replace the reference to ``substantial stockholders'' with the concept
of beneficial owners with significant influence, the concept of
``significant influence'' already exists in other parts of the auditor
independence rules, including the recently amended Loan Provision.\305\
As such, we believe that affected entities will likely be able to
leverage existing practices, processes, or controls to comply with the
final amendments compared to having separate compliance requirements by
retaining the reference to the substantial stockholder.
---------------------------------------------------------------------------

    \305\ See Loan Provision Adopting Release.
---------------------------------------------------------------------------

    Compliance with the final amendments will require the use of
professional skills, including accounting and legal skills. The final
amendments are discussed in detail in Section II above. We discuss the
economic impact, including the estimated costs, of the final amendments
in Section III (Economic Analysis) above.

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs us to consider alternatives that would accomplish
our stated objectives while minimizing any significant adverse impacts
on small entities. Accordingly, we considered the following
alternatives:
     Establishing different compliance or reporting
requirements that take into account the resources available to small
entities;
     Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the
requirements.
    In connection with the final amendments to Rule 2-01, we do not
think it feasible or appropriate to establish different compliance or
reporting requirements or timetables for small entities. The final
amendments are designed to address compliance challenges for both large
and small audit clients and audit firms, including smaller accounting
firms. With respect to clarification, consolidation, or simplification
of compliance and reporting requirements for small entities, the final
amendments do not contain any new reporting requirements.
    Some of the final amendments, such as establishing a dual
materiality threshold for the common control provision in the affiliate
of the audit client definition, amending the ICC definition, and
incorporating the concept of ``significant influence'' into the
Business Relationships Rule, will create new compliance requirements.
However, the amendments to the affiliate of the audit client and the
ICC definitions are less burdensome in nature when compared to the
existing rules, and the amendment to the Business Relationships Rule
will help with compliance by using a consistent concept that is defined
and understood. These amendments are meant to better identify those
relationships and services that are more likely to impair an auditor's
objectivity and impartiality, thereby resulting in fewer instances
where certain relationships and services would cause the auditor to
violate our independence requirements, as compared to the existing
rule. The flexibility that could result from the final amendments will
be applicable to all affected entities, regardless of size.
    With respect to using performance rather than design standards, we
note that several of the final amendments are more akin to performance
standards. Rather than prescribe the specific steps necessary to apply
such standards, the final amendments recognize that ``materiality'' and
``significant influence'' can be implemented using reasonable judgment
to achieve the intended result. Regarding the mergers and acquisitions
transition framework, the final amendments do not prescribe specific
procedures or processes and instead focus on requiring the performance
that would lead to the identification of potential violations and how
to address such violations. We believe that the use of these standards
will accommodate entities of various sizes while potentially avoiding
overly burdensome methods that may be ill-suited or unnecessary given
the facts and circumstances.
    The final amendments are intended to update the independence rules
to reflect recent feedback received from the public and the
Commission's experience administering those rules since their adoption
nearly two decades ago and address certain compliance challenges for
audit firms and their clients, including those that are small entities.
Overall, the final amendments are expected to be less burdensome in
nature than the existing rule. For this reason, exempting small
entities from the final amendments would increase, rather than
decrease, their regulatory burden relative to larger entities. The
potential benefits to be derived from the final amendments discussed in
the Economic Analysis apply to small entities as well as the larger
entities. As such, exempting small entities from any of the final
amendments would deprive them of the intended benefits and create the
potential for confusion maintaining two sets of independence
requirements.

VII. Codification Update

    The ``Codification of Financial Reporting Policies'' announced in
Financial Reporting Release No. 1 \306\ (April 15, 1982) is updated by
adding at the end of Section 602, under the Financial Reporting Release
Number (FR-85) assigned to this final release, the text in Sections I
and II of this release.
---------------------------------------------------------------------------

    \306\ 47 FR 21028 (May 17, 1982).
---------------------------------------------------------------------------

    The Codification is a separate publication of the Commission. It
will not be published in the Code of Federal Regulations.

VIII. Statutory Basis

    The amendments described in this release are being adopted under
the authority set forth in Schedule A and Sections 7, 8, 10, and 19 of
the Securities Act, Sections 3, 10A, 12, 13, 14, 17, and 23 of the
Exchange Act, Sections 8, 30, 31, and 38 of the Investment Company Act
of 1940, Sections 203 and 211 of the Investment Advisers Act of 1940,
and Section 3(a) of the Sarbanes Oxley Act of 2002.

List of Subjects in 17 CFR Part 210

    Accountants, Accounting, Banks, Banking, Employee benefit plans,
Holding companies, Insurance companies, Investment companies, Oil and
gas exploration, Reporting and recordkeeping requirements, Securities,
Utilities.

    In accordance with the foregoing, the Commission amends title 17,
chapter II of the Code of Federal Regulations as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

0
1. The authority citation for part 210 continues to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n,
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30,
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c),
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.

