is that they be members or become allied members. As noted
above, in order to ensure regulatory jurisdiction over all principal
executives, and to conform with the standard prescribed under NASD Rule
1021(a), the Exchange has proposed amendments to Rule 342 that would
require each person designated by a member organization as a
``principal executive,'' as that term is defined in Rule 416A, to pass
an examination appropriate to the

functions to be performed by such person.\78\
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    \78\ See proposed new Rule 342.13(c).
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    Forms U4 and U5 (among other forms) will require updating in order
to delete allied member registrations and to replace it with another
classification for principal executive officers (or persons occupying
similar status or having similar functions), voting stockholders, and
employee directors.
    The deletion of the ``allied member'' category of Exchange
association will not hinder the Exchange's enforcement and disciplinary
efforts with respect to individuals who fall into this category.
Specifically, the NYSE Division of Enforcement can assert jurisdiction
absent allied member status under NYSE Rule 476 and may bring
disciplinary matters based on a predicate violation pursuant to the
individual's supervisory position within the member organization. An
employee's status as an allied member has not been and will not be the
sole or preferred route to enforcement or disciplinary actions against
these individuals.
    Additionally, NYSE Market Surveillance, in conducting its
investigations, looks at the supervision of the member organizations,
its supervisory procedures and the capacity in which the individual is
employed (i.e., supervisory position), not necessarily the employee's
status as an allied member of the Exchange.
2. Statutory Basis
    The Exchange believes the statutory basis for proposed rule change
is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and in particular, with the requirements of Section 6(b)(5) \79\ of the
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. The proposed changes will provide greater
harmonization between Exchange and NASD rules of similar purpose,
resulting in less burdensome and more efficient regulatory compliance
for dual-member organizations. Where proposed amendments do not
entirely conform to existing NASD rules, the Exchange believes the
standards they would establish otherwise further the objectives of
Section 6(b)(5) by providing greater regulatory clarity and
practicality.
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    \79\ 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
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received written comments on
the proposed rule change.

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 NYSE 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 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 e-mail to<EMAIL_ADDRESS>Please include

File Number SR-NYSE-2007-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2007-22. 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, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of such filing also will 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 File Number SR-NYSE-2007-22 and should be
submitted on or before August 22, 2007.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\80\
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    \80\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-14853 Filed 7-31-07; 8:45 am]

BILLING CODE 8010-01-P