[Federal Register Volume 69, Number 15 (Friday, January 23, 2004)]
[Notices]
[Pages 3418-3421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1466]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49093; File No. SR-NYSE-99-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. To Amend Exchange Rule 350 
(``Compensation or Gratuities to Employees of Others'')

January 16, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 3419]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 26, 1999, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
February 5, 2003, The Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ On December 17, 2003, the Exchange filed Amendment No. 
2 to the proposed rule change.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, including 
Amendments No. 1 and No. 2, 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 Nancy Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated February 3, 2003 (``Amendment No. 
1''). In Amendment No. 1, the Exchange provided additional details 
regarding the purpose of the proposed rule change.
    \4\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy Sanow, Assistant Director, Division, Commission, dated 
December 16, 2003 (``Amendment No. 2''). In Amendment No. 2, the 
Exchange again provided further details regarding the purpose of the 
proposed rule change, and modified Rule 350.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of amendments to Rule 350 
(``Compensation or Gratuities to Employees of Others'') that would 
rescind the requirement that certain designated compensation 
arrangements involving Floor employees receive the prior written 
approval of the Exchange. The text of the proposed rule change is 
below. Proposed new language is italicized; proposed deletions are in 
brackets.
* * * * *
Compensation or Gratuities to Employees of Others
    Rule 350. (a) No member, allied member, member organization or 
employee thereof shall:
    (1) Employ or compensate any person for services rendered, or
    (2) Give any gratuity in excess of $50 per person per year to any 
principal, officer, or employee of the Exchange or its subsidiaries, or
    (3) Give any gratuity in excess of $100 per person per year to any 
principal, officer or employee of another member or member 
organization, financial institution, news or financial information 
media, or non-member broker or dealer in securities, commodities, or 
money instruments, except as specified below or with the prior written 
consent of the (employer. [and in the case of Floor employees the prior 
written consent of the employer and the Exchange.]
    A gift of any kind is considered a gratuity.
    (b) Compensation for services rendered of up to $200 per person per 
year may be paid with the prior written consent of the employer [, but 
not of the Exchange,] to operations employees of other members or 
member organizations of the following types:
    (1) A telephone clerk on the NYSE Floor who provides courtesy 
telephone relief to a member's clerk, or handles such a member's orders 
over the member's own wire.
    (2) Employees who make out commission bills or prepare Exchange 
reports for members.
    (3) A specialist's Floor clerk who maintains records for a 
specialist other than his employer, or provides courtesy relief to 
another specialist's clerk.
    (4) When the service rendered by the employee exceeds that which 
the primary employer is obligated to furnish,
    (a) A telephone clerk who handles a member's orders transmitted 
over the wire of the clerk's employer.
    (b) A telephone clerk who handles orders directed by the clerk's 
employer to the member who receives them.
    A Floor employee who receives compensation for services rendered in 
excess of $200 per year from another member or member organization (not 
the primary employer), must become employed by and registered with such 
member or member organization in accordance with Rule 35.
    (c) Records shall be retained for at least three years of all such 
gratuities and compensation for inspection by Exchange examiners.
    Supplementary Material:
    .10 When close relatives work in different financial organizations, 
gifts arising from the family relationship are not considered subject 
to Rule 350.
    Employment of or gratuities to personnel working on the Floor of 
other exchanges and approved by the other exchange under a rule similar 
to Rule 350 are not considered subject to Rule 350.
    Requests for Exchange consent under Section a(1) of this Rule for 
the employment or compensation of Exchange employees by members or 
member organizations should be [addressed as follows, and] sent to the 
Exchange's Human Resources Department at least 10 days in advance of 
the proposed date of employment[:].
    [(A) Exchange employees--Attention: Personnel Department
    (B) Floor employees of other members or member organizations--
Attention: Market Operations Division.

Consents under (a)(1) or (b), above, shall include name and position of 
proposed employee, amount of proposed compensation, name and title of 
person giving consent for employer, and nature of proposed duties of 
employee. Approvals under a(1) will not be given in December.
    Requests for exceptions to Section a(2) above will be considered 
only under very unusual circumstances.]
    In general, approval to employ an Exchange employee outside of the 
hours of regular employment by the Exchange will be limited to 
employment of a routine or clerical nature. Approval will not be given 
for the employment of an Exchange employee in an advisory or 
professional capacity with reference to Exchange operations or 
policies.
    When the Exchange has granted permission for part-time employment 
of an employee of the Exchange [or of another member or member 
organization] no approval is required for a subsequent gratuity or 
bonus to such person provided it is in proportion to gratuities given 
full-time employees of the employing organization.

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, 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 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

Background

    Rule 350 (sometimes referred to as the ``Rule'') designates limits 
and sets conditions on the payment of compensation and gratuities by 
members, allied members, member organizations or employees thereof to 
principals, officers, or employees of other members or member 
organizations. For instance, the Rule states that any payment exceeding 
the

[[Page 3420]]