0
2. Amend Sec.  210.2-01 by
0
a. Removing Preliminary Note to Sec.  210.2-01;
0
b. Adding an introductory paragraph;
0
c. Revising paragraphs (c)(1)(ii)(A) introductory text;
0
d. Revising paragraphs (c)(1)(ii)(A)(1)(iii) and (iv);
0
e. Revising paragraph (c)(1)(ii)(A)(1)(iv);
0
f. Adding paragraph (c)(1)(ii)(A)(1)(v);
0
g. Revising paragraph (c)(1)(ii)(E);
0
h. Revising paragraph (c)(2)(iii)(B)(2)(i);
0
i. Revising paragraph (c)(2)(iii)(C)(3)(i);
0
j. Revising paragraph (c)(3);
0
k. Revising paragraph (c)(6)(i)(A)(1);
0
l. Revising paragraph (c)(6)(i)(B)(1);
0
m. Revising paragraph (e);
0
n. Revising paragraph (f)(4);
0
o. Revising paragraph (f)(5)(iii);
0
p. Revising paragraph (f)(6); and
0
q. Revising paragraph (f)(14).
    The revisions and additions read as follows:

Sec.  210.2-01   Qualifications of accountants.

    Section 210.2-01 is designed to ensure that auditors are qualified
and independent of their audit clients both in fact and in appearance.
Accordingly, the rule sets forth restrictions on financial, employment,
and business relationships between an accountant and an audit client
and restrictions on an accountant providing certain non-audit services
to an audit client. Section 210.2-01(b) sets forth the general standard
of auditor independence. Paragraphs (c)(1) through (c)(5) of this
section reflect the application of the general standard to particular
circumstances. The rule does not purport to, and the Commission could
not, consider all circumstances that raise independence concerns, and
these are subject to the general standard in Sec.  210.2-01(b). In
considering this standard, the Commission looks in the first instance
to whether a relationship or the provision of a service: Creates a
mutual or conflicting interest between the accountant and the audit
client; places the accountant in the position of auditing his or her
own work; results in the accountant acting as management or an employee
of the audit client; or places the accountant in a position of being an
advocate for the audit client. These factors are general guidance only,
and their application may depend on particular facts and circumstances.
For that reason, Sec.  210.2-01(b) provides that, in determining
whether an accountant is independent, the Commission will consider all
relevant facts and circumstances. For the same reason, registrants and
accountants are encouraged to consult with the Commission's Office of
the Chief Accountant before entering into relationships, including
relationships involving the provision of services that are not
explicitly described in the rule.
* * * * *
    (c) * * *
    (1) * * *
    (ii) * * *
    (A) * * *
    (1) Any loan (including any margin loan) to or from an audit
client, an audit client's officers or directors that have the ability
to affect decision-making at the entity under audit, or beneficial
owners (known through reasonable inquiry) of the audit client's equity
securities where such beneficial owner has significant influence over
the entity under audit. The following loans obtained from a financial
institution under its normal lending procedures, terms, and
requirements are excepted from this paragraph (c)(1)(ii)(A)(1):
* * * * *
    (iii) Loans fully collateralized by cash deposits at the same
financial institution;
    (iv) Mortgage loans collateralized by the borrower's primary
residence provided the loans were not obtained while the covered person
in the firm was a covered person; and
    (v) Student loans provided the loans were not obtained while the
covered person in the firm was a covered person.
* * * * *
    (E) Consumer loans. Any aggregate outstanding consumer loan balance
owed to a lender that is an audit client that is not reduced to $10,000
or less on a current basis taking into consideration the payment due
date and any available grace period.
* * * * *
    (2) * * *
    (iii) * * *
    (B) * * *
    (2) * * *
    (i) Persons, other than the lead partner and the Engagement Quality
Reviewer, who provided 10 or fewer hours of audit, review, or attest
services during the period covered by paragraph (c)(2)(iii)(B)(1) of
this section;
* * * * *
    (C) * * *
    (3) * * *
    (i) Persons, other than the lead partner and the Engagement Quality
Reviewer, who provided 10 or fewer hours of audit, review, or attest
services during the period covered by paragraph (c)(2)(iii)(C)(2) of
this section;
* * * * *
    (3) Business relationships. An accountant is not independent if, at
any point during the audit and professional engagement period, the
accounting firm or any covered person in the firm has any direct or
material indirect business relationship with an audit client, or with
persons associated with the audit client in a decision-making capacity,
such as an audit client's officers or directors that have the ability
to affect decision-making at the entity under audit or beneficial
owners (known through reasonable inquiry) of the audit client's equity
securities where such beneficial owner has significant influence over
the entity under audit. The relationships described in this paragraph
(c)(3) do not include a relationship in which the accounting firm or
covered person in the firm provides professional services to an audit
client or is a consumer in the ordinary course of business.
* * * * *
    (6) * * *
    (i) * * *
    (A) * * *
    (1) The services of a lead partner, as defined in paragraph
(f)(7)(ii)(A) of this section, or Engagement Quality Reviewer, as
defined in paragraph (f)(7)(ii)(B) of this section; for more than five
consecutive years; or
* * * * *
    (B) * * *
    (1) Within the five consecutive year period following the
performance of services for the maximum period permitted under
paragraph (c)(6)(i)(A)(1) of this section, performs for that audit
client the services of a lead partner, as defined in paragraph
(f)(7)(ii)(A) of this section, or Engagement Quality Reviewer, as
defined in paragraph (f)(7)(ii)(B) of this section, or a combination of
those services; or
* * * * *
    (e) Transition provisions for mergers and acquisitions involving
audit clients.

