[Federal Register Volume 67, Number 137 (Wednesday, July 17, 2002)]
[Notices]
[Pages 47013-47016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-17979]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 46182; File No. SR-NYSE-2002-23]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the New York Stock Exchange, 
Inc. Relating to Changes to Effective Dates for Certain Provisions of 
Recently Amended Rule 472 (``Communications With the Public'')

July 11, 2002.
    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 July 5, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which items have been prepared by the 
Exchange. On July 9, 2002, the NYSE filed Amendment No. 1 to the 
proposed rules change.\3\ The NYSE has designated the proposed rule 
change as constituting a stated policy, practice, or interpretation 
with respect to the meaning, administration, or enforcement of an 
existing rule series under paragraph (f)(1) of Rule 19b-4 under the 
Act,\4\ which renders the proposal effective upon filing Amendment No. 
1 with the Commission. 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.
    \3\ In Amendment No. 1, NYSE provided associated persons until 
July 16, 2002 to submit plans for liquidation to their member or 
member organization's legal or compliance department. In Amendment 
No. 1, NYSE also corrected the several technical errors that 
appeared in its original filing. See letter from Darla C. Stuckey, 
Corporate Secretary, NYSE, to James A. Brigagliano, Assistant 
Director, Division of Market Regulation, Commission, dated July 9, 
2002 (``Amendment No. 1'').
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Commission a proposed rule change 
that would establish November 6, 2002 as the effective date for certain 
provisions of NYSE Rule 472 (``Communications with the Public'').
    First, the proposed rule change would establish, subject to certain 
conditions described below, November 6, 2002 as the effective date for 
Rule 472(b)(1), (2) and (3) for members or member organizations that 
over the three previous years, on average, have participated in 10 or 
fewer underwritings as manager or co-manager and generated $5 million 
or less in gross investment banking revenues from those transactions. 
Rule 472(b)(1), (2) and (3), when effective, will prohibit associated 
persons, as defined in Rule 472.40 from being subject to the 
supervision or control of any employees of a member's or member 
organization's investment banking department, and will further require 
legal or compliance personnel to intermediate certain communications 
between the research department and either the investment banking 
department or the company that is the subject of a research report by 
the research department (referred to herein as the ``subject 
company''). Those members or member organizations that meet the 
eligibility requirements outlined above for the delayed implementation 
date, would be required to disclose in research reports that they are 
delaying implementation of this Rule provision until November 6, 2002. 
Further, they would also be required to maintain records of 
communications that would otherwise be subject to the gatekeeper 
provisions of Rule 472(b)(2)(i) and (ii).
    Second, the proposed rule change would establish November 6, 2002 
as the effective date for Rule 472(k)(1)(ii) as applied to the receipt 
of compensation by a member's or member

[[Page 47014]]

organization's foreign affiliates from a subject company. Rule 
472(k)(1)(ii), when effective, will require members or member 
organizations to disclose in research reports all compensation received 
by it or its affiliates from a subject company for investment banking 
services in the past 12 months, or expected to be received in the next 
three months. Members and member organizations that delay 
implementation nevertheless would have to disclose in research reports 
that their foreign affiliates may (a) have managed or co-managed a 
public offering of the subject company's securities in the past 12 
months; (b) have received compensation for investment banking services 
from the subject company in the last 12 months; or (c) expect to 
receive or intend to seek compensation for investment banking services 
from the subject company in the next three months. Members or member 
organizations that delay implementation of Rule 472(k)(1)(ii) must 
notify the Exchange, and must also disclose in research reports that, 
with regard to their foreign affiliates, they are not making the 
disclosures required by the Rule until November 6, 2002. Further, 
members and member organizations would remain responsible for complying 
with the Rule's provisions for investment banking compensation received 
by the member or member organization and those affiliates based in the 
United States.
    Third, the proposed rule change would establish November 6, 2002, 
subject to certain conditions described below, as the effective date 
for Rule 472(e)(3) for those associated persons who must divest certain 
holdings to comply with their member's or member organization's more 
restrictive policy that prohibits an associated person's ownership of 
securities that they cover in research reports. Rule 472(e)(3), when 
effective, will prohibit an associated person from purchasing or 
selling a security in a manner contrary to the associated person's most 
recent published recommendation reflected in the member's or member 
organization's research report. The Exchange is proposing to delay 
implementation of Rule 472(e)(3) only for associated persons that meet 
the following conditions: (1) they are employed by a member or member 
organization that, as of July 9, 2002, has adopted a policy that bans 
research analysts' ownership of securities they cover and further 
requires complete divestiture of existing holdings in those securities; 
(2) they abide by a reasonable plan of liquidation under which all 
shares are to be sold by November 6, 2002 and submit that plan to their 
member's or member organization's legal or compliance department no 
later than July 16, 2002; (3) they receive written approval of the 
liquidation plan from their member's or member organization's legal or 
compliance department; and (4) the member or member organization 
notifies the Exchange that they have approved plans that delay 
implementation of the provision.

