[Federal Register Volume 70, Number 150 (Friday, August 5, 2005)]
[Notices]
[Pages 45459-45461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4230]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52181; File No. SR-NYSE-2005-04]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change, Amending Interpretation of 
NYSE Rule 311 (``Formation and Approval of Member Organizations'') To 
Codify Certain Qualification Requirements for and Criteria for Dual- or 
Multi-Designation of Principal Executive Officers

August 1, 2005.
    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 January 6, 2005, 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 July 
25, 2005, the NYSE amended the proposed rule change (``Amendment 
No.1'').\3\ 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 C.F.R. 240.19b-4.
    \3\ In Amendment No. 1, the Exchange deleted the provision 
codifying Chief Operations Officer exemptions for certain 
introducing firms, proposed an amendment codifying limitations on 
the employment of principal executive officers, and made technical 
corrections to the purpose section and the rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes amendments to the Interpretation of NYSE Rule 
311 (``Formation and Approval of Member Organizations'') to codify: (i) 
Qualification requirements for Chief Operations Officers (``COOs'') and 
Chief Financial Officers (``CFOs''); (ii) criteria for the dual-
designation of introducing firm COOs and CFOs; (iii) criteria for the 
other dual-designation and multi-designation of principal executive 
officer functions; (iv) criteria for co-designation of such functions; 
and (v) limitations on the employment of principal executive officers. 
The text of the proposed rule change is available on the NYSE Web site 
(http://www.nyse.com), at the NYSE's Office of the Secretary and at the 
Commission's Public Reference Room.

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

    NYSE Rule 311(b)(5) requires the designation of ``principal 
executive officers'' exercising senior principal executive 
responsibility over various prescribed areas of each member 
organization's business.\4\ The Interpretation of NYSE Rule 311(b)(5) 
\5\ further specifies that persons so designated, such as CFOs or COOs 
must be either members or allied members, must satisfy an examination 
requirement that is acceptable to the Exchange and must also have work 
experience and background commensurate with their responsibilities. The 
Exchange is proposing amendments to the Interpretation of NYSE Rule 311 
in order to codify and clarify the following:
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    \4\ The rule lists certain areas of responsibility that are 
applicable to all member organizations, such as operations, 
compliance with the rules and regulations of regulatory bodies, 
finance and credit, and those areas which may or may not be present 
in a member organization, such as sales, underwriting, and research.
    \5\ See Interpretation Handbook at NYSE Rule 311(b)(5)/01.
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     The qualification requirements for CFOs and COOs;
     That member organizations with limited operational 
activities may dually designate a single person to act as both CFO and 
COO, where circumstances permit;
     That the Exchange's approval is required for dual-
designations other than CFO/COO and for all principal executive officer 
multi-designations;
     That the Exchange's approval is required for the co-
designation of functions requiring a principal executive officer; and
     That the prior written approval of the Exchange, pursuant 
to NYSE Rule 346 (e), is required for arrangements involving the dual-
employment of principal executive officers.

Proposed Amendments to the Interpretation of NYSE Rule 311(b)(5)

CFO/COO Qualification--Clearing Firms
    The Financial and Operations Principal Qualification Examination 
(Series 27) addresses Exchange and Federal regulatory requirements 
relating to a broad range of broker-dealer functions, including:
     Maintenance of Books and Records; \6\
     Net Capital Requirements; \7\
     Customer Protection Rule; \8\
     Financial Reporting; \9\
     Processing of Funds and Securities; and
     Federal Reserve Board Regulations.\10\
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    \6\ 17 CFR 240.17a-3; 17 CFR 240.17a-4.
    \7\ 17 CFR 240.15c3-1.
    \8\ 17 CFR 240.15c3-3.
    \9\ 17 CFR 240.17a-5; 17 CFR 240.17a-11.
    \10\ 15 U.S.C. 78g; 15 U.S.C. 78h.
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    The material covered by the Series 27 Examination, in large part, 
reflects the functions and responsibilities associated with a clearing 
firm. Accordingly, since rescinding the Allied Member Examination 
(Series 41) in January 1986,\11\ the Exchange has required that the CFO 
and COO at a clearing firm be Series 27-qualified. The proposed 
amendments to the Interpretation of NYSE Rule 311(b)(5) (see proposed 
new Section/02) would codify this requirement.
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    \11\ See NYSE Information Memo Number 86-3 dated January 29, 
1986.

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[[Page 45460]]

CFO/COO Qualification--Introducing Firm

    The scope of financial and operational responsibilities is 
generally more limited in an introducing firm than in a clearing firm. 
This is because introducing firms enter into contractual arrangements 
with clearing firms, pursuant to NYSE Rule 382, in which responsibility 
for many ``back office'' (e.g., operational and financial) broker-
dealer functions are allocated to the clearing firm. Typically, the 
clearing firm would accept responsibility for: (i) Extending credit to 
customers (pursuant to margin account agreements); (ii) delivery of 
confirms and statements to customers; (iii) receiving and delivering 
funds and securities to customers; (iv) maintaining books and records; 
(v) safeguarding customer funds and securities; and (vi) clearing and 
settling transactions. Therefore, CFOs and COOs at introducing firms 
need not demonstrate as broad a range of expertise as that required of 
persons acting on behalf of clearing firms. The Introducing Broker/
Dealer Financial and Operations Principal Qualification Examination 
(Series 28) is specifically designed to address the regulatory 
responsibilities associated with supervision over those more limited 
functions that typically remain the responsibility of the introducing 
firm.
    The proposed amendments to the Interpretation of NYSE Rule 
311(b)(5) (see proposed new Section/02 ) would codify that a person can 
qualify to function as the CFO or COO of an introducing firm by passing 
either the Series 27 Examination or the Series 28 Examination.