An accounting firm's independence will not be impaired because an audit
client engages in a merger or acquisition that gives rise to a
relationship or service that is inconsistent with this rule, provided
that:
    (1) The accounting firm is in compliance with the applicable
independence standards related to such services or relationships when
the services or relationships originated and throughout the period in
which the applicable independence standards apply;
    (2) The accounting firm has or will address such services or
relationships promptly under relevant circumstances as a result of the
occurrence of the merger or acquisition;
    (3) The accounting firm has in place a quality control system as
described in paragraph (d)(3) of this section that has the following
features:
    (i) Procedures and controls that monitor the audit client's merger
and acquisition activity to provide timely notice of a merger or
acquisition; and
    (ii) Procedures and controls that allow for prompt identification
of such services or relationships after initial notification of a
potential merger or acquisition that may trigger independence
violations, but before the effective date of the transaction.
    (f) * * *
    (4) Affiliate of the audit client means:
    (i) An entity that has control over the entity under audit, or over
which the entity under audit has control, including the entity under
audit's parents and subsidiaries;
    (ii) An entity that is under common control with the entity under
audit, including the entity under audit's parents and subsidiaries,
when the entity and the entity under audit are each material to the
controlling entity;
    (iii) An entity over which the audit client has significant
influence, unless the entity is not material to the audit client;
    (iv) An entity that has significant influence over the audit
client, unless the audit client is not material to the entity; or
    (v) Each entity in the investment company complex as determined in
paragraph (f)(14) of this section when the entity under audit is an
investment company or investment adviser or sponsor, as those terms are
defined in paragraphs (f)(14)(ii), (iii), and (iv) of this section.
    (5) * * *
    (iii) The ``audit and professional engagement period'' does not
include periods ended prior to the first day of the last fiscal year
before the issuer first filed, or was required to file, a registration
statement or report with the Commission, provided there has been full
compliance with applicable independence standards in all prior periods
covered by any registration statement or report filed with the
Commission.
    (6) Audit client means the entity whose financial statements or
other information is being audited, reviewed, or attested to and any
affiliates of the audit client, other than, for purposes of paragraph
(c)(1)(i) of this section, entities that are affiliates of the audit
client only by virtue of paragraphs (f)(4)(iii), (f)(4)(iv), or
(f)(14)(i)(E) of this section.
* * * * *
    (14) Investment company complex. (i) ``Investment company complex''
includes:
    (A) An entity under audit that is an:
    (1) Investment company; or
    (2) Investment adviser or sponsor;
    (B) The investment adviser or sponsor of any investment company
identified in paragraph (f)(14)(i)(A)(1) of this section;
    (C) Any entity controlled by or controlling:
    (1) An entity under audit identified by paragraph (f)(14)(i)(A) of
this section, or
    (2) An investment adviser or sponsor identified by paragraph
(f)(14)(i)(B) of this section. When the entity is controlled by an
investment adviser or sponsor identified by paragraph (f)(14)(i)(B),
such entity is included within the investment company complex if:
    (i) The entity and the entity under audit are each material to the
investment adviser or sponsor identified by paragraph (f)(14)(i)(B) of
this section; or
    (ii) The entity is engaged in the business of providing
administrative, custodial, underwriting, or transfer agent services to
any entity identified by paragraphs (f)(14)(i)(A) or (B) of this
section;
    (D) Any entity under common control with an entity under audit
identified by paragraph (f)(14)(i)(A) of this section, any investment
adviser or sponsor identified by paragraph (f)(14)(i)(B) of this
section, or any entity identified by paragraph (f)(14)(i)(C) of this
section; if the entity:
    (1) Is an investment company or an investment adviser or sponsor,
when the entity and the entity under audit identified by paragraph
(f)(14)(i)(A) of this section are each material to the controlling
entity; or
    (2) Is engaged in the business of providing administrative,
custodian, underwriting, or transfer agent services to any entity
identified by paragraphs (f)(14)(i)(A) and (f)(14)(i)(B) of this
section;
    (E) Any entity over which an entity under audit identified by
paragraph (f)(14)(i)(A) of this section has significant influence,
unless the entity is not material to the entity under audit identified
by paragraph (f)(14)(i)(A) of this section, or any entity that has
significant influence over an entity under audit identified by
paragraph (f)(14)(i)(A) of this section, unless the entity under audit
identified by paragraph (f)(14)(i)(A) of this section is not material
to the entity that has significant influence over it; and
    (F) Any investment company that has an investment adviser or
sponsor included in this definition by paragraphs (f)(14)(i)(A) through
(f)(14)(i)(D) of this section.
    (ii) An investment company, for purposes of paragraph (f)(14) of
this section, means any investment company or an entity that would be
an investment company but for the exclusions provided by Section 3(c)
of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)).
    (iii) An investment adviser, for purposes of this definition, does
not include a subadviser whose role is primarily portfolio management
and is subcontracted with or overseen by another investment adviser.
    (iv) Sponsor, for purposes of this definition, is an entity that
establishes a unit investment trust.
* * * * *