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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these 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 aspects 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 is filing the proposed rule change to establish 
November 6, 2002 as the effective date for: (a) Rule 472(b)(1), (2) and 
(3), subject to certain conditions, for members and member 
organizations that over the previous three years, on average, have 
participated in 10 or fewer underwritings as manager or co-manager and 
generated $5 million or less in gross investment banking revenues from 
those transactions; (b) Rule 472(k)(1)(ii) as applied to the receipt of 
compensation by a member's or member organization's foreign affiliates 
from a subject company; and (c) Rule 472(e)(3), subject to certain 
conditions, for those associated persons who must divest certain 
holdings to comply with their member's or member organization's more 
restrictive policy that prohibits an associated person's ownership of 
securities they cover.
    On May 10, 2002, the Commission approved amendments to NYSE Rules 
351 and 472, which place prohibitions and/or restrictions on Investment 
Banking Department, Research Department and Subject Company 
relationships and communications and impose new disclosure requirements 
on members and member organizations and their associated persons.\5\
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    \5\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34968 (May 16, 2002) (``May 10th order'').
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    At the same time, the Commission also approved a staggered 
implementation period for the Rules. Most provisions of the Rules 
become effective on July 9, 2002, including those that restrict 
supervision and control of associated persons by the investment banking 
department and those that require disclosure of investment banking 
compensation received from a subject company.
    The ``gatekeeper'' provisions, described below, become effective 
September 9, 2002, and Rule 472(k)(1)(i)a.--a requirement to disclose 
firm ownership of subject company securities--becomes effective on 
November 6, 2002.
Small Firm Relief
    The Rules contain provisions that generally restrict the 
relationship between the research and investment banking departments, 
including ``gatekeeper'' provisions that require a legal or compliance 
person to intermediate certain communications between the research and 
investment banking departments. Rule 472(b)(1) prohibits an associated 
person (also referred to throughout this filing as a ``research 
analyst'') from being under the control or supervision of any employee 
of the investment banking department.
    Rule 472(b)(1) also prohibits the investment banking department 
from reviewing or approving any research report prior to distribution. 
Rule 472(b)(2) creates an exception to the prohibitions of (b)(1) to 
allow investment banking personnel to review a research report prior to 
publication to verify the factual information contained therein and to 
screen for potential conflicts of interest. Any permissible written 
communications must be made through an authorized legal or compliance 
official or copied to such official. Oral communications must be made 
through, or in the presence of, an authorized legal or compliance 
official and must be documented.
    Similarly, Rule 472(b)(3) restricts communications between a member 
or member organization and the subject company of a research report, 
except that a member or member organization may submit sections of the 
research report to the subject company to verify factual accuracy and 
may notify the subject company of a ratings change after the ``close of 
trading'' on the

[[Page 47015]]