Rule's designated limits requires the prior written consent of the 
employer and, in the case of Floor employees,\5\ the prior written 
consent of both the employer and the Exchange. Specifically, the prior 
written consent of the Exchange is currently required when a member, 
allied member, member organization, or employee thereof employs or 
compensates (in excess of $200 per annum) or gives a gratuity (in 
excess of $100 per annum) to a Floor employee of another member or 
member organization. The proposed amendments to Rule 350 would rescind 
the provision requiring Floor employees to obtain the prior written 
consent of the Exchange for such payments. The prior written consent of 
the employer would still be required. The amendments would eliminate a 
provision that, in the context of the Exchange's current regulatory 
framework, has become outdated, impracticable, and does not serve a 
regulatory purpose. As discussed below, the regulatory concerns 
underlying Rule 350's current procedures that require NYSE approval of 
Floor employee compensation are effectively addressed by the 
requirements set forth under Rule 35 (``Floor Employees To Be 
Registered'') and the Exchange's ongoing examination program.
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    \5\ The term ``Floor employees'' generally includes Floor clerks 
and other operational personnel (e.g., trading assistants, fron-line 
specialist clerks, and others, such as messengers, who perform 
clerical and ministerial functions). The dual employment/
compensation arrangements addressed by Rule 350 typically involve 
Floor employees providing support services (such as phone coverage 
and billing preparation) to members and member organizations other 
than their primary employer.
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    In addition, Rule 350(b) states that compensation for services 
rendered of up to $200 per person per year may be paid with the prior 
written consent of the employer, but not the Exchange, to operations 
employees of other members or member organizations for specified 
functions (e.g., courtesy telephone relief, preparation of commission 
billing or reports).
    When a member or member organization compensates a Floor employee 
of another member organization in excess of $200 per year, the Exchange 
believes that such compensation should be made only in the context of 
an employee/employer relationship. Compensation in excess of $200 is 
not de minimis and implies that a person is regularly providing 
services in support of the member's or member organization's business.
    Accordingly, the proposed rule change includes a provision that a 
Floor employee of a member or member organization (the primary 
employer) who receives compensation for services rendered in excess of 
$200 per year from another member or member organization must become 
employed by and registered with such member or member organization (who 
becomes the secondary employer) pursuant to Rule 35.

Proposal

    The proposed amendments to Rule 350 would rescind the provision 
that requires the prior written consent of the Exchange for payment of 
compensation or gratuities above the Rule's prescribed levels by a 
member, allied member, member organization or employee thereof, to 
Floor employees of another member or member organization. Compliance 
with this provision currently involves the submittal to the Exchange of 
``Form 350'' by the Floor employee's primary employer. The Form 
requires a brief outline of the payment arrangement.
    The amendments are proposed in consideration of the primary purpose 
of Rule 350, which is to protect against potential conflicts of 
interest or other improprieties that might arise in connection with the 
payment of compensation or gratuities to certain persons. The Exchange 
believes that determining the propriety of employee compensation and 
gratuities is a function more appropriately, reasonably, and 
effectively exercised by the primary member or member organization 
employer. The employer, by virtue of its direct knowledge of the 
employee, the employee's duties, and the business relationship with the 
other individual or entity, is in the best position to evaluate the 
initial and ongoing propriety of such arrangements. Accordingly, Rule 
350 will continue to require that the primary employer approve, in 
writing, the employment and compensation of Floor employees by any 
other member or member organization.\6\
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    \6\ This is consistent with the NYSE Rule 346(b) requirement 
that no member, allied member or employee of a member or member 
organization be employed or compensated by another person ``without 
making a written request and receiving the prior written consent of 
his member or member organization employee * * *.''
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    Also, if compensation to any Floor employee exceeds $200 per year 
(as specified in paragraph (b) of the Rule), the Exchange views the 
arrangement as one of employment. As such, it would trigger certain 
requirements of Rule 35, including registration of the Floor employee 
with the secondary employer. The secondary employer is obligated to 
thoroughly investigate the person's background and submit a Form U-4, 
fingerprint card and an application for an Exchange-issued 
identification card to the Exchange's Qualifications and Registrations 
Department. The Exchange approves the registration of each Floor 
employee if the qualifying requirements have been met, i.e., training 
and satisfaction of appropriate examinations. Upon employment, the 
secondary employer then becomes responsible for supervision of all 
activities of the Floor employee performed on its behalf.
    Further, as previously noted, the proposed rescission would 
eliminate a provision that has become outdated. Given that an average 
of over eight hundred Form 350 requests have been received each year 
over the past three years, it is not practicable for the Exchange to 
investigate and approve each such request. Due to the sheer number of 
applications and the historical absence of regulatory ``red flags'' or 
actual problems found as a result of such review/approval process, the 
Exchange believes that it would be more effective to monitor and 
regulate, on an ongoing basis through routine examinations, the 
supervisory procedures and recordkeeping responsibilities associated 
with the arrangements.
    In this regard, the Exchange has strengthened its examination 
program to regulate Floor employees, members, and member organizations. 
The program has been enhanced and updated to place greater emphasis on 
dual employment arrangements. Included in the examination scope is a 
chapter that requires examiners to test that an employer's dual 
employment approval letters are on file, that compensation is properly 
recorded on the employer's books and records, that certain records 
(including Form U-4 and fingerprints) have been filed, and that 
effective supervisory procedures are in place.
    The proposed rule change will not alter the categories of persons 
covered by Rule 350, nor will it affect the requirement that members 
and member organizations retain a record of all gratuities and 
compensation paid for a minimum of three years.
    Based on the foregoing, the Exchange believes that the proposed 
rule change will not compromise the effectiveness of Rule 350.
    The Exchange is also proposing to amend Supplementary Material .10 
to Rule 350 to clarify that approval requests for dual employment/
compensation arrangements involving Exchange employees should be sent 
to the Exchange's Human Resources Department at least 10 days in 
advance of the proposed employment date.

[[Page 3421]]

2. Statutory Basis
    The proposed rule change is consistent with the requirements of 
Section 6(b)(5) \7\ of the Act which requires that the rules of the 
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 in that it 
establishes appropriate approval and procedures for Floor employees of 
members and member organizations who seek to be employed, compensated, 
or paid gratuities by another member or member organization.
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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 Exchange believes that the proposal does not 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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the 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 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NYSE-99-12. 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, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 Exchange. All 
submissions should refer to file number SR-NYSE-99-12 and should be 
submitted by February 13, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 8 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1466 Filed 1-22-04; 8:45 am]
BILLING CODE 8010-01-P