[Federal Register Volume 66, Number 110 (Thursday, June 7, 2001)]
[Notices]
[Pages 30776-30777]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14331]



[[Page 30776]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44375; File No. SR-NYSE-00-58]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to an Interpretation of 
Rule 342 (``Offices--Approval, Supervision, and Control'')

June 1, 2001.

I. Introduction

    On December 15, 2000, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend interpretations concerning the meaning 
and administration of NYSE Rule 342 with respect to registered 
representatives working in small or residence branch offices of 
Exchange member organizations. The proposed rule change was published 
for comment in the Federal Register on January 22, 2001.\3\ No comments 
were received on the proposal. This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 43834 (January 10, 
2001), 66 FR 6721.
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II. Description of the Proposal

    The proposal would amend interpretations of NYSE Rule 342 with 
respect to the supervision of, and the experience requirements for, 
registered representatives working in small or residence branch offices 
of Exchange member organizations. This Interpretation will be published 
as an Interpretation Memorandum for inclusion in the Exchange's 
Interpretation Handbook.
    NYSE Rule 342 requires that each office, department and business 
activity be under the supervision and control of the member 
organization establishing it and of the personnel delegated such 
authority and responsibility. Additionally, the structure and 
administration of Exchange rules mandate that all member organization 
employees, including registered representatives (``RR''), be fully 
subject to the direct and ongoing supervision, control and discipline 
of their member organization employers. Further, Exchange Rule 342(c) 
requires that a member or member organization obtain the Exchange's 
prior written consent for each office established.

NYSE Rule 342.11 and Current Interpretations

    NYSE Rule 342.11 provides that an RR may operate out of his or her 
residence, with Exchange approval, and that if the residence is 
advertised (through, e.g., business cards or stationery), then the 
residence constitutes a branch office of the member organization 
employer. Further, and notwithstanding the above, Interpretation /01 to 
Rule 342.11 in the NYSE Interpretation Handbook states that if an RR 
regularly operates from his home during business hours (even on a part-
time basis), the member organization employer must register the home as 
a branch office (a ``residence office''). Interpretation /03 to Rule 
342.11 currently provides that an RR who will be working from his or 
her residence must have a minimum of six-months' securities experience 
before being approved in a residence office.

Proposed Amendment to Interpretation /03 to Rule 342.11

    The NYSE represents that the six-month securities industry 
experience requirement for RRs in residence offices has come to be 
viewed as unnecessary and restrictive in that member organizations are 
prohibited from permitting the RR from working for two additional 
months beyond the prescribed four-month training period of NYSE Rule 
345. This six-month experience requirement has particularly affected 
member organizations structured with multiple one-person offices.
    The additional training period for inexperienced RRs was 
appropriate when the interpretation was implemented in the 1970s 
because of the remote physical location of supervisors. Now, however, 
with member organizations increasingly employing advanced technology 
and electronic communications in the supervision and review of RR 
activities, supervision can be readily performed without being 
dependent on close physical proximity of the manager to the RR.
    Under the proposed amended Interpretation, the six-month experience 
requirement will be eliminated, thereby allowing the RR who operates 
from a residence or one-person office to begin working upon completion 
of the prescribed four-month training period, provided that the member 
organization develops and implements special supervisory procedures for 
heightened supervision for the two-month period immediately following 
completion of prescribed training.
    The special supervision will include procedures such as:
     Daily review of all customer account activity;
     Daily review of all correspondence including prior 
approval of all outgoing correspondence;
     Review of all incoming and outgoing electronic 
communications, e.g., internet use and electronic mail; and
     On-site inspection by the branch office manager (or 
qualified designee) responsible for supervision of the residence office 
in the two months following the prescribed training period.
    Member organizations will be required to inform RRs operating from 
a residence or small one-person office of the special supervision, and 
to maintain records evidencing the implementation and conduct of the 
special supervision.
    The Exchange believes the amended interpretation will allow these 
RRs to begin working immediately after completing the prescribed four-
month training period (like all other RRs), while also helping to 
ensure that, through special supervision, member organizations have 
appropriate supervision and control of RRs operating from a residence 
and customer accounts serviced by those RRs. Moreover, while the 
special supervision is required for a limited time, there is the 
ongoing responsibility of the member organizations, beyond the two-
month special supervision period, to have appropriate policies and 
procedures in place for the supervision and control of all sales and 
operational activities of each branch office and of all registered 
employees and the customer accounts they service.