business day preceding the announcement of the ratings change. 
Submissions to the subject company may not include the research 
summary, the rating or the price target, and a complete draft of the 
research report must be provided beforehand to legal or compliance 
personnel. Finally, any change to a rating or price target after review 
by the subject company must first receive written authorization from a 
legal or compliance official.
    As the Commission noted in its May 10th order, several commenters 
argued that the ``gatekeeper'' provisions would impose significant 
costs, especially for smaller firms that may have to hire additional 
personnel to comply with the requirements. Commenters also noted that 
personnel often wear multiple hats in smaller firms, thereby causing a 
greater burden to comply with the restriction on supervision and 
control by investment banking personnel over research analysts. These 
comments raised the prospect that the Rules might force some firms out 
of the investment banking or research business and/or reduce important 
sources of capital and research coverage for smaller companies.
    The NYSE is sensitive to the issues confronted by small firms and, 
as the Commission's May 10th order noted, along with NASD, is reviewing 
the issue to explore possible exemptions or accommodations that might 
be made while preserving the purposes of the Rules. To that end, and in 
order to provide time to review those issues, the Exchange is proposing 
to delay implementation of Rules 472(b)(1), (2), and (3) until November 
6, 2002 for members and member organizations that over the previous 
three years, on average, have participated in 10 or fewer underwritings 
as manager or co-manager and generated $5 million or less in gross 
investment banking revenues from those transactions.
    Those members or member organizations that meet the eligibility 
requirements outlined above for the delayed implementation date, would 
be required to disclose in research reports that they are delaying 
implementation of this Rule provision until November 6, 2002. Further, 
they would also be required to maintain records of communications that 
would otherwise be subject to the ``gatekeeper'' provisions of Rules 
472(b)(2)(i) and (ii). The Exchange believes that for these members and 
member organizations, provided they comply with the conditions 
described, the temporary relief from these provisions will not 
adversely impact the spirit and intent of the Rule initiative.
Receipt of Investment Banking Compensation by Foreign Affiliates
    Rule 472(k)(1)(ii) requires a member or member organization to 
disclose in research reports if the member or member organization or 
its affiliates: (a) managed or co-managed a public offering of the 
subject company's securities in the past 12 months; (b) received 
compensation for investment banking services from the subject company 
in the past 12 months; or (c) expects to receive or intends to seek 
compensation for investment banking services from the subject company 
in the next 3 months.
    The Exchange understands that members and member organizations are 
setting up systems that can track the information required by this 
provision of the Rule. However, members and member organizations, 
particularly those with global operations and foreign affiliates, have 
informed the Exchange that the scope of their operations make it 
impossible to have systems in place by July 9, 2002, to track all 
investment banking compensation received by their foreign affiliates.
    The Exchange recognizes that the tracking of investment banking 
compensation received by foreign affiliates requires significant 
resources, and therefore believes it is appropriate to allow members 
and member organizations additional time to set up systems to enable 
compliance with the Rule. Accordingly, NYSE is proposing to delay the 
implementation date for Rule 472(k)(1)(ii) until November 6, 2002, only 
as it relates to investment banking compensation received by members' 
and member organizations' foreign affiliates. Members and member 
organizations would remain responsible for complying with the Rule's 
provisions for investment banking compensation received by the member 
or member organization and those affiliates based in the United States.
    Members and member organizations that delay implementation 
nevertheless would have to disclose in research reports that their 
foreign affiliates may (a) have managed or co-managed a public offering 
of the subject company's securities in the past 12 months; (b) have 
received compensation for investment banking services from the subject 
company in the last 12 months; or (c) expect to receive or intend to 
seek compensation for investment banking services from the subject 
company in the next three months. Members or member organizations that 
delay implementation of Rule 472(k)(1)(ii) must notify the Exchange, 
and must also disclose in research reports that, with regard to their 
foreign affiliates, they are not making the disclosures required by the 
Rule until November 6, 2002.
Trading Contrary to Recommendations
    The Rules contain provisions that restrict the personal trading by 
research analysts, but it does not completely prohibit ownership of 
securities that the research analyst covers. One such restriction is 
found in Rule 472(e)(3), which becomes effective on July 9, 2002. That 
provision prohibits an associated person from purchasing or selling a 
security or option or derivative of that security, in a manner contrary 
to the research analyst's most recent published recommendation 
reflected in the member's research report. For purposes of this Rule, 
the restriction applies to the associated person and ``household 
member'' as it is defined in the Rule, and to any account in which an 
associated person or household member has a financial interest, or over 
which the associated person has discretion or control, except for an 
investment company registered under the Investment Company Act of 1940.
    Several members and member organizations have gone beyond the 
requirements of the Rule and instituted internal policies that prohibit 
research analysts from owning securities that they cover. Most of these 
firms require that research analysts divest themselves, over a certain 
period of time, of any existing holdings in securities they cover. 
Consequently, research analysts could face the predicament of violating 
Rule 472(e)(3) to comply with their firm's more restrictive policy 
because they could be required by their firm to divest their holdings 
in a security even as they maintain a buy recommendation in that 
security. Absent some relief from the Rule, the practical impact of the 
firm-imposed prohibition would be that research analysts would have to 
divest all holdings in securities they cover by July 9, 2002, or cease 
coverage in those securities in which they hold positions.
    To alleviate this situation, and to allow an orderly liquidation of 
holdings, the Exchange is proposing to delay implementation of Rule 
472(e)(3) until November 6, 2002, only for associated persons that meet 
the following conditions: (a) they are employed by a member or member 
organization that as of July 9, 2002 has adopted a policy that bans 
research analysts' ownership of securities they cover and further 
requires complete divestiture of existing holdings in those securities; 
(b) they abide by a reasonable plan of liquidation under which all 
shares are to be sold by November 6, 2002 and submit that plan to their 
member's or

[[Page 47016]]

member organization's legal or compliance department no later than July 
16, 2002; (c) they receive written approval of the liquidation plan 
from their member's or member organization's legal or compliance 
department; and (d) the member or member organization notifies the 
Exchange that they have approved plans that delay implementation of the 
provision.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
\6\ of the Act which requires, among other things, that the rules of 
the Exchange are 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 interests.
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    \6\ 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 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

    The proposed rule change has been filed by the Exchange as a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule under Rule 19b-
4(f)(1) under the Act.\7\ Consequently, it has become effective 
pursuant to Section 19(b)(3)(A) \8\ of the Act and Rule 19b-4(f)(1) 
thereunder.\9\
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    \7\ 17 CFR 240.19b-4(f)(1).
    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. 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. Copies of such filing will 
also be available for inspection and copying at the principal office of 
the above-mentioned self-regulatory organization. All submissions 
should refer to file number SR-NYSE-2002-23 and should be submitted by 
August 7, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to the delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-17979 Filed 7-16-02; 8:45 am]
BILLING CODE 8010-01-P