[Federal Register Volume 68, Number 64 (Thursday, April 3, 2003)]
[Notices]
[Pages 16334-16337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8036]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47584; File No. SR-NYSE-2002-35]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
3 to a Proposed Rule Change by the New York Stock Exchange, Inc. 
Relating to Business Continuity and Contingency Planning

March 27, 2003.
    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 March 27, 2003, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exhange Commission 
(``Commission'') Amendment No. 3 \3\ to the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. The NYSE submitted the proposed rule change to the 
Commission on August 16, 2002, and it was published in the Federal 
Register on September 9, 2002 (``Original Notice'').\4\ The NYSE 
subsequently submitted amendments to the proposed rule change on 
January 13, 2003,\5\ and March 7, 2003.\6\ Amendment No. 3 incorporates 
and replaces Amendments Nos. 1 and 2 in their entirety. The Commission 
is publishing Amendment No. 3 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\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Katherine A. England, Division of Market Regulation, Commission, 
dated March 26, 2003 (``Amendment No. 3'').
    \4\ Securities Exchange Act Release No. 46443 (August 30, 2002), 
67 FR 57264.
    \5\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy Sanow, Division of Market Regulation, Commission, dated 
January 10, 2003 (``Amendment No. 1'').
    \6\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Katherine A. England, Division of Market Regulation, Commission, 
dated March 6, 2003 (``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to clarify that proposed new NYSE Rule 
446 (``Business Continuity and Contingency Plans'')--which would 
require members and member organizations to develop, maintain, review, 
and update business continuity and contingency plans that establish 
procedures to be followed in the event of an emergency or significant 
business disruption--also would require such plans to be reasonably 
designed to enable members and member organizations to continue their 
businesses in the event of a significant business disruption.
    Below is the text of the proposed rule change, as amended. The base 
text is that provided in the Original Notice. Language added by 
Amendment No. 3 is in italics; language deleted by Amendment No. 3 is 
in brackets:
* * * * *
Business Continuity and Contingency Plans
New Rule 446
    (a) Members and member organizations must develop and maintain a 
written business continuity and contingency plan establishing 
procedures [to be followed in the event of] relating to an emergency or 
significant business disruption. Such procedures must be reasonably 
designed to enable members and member organizations to continue their 
businesses in the event of a future significant business disruption. 
Members and member organizations must make such plan available to the 
Exchange upon request.
    (b) Members and member organizations must conduct, at a minimum, a 
yearly review of their business continuity and contingency plan to 
determine whether any modifications are necessary in light of changes 
to the member's or member organization's operations, structure, 
business or location. In the event of a material change to a member's 
or member organization's operations, structure, business or location, 
the member or member organization must promptly update its business 
continuity and contingency plan.
    (c) The [requirements of] elements that comprise a business 
continuity and contingency plan shall be tailored to the size and needs 
of a member or member organization so as to enable the member or member 
organization to continue its business in the event of a future 
significant business disruption. Each plan, however, must, at a 
minimum, address, if applicable:
    (1) books and records back-up and recovery (hard copy and 
electronic);
    (2) identification of all mission critical systems and back-up for 
such systems;
    (3) financial and operational risk assessments;
    (4) alternate communications between customers and the firm;
    (5) alternate communications between the firm and its employees;
    (6) alternate physical location of employees;
    (7) business constituent, bank and counter-party impact;
    (8) regulatory reporting; and
    (9) communications with regulators.
    To the extent that any of the above items is not applicable, the 
member's or member organization's business continuity and contingency 
plan must specify the item(s) and state the rationale for not including 
each such item(s) in its plan. If a member or member organization 
relies on another entity for any of the above-listed categories or any 
mission critical system, the member's or member organization's business 
continuity and contingency plan must address this relationship.
    (d) The term ``mission critical system,'' for purposes of this 
Rule, means any system that is necessary, depending on the nature of a 
member's or member organization's business, to ensure prompt and 
accurate processing of securities transactions, including order taking, 
entry, execution, comparison, allocation, clearance and settlement of 
securities transactions, the