    By the Commission.

    Dated: October 16, 2020.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-23364 Filed 12-10-20; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register: February 20, 2009 (Volume 74, Number 33)]
[Notices]
[Page 7947-7952]
[DOCID:fr20fe09-116]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59383; File No. SR-NYSE-2009-07]

Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by New York Stock Exchange LLC
Amending NYSE Rule 123E (``DMM Combination Review Policy'') To Be More
Consistent With the Exchange's Current Designated Market Maker
(``DMM'') System

February 11, 2009.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on January 27, 2009, New York Stock Exchange LLC (``NYSE''
or the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II below, which Items have been prepared by the self-regulatory
organization. NYSE filed the proposed rule change pursuant to Section
19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(6) thereunder,\5\ which
renders it effective upon filing with the Commission. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rule 123E (``DMM Combination
Review Policy'') to be more consistent with the Exchange's current
Designated Market Maker (``DMM'') system.

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 self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend NYSE Rule 123E (``DMM Combination
Review Policy'') to be more consistent with the Exchange's current
Designated Market Maker (``DMM'') system.
    The Exchange notes that parallel changes are proposed to be made to
the rules of the NYSE Alternext Exchange (formerly the American Stock
Exchange).\6\
---------------------------------------------------------------------------

    \6\ See SR-NYSEALTR-2009-04.
---------------------------------------------------------------------------

Background
a. Origination of Review Process
    In 1986, the Exchange developed procedures for reviewing proposed
mergers, acquisitions and other combinations between or among
specialist units.\7\ The procedures were the result of a study of
significant issues related to the specialist system which concluded, in
part, that there would be an increasing incidence of specialist
consolidation as specialist units sought to acquire additional capital
and resources to meet the growing needs of the market. At that time,
the Exchange determined that a structured approach for reviewing
proposed specialist combinations was required in order to avoid the
formation of specialist units that had capital or operational
deficiencies that would negatively impact the Exchange's market and
potentially undermine the orderly evolution of the specialist system.
The Exchange chose to structure its review based on the degree of
concentration of securities in the specialist unit(s). After a pilot
program and a series of amendments, the procedures were permanently
approved by the Commission in June 1994.\8\ The procedures were
eventually codified as NYSE Rule 123E in 2002 and subsequently
amended.\9\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Release No. 24411, 52 FR 17870
(april 29, 1987)SR-NYSE-86-37).
    \8\ See Securities Exchange Release No. 35343 (February 8,
1995), 60 FR 8437 (February 14, 1995) (SR-NYSE-94-46).
    \9\ See Securities Exchange Release No. 46579 (October 1, 2002),
67 FR 63004 (October 9, 2002) (SR-NYSE-2002-31); See Securities
Exchange Release No. 47547 (March 20, 2003), 68 FR 15027 (March 27,
2003) (SR-NYSE-2002-41); See Securities Exchange Release No. 52969
(December 16, 2005), 70 FR 76337 (December 23, 2005) (SR-NYSE-2005-
38) (amendment to specialist unit capital requirements); See
Securities Exchange Release No. 58845 (October 24, 2008), 73 FR
64379 (October 29, 2008) (NYSE-2008-46) (amendment implementing the
New Market Model); See Securities Exchange Act Release No. 58857
(October 24, 2008), 73 FR 65435 (November 3, 2008) (SR-NYSE-2008-52)
(amendment implementing the new Allocation Policy); See Securities
Exchange Act Release No. 59077 (December 10, 2008), 73 FR 76691
(December 17, 2008) (NYSE-2008-127) (technical amendments to correct
rule reference to DMM net capital requirements).
---------------------------------------------------------------------------

b. Current NYSE Rule 123E Requirements
    On October 24, 2008, the Exchange eliminated the specialist system
and created a Designated Market Maker (``DMM'') system.\10\ At that
time, the Exchange did not substantively amend the review process
related to combinations to be consistent with the new DMM system;
rather, the provisions of NYSE Rule 123E were carried over to govern
DMM combinations.\11\ The Exchange expected to turn to appropriate
revisions to Rule 123E as soon as possible following the implementation
of the DMM system. That work has resulted in this rule proposal.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 58845 (October 24,
2008) (SR-NYSE-2008-46) (``New Market Model'').
    \11\ The Exchange did amend this rule to be consistent with its
new Allocation policy on October 24, 2008. See Securities Exchange
Act Release No. 58857 (October 24, 2008), 73 FR 65435 (November 3,
2008) (SR-NYSE-2008-52).
---------------------------------------------------------------------------

