[Federal Register Volume 70, Number 150 (Friday, August 5, 2005)]
[Notices]
[Pages 45461-45464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4234]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52179; File No. SR-NYSE-2004-47]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To 
Amend Rule 352 Concerning Guarantees and Sharing in Accounts

July 29, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is 
hereby given that on August 14, 2004 and on July 6, 2005 (Amendment No. 
1), the New York Stock Exchange, Inc. (``NYSE'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or the 
``Commission'') the proposed rule change. The proposed rule change as 
described in items I, II, and III below, which items have been prepared 
by the Exchange, incorporates amendments submitted to the Commission as 
Amendment No. 1. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 352 (the ``Rule'') to expand 
the Rule to include specific limitations on loan arrangements between 
personnel associated with a member organization in any registered 
capacity on the one hand, and customers on the other. In addition, the 
amendments integrate the Rule's Interpretation into the proposed Rule 
text, and otherwise clarify both the Rule's scope and purpose. The text 
of the proposed rule change is available on the NYSE's Web site (http://www.NYSE.com), at the NYSE's principal office, 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. 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 352 generally prohibits members, member 
organizations, and specified associated persons of such from entering 
into arrangements that guarantee the payment of a debit balance in any 
customer account; guarantee a customer against loss; or establish a 
profit and/or loss-sharing agreement with a customer. The amendments 
proposed herein expand the Rule to include specific limitations on loan 
arrangements between personnel associated with a member organization in 
any registered capacity on the one hand, and

[[Page 45462]]

customers on the other. In addition, the amendments integrate the 
Rule's Interpretation into the proposed Rule text, and otherwise 
clarify both the Rule's scope and purpose.
    Loan Arrangements between Registered Personnel and Customers. The 
Exchange does not currently have a rule that specifically addresses the 
issue of loan arrangements between member organization personnel and 
customers; however, the Exchange believes that such arrangements, given 
their inherent potential for conflict of interest and abuse, are 
generally not a good business practice. Bearing this concern in mind, 
it is recognized that there are certain situations when such loans may 
be appropriate. Accordingly, proposed paragraphs (e) and (f) to Rule 
352 would limit loan arrangements, between persons associated with a 
member organization in any registered capacity and customers, to 
certain prescribed situations. As outlined in detail below, proposed 
Rule 352(e) requires written supervisory procedures that would limit 
loan arrangements between registered member organization personnel and 
customers of the member organization to those arising either in the 
context of a prescribed personal or business relationship outside of 
the broker-customer relationship, or to those involving other 
registered personnel of the member organization. Proposed Rule 352(f) 
further requires detailed written supervisory procedures that would 
require that certain loan arrangements between registered member 
organization personnel and customers of the member organization be 
disclosed to the member organization for prior approval.
    Limitations on Loan Arrangements. Proposed Rule 352(e) would permit 
a person associated with a member organization in any registered 
capacity to borrow money from or lend money to a customer of such 
person only if: (A) The member organization has written supervisory 
procedures permitting the borrowing and lending of money between such 
registered persons and their customers; and (B) the lending or 
borrowing arrangement meets one of the following conditions: (1) The 
customer is a member of such registered person's immediate family; or 
(2) the customer is a financial institution regularly engaged in the 
business of providing credit, financing, or loans, or other entity or 
person that regularly arranges or extends credit in the ordinary course 
of business; or (3) the customer and the registered person are both 
registered persons of the same member organization; or (4) the lending 
arrangement is based on a personal relationship with the customer, such 
that the loan would not have been solicited, offered, or given had the 
customer and the registered person not maintained a relationship 
outside of the broker/customer relationship; or (5) the lending 
arrangement is based on a business relationship outside of the broker-
customer relationship.
    Loan Procedures. Proposed Rule 352(f)(1) would require member 
organizations to pre-approve, in writing, the lending or borrowing 
arrangements described in proposed paragraphs (e)(3) (between 
registered persons of the same member organization); (e)(4) (involving 
a personal relationship outside the context of the broker-customer 
relationship); and (e)(5) (involving a business relationship outside 
the context of the broker-customer relationship).
    With respect to the lending or borrowing arrangements described in 
proposed Rule 352(e)(1) between a person associated with a member 
organization in any registered capacity and a customer that is a member 
of such registered person's immediate family, proposed paragraph (f)(2) 
would permit a member organization's written procedures to indicate 
that registered persons are not required to notify the member 
organization or receive member organization approval either prior to or 
subsequent to entering into a lending or borrowing arrangement with an 
immediate family member. For purposes of this proposed rule, the term 
``immediate family'' is defined in proposed paragraph 352(g) to include 
parents, grandparents, mother-in-law or father-in-law, husband or wife, 
brother or sister, brother-in-law or sister-in-law, son-in law or 
daughter-in-law, children, grandchildren, cousin, aunt or uncle, or 
niece or nephew, and would also include any other person whom the 
registered person supports, directly or indirectly, to a material 
extent.
    With respect to the lending or borrowing arrangements described in 
proposed Rule 352(e)(2) between a person associated with a member 
organization in any registered capacity and a customer that is a 
financial institution regularly engaged in the business of providing 
credit, financing, or loans, or other entity or person that regularly 
arranges or extends credit in the ordinary course of business, proposed 
paragraph (f)(3) would permit a member organization's written 
procedures to indicate that registered persons are not required to 
notify the member organization or receive approval either prior to or 
subsequent to entering into a lending or borrowing arrangements with a 
customer that is a prescribed financial institution, provided that the 
loan has been made on commercial terms that the customer generally 
makes available to members of the general public similarly situated as 
to need, purpose, and creditworthiness. For purposes of proposed 
paragraph (e)(2), a member organization may rely on the registered 
person's written representation that the terms of the loan meet the 
standards required by proposed paragraph (f)(3).
    Integration of the Rule's Interpretation. The NYSE Interpretation 
Handbook contains an exception to the general prohibition, under 
current Rule 352(c), against sharing or agreeing to share in any 
profits or losses in any customer's account or from any transaction 
transacted therein.\3\ The Interpretation states, in part, that: ``* * 
* where a participatory compensation arrangement is entered into by a 
member organization that itself is registered with the SEC as an 
investment adviser, and such arrangement complies with section 205(1) 
and the rules thereunder, the arrangement will not be deemed violative 
of Rule 352(c) if the arrangement arises in the context of such member 
organization's advisory relationship with the customer. Member 
organizations may not have such participatory compensation arrangements 
if they are only acting as a broker for the customer.''
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    \3\ See text of the proposed rule change which is available on 
the NYSE's Web site (http://www.NYSE.com), at the NYSE's principal 
office, and at the Commission's Public Reference Room.
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    Since this exemption for member organizations acting in the 
capacity of a registered investment adviser is not referred to nor 
reasonably implied by the Rule, it is proposed that it be deleted in 
its entirety from the Interpretation Handbook, and integrated into the 
proposed Rule text.\4\
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    \4\ Id.
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    In addition, the Interpretation text reference to section 205(1) of 
the Investment Advisers Act of 1940 is inaccurate. It is proposed that 
the reference be corrected to read ``Section 205* * *unless exempt 
pursuant to section 203(b) of the Advisers Act.'' \5\ The proposed 
change simply clarifies the scope and original intent of the reference, 
and does not alter the substance of the Interpretation.
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    \5\ Id.
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    Miscellaneous Rule Text Clarifications. The Exchange has taken this 
opportunity to rearrange and clarify certain sections of the Rule. For 
example, the text of Rule 352(b) arguably suggests an application of 
the Rule to a category broader than that of ``customers'' (e.g., 
encompassing broker-