Proposed Amendments to Interpretations /01, /02, and a New 
Interpretation /04 to NYSE Rule 342.15

    Generally, each location where member organization employees are 
engaged in activities on behalf of a member organization must be 
registered as a branch office (excluding locations on the Exchange 
Floor where member organizations conduct Floor Business).
    A ``small'' office is a branch with three or less registered 
representatives, one of whom is designated as ``RR-in-charge'' (this 
designation is required only if there is more than one registered 
representative in the small office). A small office may engage in sales 
activities but may not conduct operational functions, such as 
cashiering (receipt and disbursement of funds and securities).
    Interpretation /02 to NYSE Rule 342.15 currently requires small 
offices to be under the close supervision and

[[Page 30777]]

control of the member organization's main office or to be supervised by 
a manager of another office within short travel distance. The manager 
may be responsible for only two small offices.
    The proposed amendments to the Interpretation will require that 
small offices be controlled and supervised by either the main office or 
another designated branch office having a qualified (i.e., Series 9 and 
10 exam-qualified) Branch Office Manager on the premises. Further, such 
supervisory arrangements must be made part of the member organization's 
written plan of supervision. Adoption of the Interpretation will 
eliminate the current provision under Interpretation /01 to NYSE Rule 
342.15 that a manager may be responsible for only two small offices 
that are in close geographical proximity. Given modern electronic 
surveillance and monitoring techniques, the Exchange believes this 
limitation regarding number of offices and geographical location is no 
longer necessary. New Interpretation /04 to NYSE Rule 342.15 provides 
that RRs operating from small, one-person branch offices must be 
subject to the same special supervision prescribed in Interpretation /
03 to NYSE Rule 342.11 for residence offices.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\4\ 
Specifically, the Commission finds the proposal is consistent with the 
section 6(b)(5) \5\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. The Commission believes that 
by amending its Interpretations to NYSE Rule 342, the Exchange will 
enhance the process for member organization supervision and control of 
small and residence branch offices, while also permitting RRs to engage 
in activities upon completion of a prescribed training period.
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    \4\ In approving this rule change, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
information. 15 U.S.C. 78c(f).
    \5\ 15 U.S.C. 78f(b)(5).
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    The proposal would amend Interpretation /03 to NYSE Rule 342.11 to 
permit RRs in residence offices to begin working after the four-month 
training period required in NYSE Rule 345, instead of a six-month 
securities industry experience requirement in Interpretation /03. The 
proposal would require member organizations to develop and implement 
special supervisory procedures for heightened supervision for the two-
month period immediately following completion of prescribed training, 
and to inform RRs operating from a residence or small one-person office 
of the special supervision, as well as to maintain records evidencing 
the implementation and conduct of the special supervision. 
Notwithstanding the proposed special supervision period, member 
organizations must always have appropriate policies and procedures in 
place for the supervision and control of all sales and operational 
activities of each branch office and of all registered employees and 
the customer accounts they service. The Commission believes that this 
interpretation establishes a good foundation for Exchange members to 
develop sufficient procedures for continuous and meaningful supervision 
of their RRs operating from a residence or small one-person office.
    The proposal also would amend Interpretations /01 and /02 of NYSE 
Rule 342.15 to require that small offices be controlled and supervised 
by either the main office of another designated branch office having a 
qualified Branch Office Manager on the premises, and that such 
supervisory arrangements must be made part of the member organization's 
written plan of supervision. Further, the proposal would create 
Interpretation /04 to NYSE Rule 342.15 which would require that RRs 
operating from small, one-person branch offices must be subject to the 
same special supervision prescribed in Interpretation /03 to NYSE Rule 
342.11 for residence offices. The Commission believes that these 
proposed changes are consistent with the Act in that they will aid the 
Exchange in supervising member firms that have small offices and the 
RRs who work therein without reducing any of the currently established 
oversight mechanisms.

IV. Conclusion

    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\6\ that the proposed rule change (SR-NYSE-00-58) is approved.
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    \6\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14331 Filed 6-6-01; 8:45 am]
BILLING CODE 8010-01-M