    Currently, pursuant to NYSE Rule 123E, the Exchange is responsible
for reviewing proposed DMM combinations, subject to certain
considerations, when the proposed DMM unit combination would result in
an aggregate of more than five percent (``Tier 1 combination''), 10
percent (``Tier 2 combination'') or 15 percent or more (``Tier 3
combination'') in any one of four concentration measures: (1) Common
stocks listed on the Exchange; (2) the 250 most active listed common
stocks; (3) the total trading volume of common stock listed on the
Exchange; and (4) the total dollar value of common stock listed on the
Exchange.
    Where a proposed combination involves or would result in a DMM unit
accounting for more than five percent of any of the ``concentration
measures,'' the Exchange is required to review the proposed combination
to take into consideration:

    (1) the effects of the proposed combination in terms of the
following criteria:
    (a) strengthening the capital base of the resulting DMM unit;
    (b) minimizing both the potential for financial failure and the
negative consequences of any such failure on the DMM system as a
whole; and
    (c) maintaining or increasing operational efficiencies;
    (2) commitment to the Exchange market, focusing on whether the
constituent DMM units have worked to support, strengthen and advance
the Exchange, its agency/auction market and its competitiveness in
relation to other markets; and
    (3) the effect of the proposed combination on overall
concentration of DMM units.

    Where a DMM unit currently exceeds five percent of any
concentration measure, and then proposes a combination that would not
result in increasing its concentration measure by more than two
percentage points, or not result in the combined unit moving into a
higher tier classification, the Exchange shall not review the proposed
combination.
    When a proposed combination has a concentration percentage of 10%
or higher in any of the four measures set forth above, NYSE Rule
123E(c)(1)(a)(i)-(iv) requires the combined entity to prove by a
preponderance of the evidence that the proposed combination: (1) Would
not create or foster concentration in the DMM business detrimental to
the Exchange and its markets; (2) would foster competition among DMM
units; (3) would enhance the performance of the constituent DMM unit
and the quality of market of stocks involved; and (4) would demonstrate
that, if approved, the proposed combination is otherwise in the public
interest.
    Moreover, pursuant to NYSE Rule 123E(d) proposed combinations that
would result in the DMM units accounting for more than 10% of a
concentration measure, requires the proponents of the combination to
submit an operational certification prepared by an independent,
nationally recognized management consulting organization with respect
to all aspects of the unit's management and operations.\12\ The
proponents must also submit an acceptable risk management plan with
respect to any line of business in which they engage.
---------------------------------------------------------------------------

    \12\ The initial rationale behind this additional requirement
was to minimize the risk of financial and/or operational failure of
larger specialist units.
---------------------------------------------------------------------------

    If the proposed combination has a concentration percentage greater
than 15%, NYSE Rule 123E (c)(1)(b)(i)-(iv) further requires the
combined entity to prove that the measures set forth for combination of
10% are satisfied by clear and convincing evidence.
Proposed Amendments to NYSE Rule 123E
    The Exchange proposes to amend the DMM Combination review to more
clearly define what constitutes a DMM Combination that requires review
and approval by the Exchange. The Exchange further seeks to clarify the
administrative process associated with that review.

    The Exchange proposes to amend NYSE Rule 123E to eliminate the
current ``Tier'' system as the mechanism for determining the nature of
the review for a proposed DMM combination. At the time the combination
review procedures were first adopted in 1986, there were 55 specialist
units on the Exchange. The threshold concentration level of five
percent in any one of the four concentration measures defined in the
Rule was needed to focus on combinations that would have significant
impact on the Exchange. Today, there are six DMMs approved to operate
on the Exchange; as such, any proposed combination has the potential to
have significant impact on the Exchange's ability to maintain its DMM
system and provide a fair and orderly market place. Accordingly, the
Exchange proposes to eliminate threshold concentration levels as the
instigating factor for the Exchange to review a proposed DMM
combination. Pursuant to proposed NYSE Rule 123E(a), any ``proposed
combination'' must be approved by the Exchange.
    Proposed NYSE Rule 123E(b) defines a ``proposed combination'' to
include changes to the current DMM unit business that has the potential
to have significant impact on the Exchange's market. As such, the
Exchange will review when: (1) Two or more DMM units merge or otherwise
combine their businesses with the result that the total number of
existing DMM units will be reduced; (2) two or more DMM units combine
their businesses with the result that the existing number of DMM units
is not reduced, but one or more of the surviving units is substantially
reduced in size; or (3) a DMM unit merges or otherwise combines with a
non-DMM business resulting in a change of control of the existing DMM
unit.\13\
---------------------------------------------------------------------------