[[Page 45463]]

dealers). Specifically, it states that ``no member, allied member, 
registered representative or officer shall guarantee or in any way 
represent that either he or his employer will guarantee any customer 
against loss in any account or on any transaction'' (italics added). It 
is proposed that this text be amended to specify ``customer'' accounts 
and ``customer'' transactions in order to remove any suggestion that 
proposed Rule 352 is to be construed more expansively than other NYSE 
sales practice rules. These proposed amendments are consistent with 
both the original intent of the Rule and the Exchange's ongoing 
interpretation of it.
    It is proposed that the text of Rule 352(c) be amended, as 
reflected in proposed Rule 352(b), to clarify that its general 
restriction against receiving or agreeing to receive a share in the 
profits or losses of any customer account extends to officers of a 
member organization who are acting in the capacity of a registered 
representative. Inclusion of the term ``officer'' also makes proposed 
paragraph (b) consistent with proposed paragraph (a).
    Current Rule 352 paragraphs (a) and (b) have been combined into 
proposed paragraph (a). Further, the exceptions to the general 
prohibition against sharing in profits and losses which are currently 
in paragraphs .10 and .20 of the Rule's Supplemental Material have been 
clarified and relocated to proposed paragraph 352(c) under the heading 
``Joint Accounts and Order Errors.''
    Additional amendments are non-substantive changes, such as the 
clarification of rule text and the revision of dated language to 
reflect current usage.
(2) Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with the requirements of sections 6(b)(5) \6\ of the 
Exchange Act. Section 6(b)(5) requires, among other things, that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and national market system, and in general, 
to protect investors and the public interest. The Exchange believes 
that the proposed rule change is designed to accomplish these ends (1) 
by placing limitations on loan arrangements between personnel 
associated with a member organization in any registered capacity on the 
one hand, and customers on the other, (2) by integrating the Rule's 
Interpretation into the proposed Rule, and (3) by clarifying both the 
Rule's scope and purpose with respect to prohibiting members, member 
organizations, and specified associated persons of such from entering 
into arrangements that guarantee the payment of a debit balance in any 
customer account; guarantee a customer against loss; or establish a 
profit and/or loss-sharing agreement with a customer.\7\
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    \6\ 15 U.S.C. 78f(b)(5).
    \7\ Telephone conversation between William Jannace, Director, 
Rule and Interpretive Standards, NYSE, and Lourdes Gonzalez, 
Assistant Chief Counsel, Division of Market Regulation, Commission, 
(July 11, 2005).
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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 Exchange 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 self-regulatory organization 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 Exchange Act. The Commission 
in particular solicits comment on the following question(s): Will any 
changes created by combining Rule 352 paragraphs (a) and (b) into 
proposed Rule 352 paragraph (a) allow a person associated with a member 
organization as a registered representative or officer, to guarantee to 
his employer the payment of the debit balance in a customer's account? 
If so, will such proposed change create any adverse impact on a member 
organization's incentive to supervise the activities of a person 
associated with such member organization as a registered representative 
or officer?
    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-2004-47 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-2004-47. 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, 100 F Street, 
NE., Washington, DC 20549. 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 the File Number SR-NYSE-2004-47 and should 
be submitted on or before August 26, 2005.


[[Page 45464]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-4234 Filed 8-4-05; 8:45 am]
BILLING CODE 8010-01-P