[[Page 16335]]

maintenance of customer accounts, access to customer accounts and the 
delivery of funds and securities.
    (e) The term ``financial and operational risk assessments,'' for 
purposes of this Rule, means a set of written procedures that allow 
members and member organizations to identify changes in their 
operational, financial, and credit risk exposure.
    (f) Members and member organizations must designate a senior 
officer, as defined in Rule 351(e), to approve the Plan, who shall also 
be responsible for the required annual review, as well as an Emergency 
Contact Person(s). Such individuals must be identified to the Exchange 
(by name, title, mailing address, e-mail address, telephone number, and 
facsimile number). Prompt notification must be given to the Exchange of 
any change in such designations.
* * * * *

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this amendment is to clarify that the language of 
proposed NYSE Rule 446 is intended to require not only that members and 
member organizations conduct a planning process to create a written 
business continuity and contingency plan, but also that the plan 
resulting from such process be reasonably designed to enable members 
and member organizations to continue their businesses in the event of a 
future significant business disruption.
    As described in detail in the Original Notice, the tragic events of 
September 11, 2001, and their disruptive impact on the manner in which 
the securities industry operates have re-emphasized the need for 
greater contingency planning for business continuity. Accordingly, the 
Exchange has proposed new NYSE Rule 446 which would require members and 
member organizations to develop, maintain, review, and update business 
continuity and contingency plans that establish procedures to be 
followed in the event of an emergency or significant business 
disruption. Members and member organizations would be required to make 
such plans available to the Exchange upon request. The proposed rule 
also would require that members and member organizations designate and 
notify the Exchange of a senior officer designated to approve and 
annually review the plans and to designate an emergency contact 
person(s).
    The purpose of Amendment No. 3 is to address concerns that a 
literal reading of proposed NYSE Rule 446, as set forth in the Original 
Notice, could suggest that the rule would require members and member 
organizations only to create, maintain and periodically review a 
business continuity and contingency plan, but would not obligate 
members and member organizations to develop a plan that is effective in 
enabling the member or member organization to continue its business in 
the event of a future significant business disruption. The Exchange did 
not intend to propose a rule which limits the scope of its members' and 
member organizations' responsibilities in establishing such plans. In 
this regard, in its description of the purpose of the proposed rule 
change, the Exchange stated that the ``disruptive impact'' of September 
11, 2001 ``re-emphasized the need for greater contingency planning for 
business continuity.'' Implicit in planning for ``business continuity'' 
is the requirement that members'' and member organizations' business 
plans make it possible for them to continue operating in the event of a 
significant business disruption. Accordingly, the NYSE believes that 
members and member organizations should be obligated to develop a 
business continuity and contingency plan that is reasonably designed, 
in light of particular characteristics of the firm, to allow the firm 
to recover as early as practicable in the event of a future significant 
business interruption.
    Accordingly, the Exchange is amending the language of proposed NYSE 
Rule 446 to clarify that the proposed rule change is intended to 
require the creation of not only a written business continuity and 
contingency plan, but also a reasonably effective plan. In light of the 
concerns regarding the clarity of the original proposed rule text, the 
Exchange believes that this amendment to the proposed rule change 
should be published for comment to ensure that interested persons are 
given notice of the clarification and an opportunity to comment 
thereon.
2. Statutory Basis
    The NYSE believes that the proposed rule change, as amended, 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) of the 
Act.\7\ Under that section, the rules of the Exchange must be designed 
to, among other things, 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.
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    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NYSE does not believe that the proposed rule change, as 
amended, would result in any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.

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

    The NYSE received three written comment letters in response to the 
Original Notice. In response to the comment letters, the Exchange 
identified the following issues that warranted amendment and/or further 
clarification:\8\
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    \8\ This discussion was originally provided in Amendment No. 1.
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Annual Review of Business Continuity and Contingency Plans (``BCPs'')
    Proposed NYSE Rule 446(b) would require members and member 
organizations to conduct a yearly review of their business continuity 
and contingency plans to determine whether any modifications are 
necessary in light of changes to the member's or member organization's 
operations, structure, business or location. Some commenters believed 
that the yearly review requirement was inadequate. Although commenters 
cited different events that should trigger an update of a BCP, most 
commenters who dissented believed that the plans should be updated more 
frequently.
    The Exchange believes that BCPs must be updated whenever there is a

[[Page 16336]]

material change in a firm's operations, structure, business, or 
location that affects the information set forth in the BCP. In response 
to industry comments, the Exchange is amending the proposed rule to 
expand upon this requirement to include the following language:
    Members and member organizations must conduct, at a minimum, a 
yearly review of their business continuity and contingency plan. In the 
event of a material change to a member's or member organization's 
operations, structure, business or location, the member or member 
organization must promptly update its business continuity and 
contingency plan.
    This added language emphasizes that this requirement would be in 
addition to the yearly review.