    \13\ The current provisions of NYSE Rule 123E(g)(4) will be
deleted and not incorporated in the text of the proposed definition
of ``proposed combination.'' NYSE Rule 123E(g)(4) includes as a
definition of a DMM combination: ``an individual DMM leaving an
existing unit and proposing to take securities with him or her to
join another existing unit.'' Securities allocated on the Exchange
are assigned to DMM units pursuant to NYSE Rule 103B with an
individual employed by the unit assigned as the DMM. As such, the
individual DMM on the NYSE is not permitted to take securities with
him or her if the DMM becomes employed by another DMM unit.
Accordingly, this concept is not being carried over into proposed
NYSE Rule 123E. See e-mail from Deanna Logan, Managing Director,
NYSE Regulation, Inc., to David Liu, Assistant Director, Commission,
dated January 30, 2009 (``January 30 e-mail'').
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    The current rule does not specify where the correspondence
regarding a proposed combination should be directed. Through this
amendment, the Exchange would require the proponents of a proposed
combination to direct the correspondence to the Office of the Corporate
Secretary.\14\ This department will be able to coordinate and
facilitate the timely review of the request.
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    \14\ See proposed NYSE Rule 123E(c). See January 30 e-mail,
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    Similar to the current rule, the written submission should address
all the factors for review as well as: (1) Performance in any
securities received through previous combinations or transfers of
registrations during the preceding two years; (2) whether the resulting
DMM unit will maintain staffing adequate to the needs of the market
place; (3) whether the proposed combined unit will have a real-time
surveillance system that monitors DMM trading and uses exception alerts
to detect unusual trades or trading patterns; (4) whether the proposed
combined unit will have disaster recovery facilities for its computer
network and software; (5) whether it has designated specific
individuals to handle unusual situations on the Floor (if so, the names
of the individuals); (6) whether the combined unit will employ a
``zone'' or other management system on the Floor (with identification
of the names of the individuals and their specific responsibilities, as
applicable); and (7) whether the combined unit will designate a senior
staff member to be responsible for reviewing DMM performance data, with
specific procedures for correcting any deficiencies identified.\15\
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    \15\ See proposed NYSE Rule 123E(c).
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    The Exchange further proposes to rescind the requirement to submit
an operational certification prepared by an independent, nationally
recognized management consulting organization with respect to all
aspects of the firm's management and operations for proposed
combinations as it related to proposed combinations of 10% or higher,
as required by NYSE Rule 123E(d).
    In 1994, when the rule was amended to add this requirement for
proposed combinations of specialist units that would account for more
than 10% of a concentration measure, there were approximately 40
specialist units on the Floor. Specialist units at that time were
relatively small independent companies. The Exchange believed that the
independent certification was necessary to determine whether the
combined entity had the managerial and operational capabilities to
operate as a larger-sized specialist unit.
    Today, the DMM system is comprised of six DMM units, all of which
are relatively large, well-capitalized firms. The Exchange believes
that the management and operational concerns originally associated with
the combination of individual specialist units does not exist today,
given the characteristics of the organizations engaged in market making
as DMMs, and given the changed nature of the role DMMs play in the
current market environment compared with the role played by specialists
when this Rule was originally adopted. Furthermore, the Exchange
submits that its current rules already address and monitor the
management and operational requirements originally contemplated by the
performance of an independent consultant and therefore, such outside
certification is duplicative and unnecessary.
    On July 30, 2007, NASD and NYSE Regulation, Inc. consolidated their
member firm regulation operations into a combined organization,
FINRA.\16\ As part of its duties and responsibilities, FINRA oversees
NYSE Member Firm Regulation and carefully reviews organizations seeking
membership with FINRA and the NYSE. FINRA and NYSE Consolidated Rules
both require that all prospective member organizations comply with the
Securities and Exchange Act of 1934 [sic] as well as its rules with
regard to the creation and preservation of books and records, the
corporate structure of the proposed member organization, the
supervision and control, and the net capital requirements of the
proposed member organization. Furthermore, these rules require annual
audits of the member organization's financial statements by an
independent public account and the