CFO/COO Dual-Designations

    The current Interpretation of NYSE Rule 311 is not explicit as to 
whether the duties of CFOs and COOs must be exercised by different 
persons or whether a single person may be dually designated. The 
proposed amendments are intended to clarify the Exchange's position on 
the matter.
    Given that the level of operational and financial responsibility at 
many introducing firms may be such that a single qualified person could 
(and, in fact, does) adequately function as both the designated CFO and 
COO, it is proposed that allowance for such dual-designations be 
codified (see proposed new Section/03). An introducing firm's dually 
designated CFO/COO could be either Series 27 or 28 qualified. The 
determination of whether one person could effectively function as both 
CFO and COO would be made by the member organization, based upon the 
nature and extent of their operational and financial activities. The 
proposed amendments require that the member organization use due 
diligence to assess the adequacy of the arrangement in light of the 
prescribed supervisory requirements of NYSE Rule 342 (``Offices--
Approval, Supervision and Control''). The proposed amendments would 
also require that the Exchange be promptly notified of all such dual-
designations.

Other Dual- or Multi-Designations

    Given that the Series 27 is the qualifying examination for both 
CFOs and COOs, the pairing of CFO/COO functions is the most common 
dual-designation. The Exchange believes that the dual-designation of 
other principal executive officer functions, as well as the multi-
designation of such functions, may also be appropriate under certain 
circumstances. However, given the diversity of responsibilities that 
may be involved with such arrangements, the Exchange also believes that 
a greater measure of regulatory control should be maintained over them. 
Accordingly, amendments to the Interpretation of NYSE Rule 311(b)(5) 
are proposed (see proposed new Section/04) to codify that any 
assignment of principal executive officer dual-designation status other 
than a CFO/COO arrangement, or any multi-designation of principal 
executive officer titles, would require the prior written approval of 
the Exchange.

Co-Designation of Principal Executive Officers

    The practice of designating co-CEOs at member organizations has 
been permitted in the past, subject to Exchange approval. The Exchange 
proposes amendments to codify the approval process, as well as to 
address the matter of whether a member organization may co-designate 
other principal executive officers. While the Exchange believes that 
this practice could lead to confusion as to which designee is 
ultimately responsible and accountable for assigned functions, there 
may be instances where such arrangements are supported by valid 
business reasons, such as when each co-designee has special expertise 
in critical areas within the purview of the principal executive officer 
job description. Accordingly, the proposed amendments would permit such 
co-designations, pursuant to a written request and subject to the prior 
written approval of the Exchange (see proposed new Section /05).
    Written requests to the Exchange must set forth the reason for the 
co-designation and explain how the arrangement is structured. Further, 
since such co-designations raise issues regarding which person has 
ultimate authority and accountability, the request must make clear that 
each co-designee has joint and several responsibility for discharging 
the duties of that principal executive officer designation and that no 
understanding or agreement purporting to apportion or limit such 
responsibility will be recognized by the Exchange.

Limitations on the Employment of Principal Executive Officers

    Proposed amendments to the Interpretation reaffirm that, pursuant 
to NYSE Rule 346(e), a principal executive officer may, with the prior 
written approval of the Exchange, be a part-time employee (see proposed 
new Section /06). Approval will depend upon the degree of control, if 
applicable, between the member organization and such other business; 
the nature of the principal executive officer's duties and 
responsibilities at the member organization; the approximate time 
required to perform such duties and responsibilities effectively, and; 
the nature of the outside employment. This reference to Rule 346(e) is 
intended to clarify that such requests will be considered on a case-by-
case basis, and are not subject to restrictions regarding Financial and 
Operational Principals' part-time employment at more than two members 
or member organizations outlined in NYSE Information Memo No. 91-25, 
dated July 8, 1991. This aspect of the proposed rule change will be 
discussed in the Information Memo released in conjunction with the 
approval of the proposed rule change.

Miscellaneous

    It is proposed that current Section /03 be deleted. This Section, 
which addresses the use of ``vice-presidential titles'' and includes an 
unnecessary reference to ``Rule 345(b)'' and a dated reference to 
``Question 11 of the U-4 application'' is outmoded and serves no 
current purpose. Also, the reference to Rule 304(b)/04 has been 
corrected to Rule 304(b) and moved from current Section /02 to proposed 
Section /01.
2. Statutory Basis
    The Exchange believes that the statutory basis for this proposed 
rule change is section 6(c)(3)(B) of the Act.\12\ Under that section, 
it is the Exchange's responsibility to prescribe standards of training, 
experience and competence for persons associated with Exchange members 
and member organizations. In addition, under section 6(c)(3)(B) of the

[[Page 45461]]

Act, the Exchange may bar a natural person from becoming a member or 
person associated with a member, if such natural person does not meet 
such standards of training, experience and competence as are prescribed 
by the rules of the Exchange. The Exchange believes that the proposed 
amendments are consistent with the Act in that they codify 
qualification and examination requirements for certain prescribed 
individuals.
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    \12\ 15 U.S.C. 78f(c)(3)(B).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change 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 dated 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. 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 protected]. Please include 
File Number SR-NYSE-2005-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NYSE-2005-04. 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. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NYSE. 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-2005-04 and should be submitted on or before August 
26, 2005.

For the Commission, by the Division of Market Regulation, pursuant 
to the delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-4230 Filed 8-4-05; 8:45 am]
BILLING CODE 8010-01-P