Minimum Requirements of a BCP

    Proposed Rule 446(c) would set forth the minimum requirements that 
a BCP must address. Plans would, at a minimum, be required to address: 
Books and records back-up and recovery (hard copy and electronic); 
identification of all mission critical systems and back-up for such 
systems; financial and operational risk assessments; alternate 
communications between customers and the firm; alternate communications 
between the firm and its employees; alternate physical location of 
employees; business constituent, bank, and counter-party impact; 
regulatory reporting; and communications with regulators.
    One commenter stated that all of the items listed above may not be 
applicable to all members and member organizations. In response to 
industry comments, the Exchange is amending proposed NYSE Rule 446(c) 
to include the language ``if applicable.'' In addition, the rule would 
require that, if an item is not applicable, a member's or member 
organization's BCP would have to specify the item(s) and state the 
rationale for not including such item(s) in its plan. Further, the rule 
would state that, if a member or member organization relies on another 
entity for any of the above-listed categories or any mission critical 
system, the member's or member organization's business continuity and 
contingency plan must address this relationship.

Business Constituent, Bank and Counterparty Impact

    Proposed NYSE Rule 446(c)(7) would require that a member's or 
member organization's BCP address ``business constituent, bank and 
counterparty impact.'' A commenter asked for clarification of this 
category. Under this proposed category, members and member 
organizations would be required to establish procedures that assess the 
impact that a significant business disruption has on business 
constituents (businesses with which a member or member organization has 
an on-going commercial relationship pertaining to the support of the 
member's or member organization's operating activities), banks 
(lenders), and counter-parties (such as other broker-dealers or 
institutional customers). In addition, members and member organizations 
would be required to provide for alternative actions or arrangements 
with respect to their contractual relationships with business 
constituents, banks, and counter-parties upon the occurrence of a 
material business disruption to either party. An Exchange Information 
Memo announcing adoption of the rule will provide the guidance 
described above with regard to this requirement of the rule.

Emergency Contact Information

    Proposed NYSE Rule 446(f) would require members and member 
organizations to designate and identify to the Exchange a senior 
officer to approve and review BCPs, as well as an emergency contact 
person(s). Prompt notification would have to be given to the Exchange 
in the event of a change in such designations. While commenters 
supported this requirement, one commenter suggested that the SROs take 
a ``proactive role in the gathering of this contact information.'' The 
Exchange believes that it has taken a proactive approach in that 
regard. The Exchange previously required (effective August 30, 2002) 
that members and member organizations furnish BCP contact information 
to the Exchange in addition to contact information on other key 
personnel and that such information be reviewed and updated on a 
quarterly basis. Such changes in designation are made by members and 
member organizations through the Exchange's Electronic Filing Platform 
(``EFP''). The Exchange also established a new emergency notification 
telephone line (1-866-NYSEDIAL) and website (www.nyse.com/memberinfo) 
for members and member organizations to access and obtain up-to-date 
information concerning a disruption to normal NYSE business operations.

Participation in a Corporate-Wide BCP

    One commenter raised an issue that, when a member or member 
organization participates in a corporate-wide BCP of its parent 
corporation (non-member or member organization) that satisfies the 
proposed rule requirements, this requirement inappropriately imposes 
Exchange rules upon non-member organization parents. The Exchange 
believes that if a member or member organization chooses to participate 
in a parent company's corporate-wide business continuity plan, the 
record-keeping, supervision, creation, execution, or updating of that 
plan must comply with NYSE rules. Participating in a corporate-wide 
continuity plan is an alternative and is intended to give firms greater 
flexibility in complying with the proposed rule.

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the 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 
filings will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No. 
SR-NYSE-2002-35 and should be submitted by April 24, 2003.


[[Page 16337]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8036 Filed 4-2-03; 8:45 am]
BILLING CODE 8010-01-P