submission of an audited financial and operational report to the
Exchange.\17\
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    \16\ Pursuant to Rule 17d-2 under the Securities Exchange Act of
1934, as amended (the ``Exchange Act''), NYSE, NYSE Regulation,
Inc., and NASD entered into an agreement (the ``Agreement'') to
reduce regulatory duplication for firms that are members of FINRA
and also members of NYSE on or after July 30, 2007 (``Dual
Members''), by allocating to FINRA certain regulatory
responsibilities for selected NYSE rules. The Agreement includes a
list of all of those NYSE and NASD rules for which FINRA has assumed
regulatory responsibilities (``Common Rules''). See Securities
Exchange Act Release No. 56148 (July 26, 2007), 72 FR 42146 (August
1, 2007) (Notice of Filing and Order Approving and Declaring
Effective a Plan for the Allocation of Regulatory Responsibilities).
The Common Rules include those NYSE rules that FINRA has
incorporated into its rulebook (the ``NYSE Incorporated Rules'').
See Securities Exchange Act Release No. 56147 (July 26, 2007), 72 FR
42166 (August 1, 2007) (Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Change to Incorporate Certain
NYSE Rules Relating to Member Firm Conduct; File No. SR-NASD-2007-
054). Paragraph 2(b) of the 17d-2 Agreement sets forth procedures
regarding proposed changes by either NYSE or FINRA to the substance
of any of the Common Rules.
    \17\ See, e.g., NYSE and FINRA Rules 104, 311, 325-328, 382 and
418.
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    The structure and regulatory concerns that accompany applications
for membership on the Exchange in today's market have been carefully
considered and addressed in the FINRA and NYSE Consolidated Rules.
These Rules create a multi-tiered level of review to ensure that
requirements related to appropriate managerial and financial
capabilities for DMM units are in place from the onset of membership
with the Exchange to the approval of members as DMMs.
    In addition, NYSE Rule 98 monitors and regulates the member
organization's managerial and operational systems. Under NYSE Rule 98,
FINRA reviews the managerial aspects of a DMM unit and requires a DMM
unit to: (i) Adopt and implement comprehensive written procedures and
guidelines governing the conduct and supervision of business handled by
such unit; (ii) establish a process for regular review of such written
procedures and guidelines; and (iii) implement controls and
surveillances reasonably designed to prevent and detect violations of
these procedures and guidelines.
    Furthermore, NYSE Rule 103 and NYSE Rule 104 regulate a DMM unit's
compliance with capital requirements. NYSE Rule 103 sets forth the
criteria that an Exchange member must satisfy in order to apply as a
DMM unit. For example, the Exchange reviews the member organization's
market making ability and the capital available for market making.
Specifically, NYSE Rule 103.20 imposes stringent net capital
requirements for DMM units and requires the DMM unit to immediately
notify the Exchange if it is unable to comply with these prescribed
requirements. The Exchange therefore believes that the requirement for
an independent, nationally recognized management consulting
organization review with respect to all aspects of the proposed
combined entity's management and operations is no longer warranted.
NYSE Rule 104 sets forth the dealings and responsibilities of DMMs and
requires the DMM units to maintain compliance at all times with NYSE
and SEC regulations.
    The Exchange submits that the FINRA and NYSE Consolidated Rules
currently in place appropriately monitor and review organizations
seeking initial membership to the Exchange and the ability to operate
as a DMM on the Exchange. These Rules operate to ensure continued
compliance with protocols required of Exchange members. This new
regulatory structure obviates the need for an independent consultant to
perform a review of a proposed combination's management and operational
efficiencies.
    The Exchange further seeks to make consistent the criteria for the
Exchange's review of a proposed combination with the requirements for
operating a DMM unit. The Exchange will therefore review whether the
proposed combined entity will be able to comply with NYSE Rule 103B,
Section II \18\ as well as the provision of NYSE Rules 98, 103 and 104.
Additionally, the Exchange proposes to retain the criteria set forth in
the current process and include as part of its review: (1) Whether the
proposed combination minimizes both the potential for financial failure
and the negative consequences of any such failure on the DMM system as
a whole; (2) whether the proposed combination maintains or increases
operational efficiencies; (3) the surviving DMM unit's commitment to
the Exchange's market; and (4) the effect of the proposed combination
on overall concentration of DMM units.\19\
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    \18\ The Exchange established an allocation system based on a
single objective measure to determine a DMM unit's eligibility to
participate in the allocation process. See Securities Exchange
Release No. 58363 (August 14, 2008), 73 FR 49514 (August 21, 2008)
(SR-NYSE-2008-52). See January 30 e-mail, supra, note 11.
    \19\ The Exchange seeks to eliminate references to certain
legacy programs that the Exchange no longer operates. Specifically,
NYSE Rule 123E, Supplementary Material. 10(a) refers to
participation in a ``FACTS'' program which is no longer maintained
by the Exchange.
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    As set forth above, the NYSE has regulations in place to ensure
that its members and those members seeking approval as DMM units have
the necessary managerial and operational capabilities to operate on the
Exchange. Furthermore, these NYSE rules also specifically dictate
stringent capital requirements that its members and DMM units are
required to maintain in order to comply with NYSE and SEC rules. DMM
units that are not capable of meeting these requirements must notify
the Exchange immediately and are monitored by the Exchange.
Accordingly, the Exchange submits that the retention of the rule
requiring an independent consultant to conduct an operational
certification regarding a DMM unit's management and operations for
proposed combinations would be duplicative and unnecessary since the
Exchange has the appropriate procedures and rules in place to regulate
its members and DMM units and ensure their compliance with all
necessary requirements.
    The Exchange's ultimate determination to approve or disapprove a
proposed combination will be based upon a determination that the
proposed combination has satisfied the criteria set forth in proposed
NYSE Rule 123E(d)(1)-(5) and the Exchange determines that the proposed
combination would: (1) Not create or foster concentration in the DMM
business detrimental to the Exchange and its markets; (2) foster
competition among DMM units; and (3) enhance the performance of the
constituent DMM unit and the quality of the markets in the securities
involved.\20\ The Exchange may condition its approval upon compliance
by the resulting DMM unit with any steps the Exchange may specify to
address any concerns it may have in regard to considerations of the
above criteria.
---------------------------------------------------------------------------

    \20\ See Proposed NYSE Rule 123E(f). See January 30 e-mail,
supra, note 11.
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    To ensure the fairness of the new process, pursuant to proposed
NYSE Rule 123E(f), the Exchange must approve or disapprove a proposed
combination within ten (10) business days of the written
submission.\21\ The Exchange reserves the right to extend its review
process if the information submitted by the proponents of the DMM
combination is inadequate or requires additional time to review in
order for the Exchange to reach a decision.
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    \21\ The Exchange however, reserves the right to extend its
review process if the information submitted by the proponents of the
combination is inadequate to enable the Exchange to reach a
decision.
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    In any instance where the Exchange does not approve a proposed
combination, the proponents of such proposed combination have a right
to have such decision reviewed by the Exchange's Board of Directors.
Conclusion
    The Exchange believes that the proposed modifications to the
Exchange's current administrative procedures relating to the review of
a proposed DMM combination, which clarify what constitutes a proposed
combination and amend the criteria used to review the proposed
combination, are consistent with the current DMM system and will
provide a more reasonable review than the current procedures which were
predicated on the specialist system and the Exchange's market as they
existed in 1994. Moreover, by establishing a deadline for the
completion of the review and a right to appeal to the Exchange Board of
Directors, the NYSE believes that its process will be fair and

allow member organizations to properly manage their business
initiatives.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5),\22\ which requires that an exchange
have rules that are designed to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest. The proposed rule change is
consistent with these objectives in that it enables the Exchange to
further enhance the process by which it reviews proposed combinations
of DMM units. Through the instant filing to make its internal
administrative process related to the Exchange review of a proposed DMM
combination consistent with the underlying requirements for DMMs and
maintaining criteria that fosters the DMM system, the Exchange believes
that it is facilitating transactions. Specifically, the Exchange
believes that the proposed changes to the DMM combination review
process are necessary to facilitate the continuation of its DMM system
which allows the Exchange to provide its market participants with a
market maker that is responsible for: (i) Providing liquidity to the
market when there is a recognized need for additional liquidity; (ii)
bridging the gap between supply/demand by purchasing when no one else
is buying or selling when no one else is selling; and (iii) overall
maintaining a fair and orderly market, that ultimately removes
impediments to and perfects the mechanism of a free and open market and
a national market system and, in general, protects investors and the
public interest.
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    \22\ 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

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

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

    Because the foregoing proposed rule change: (1) Does not
significantly affect the protection of investors or the public
interest; (2) does not impose any significant burden on competition;
and (3) by its terms, does not become operative for 30 days after the
date of filing, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest,
the proposed rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \23\ and Rule 19b-4(f)(6) thereunder.\24\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of filing.\25\ However,
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest. The Exchange requested that the Commission waive
the 30-day operative delay and designate the proposed rule change
operative upon filing.
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    \25\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires the self-regulatory organization to give the
Commission notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. NYSE has satisfied this requirement.
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    The Exchange believes that the instant filing is non-controversial
because it amends NYSE Rule123E, which was historically predicated on
the specialist system and the Exchange's market as it existed in 1994,
to employ simplified criteria to govern a proposed DMM combination. The
Exchange believes that such criteria are more consistent with the
current DMM system. The Exchange submits that good cause exists to
justify waiver of the operative delay in order to allow the Exchange to
have an established procedure that is consistent with its new market
model. In light of the current economic environment which has witnessed
swift consolidations among financial institutions, the Exchange
believes that is essential to be equipped with the ability to
expeditiously review and approve proposed DMM combinations using
criteria that reflects the current operation of the Exchange, thereby
maintaining the integrity of the Exchange's DMM systems which
ultimately protects investors and the public interest.
    In light of the forgoing, the Commission believes that waiving the
30-day operative delay is consistent with the protection of investors
and the public interest. Therefore, the Commission designates the
proposal operative upon filing.\26\
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    \26\ For purposes only of waiving the operative delay for this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.\27\
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    \27\ 15 U.S.C. 78s(b)(3)(C).
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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-2009-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2009-07. 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 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
Exchange. 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-2009-07 and should be submitted on or before March 13, 2009.
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    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-3611 Filed 2-19-09; 8:45 am]

BILLING CODE 8011-01-P