[Federal Register Volume 70, Number 161 (Monday, August 22, 2005)]
[Notices]
[Pages 48997-49000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4547]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52259; File No. SR-NYSE-2004-64]


Self-Regulatory Organizations; New York Stock Exchange, Inc., 
Notice of Filing of Proposed Rule Change and Amendments No. 1 and 2 
Thereto Relating to Proposed Changes to Exchange Rule 342 (``Offices--
Approval, Supervision and Control'')

August 15, 2005.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Exchange Act'' or ``Act''),\2\ and Rule 19b-4 thereunder,\3\ 
notice is hereby given that on November 2, 2004, 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 NYSE. On July 11, 2005, the NYSE filed Amendment No. 1 to the 
proposed rule change (``Amendment No. 1'').\4\ On August 12, 2005, the 
NYSE filed Amendment No. 2 to the proposed rule change (``Amendment No. 
2'').\5\ The Commission is publishing this notice to solicit comments 
on the proposed rule

[[Page 48998]]

change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ In Amendment No. 1, which supplemented the original filing, 
the Exchange added its proposed Interpretive Handbook 
Interpretations 342.30(d)/01 and 342.30(e)/01 for purposes of 
clarifying issues related to the designation of a Chief Compliance 
Officer and the Annual Certification, respectively. The text of 
interpretations 342.30(d)/01 and 342.30(e)/01 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.
    \5\ In Amendment No. 2, which supplemented the original filing, 
the Exchange modified interpretation 342.30(e)/01 in order to 
clarify the obligations of member organizations in the preparation 
of annual certifications.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed amendment to NYSE Rule 342.30 (``Annual Reports'') 
would: require each member organization (``Member Organization'') and 
each member not associated with a member organization (``Member'') to 
file with the Exchange the annual reports (``Annual Reports'') it is 
currently required to prepare, and in the case of a Member 
Organization, to submit to its Chief Executive Officer (``CEO''); add 
to the Annual Reports a required discussion of compliance efforts 
regarding anti-money laundering; require each Member Organization to 
designate a principal officer or general partner as Chief Compliance 
Officer (``CCO''); and require each Member and the CEO of each Member 
Organization to file a yearly statement confirming the adequacy of 
their compliance processes and procedures. 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 NYSE included statements 
concerning the purpose of and basis for the proposed rule changes. The 
text of these statements, as amended, 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
a. Background
    NYSE Rule 342 requires supervision of the offices, departments and 
business activities of Members and Member Organizations. NYSE Rule 
342.30, which was adopted on May 27, 1988, requires Members and Member 
Organizations to prepare an Annual Report addressing specified 
compliance issues by April 1 of each year. Currently, Member 
Organizations are required to submit this report only to their CEO or 
managing partner and Members are required only to prepare the report.
b. Provisions of the Proposed Rule Change
    The proposed rule change makes the following changes relating to 
the Annual Reports:
     The Annual Reports must be filed with the Exchange by 
April 1 of each year.
     The anti-money laundering compliance programs required by 
Exchange Rule 445 \6\ have been added to the list of specific areas of 
compliance that must be discussed in the Annual Reports.
     Member Organizations must designate a principal officer or 
general partner as CCO.\7\
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    \6\ NYSE Rule 445 requires Members and Member Organizations to 
develop and implement written anti-money laundering programs 
consistent with the Bank Secrecy Act (31 U.S.C. 5311, et seq. and 
Treasury Regulation 31 CFR 103.120).
    \7\ The SEC recently approved a similar requirement in NASD's 
new Rule 3013. Securities Exchange Act Release No. 50347 (September 
10, 2004), 69 FR 56107 (September 17, 2004) (SR-NASD-2003-176).
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     Each Member, and the CEO (or equivalent) of each Member 
Organization, must submit a certification attesting to the adequacy of 
their organization's compliance policies and procedures.\8\
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    \8\ The SEC recently approved a similar requirement in NASD's 
new Rule 3013. See id.
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c. Regulatory Purpose of Proposed Rule Change's Provisions
(i) Submission of Annual Reports to the Exchange
    Filing the Annual Reports with the Exchange will provide timely 
information about the compliance efforts of Members and Member 
Organizations, thereby strengthening and making more efficient the 
Exchange's regulatory oversight, and facilitating the required annual 
certifications (see below).
    Because submission of the Annual Reports to the Exchange was 
previously not required, the reports were typically provided to the 
Exchange at the time of, or in connection with, examinations of Member 
Organizations and Members.\9\ Consequently, the Exchange did not always 
receive important information in a timely, efficient manner. Providing 
the reports to Exchange staff at annual intervals will afford the 
Exchange a timely picture of the Members' and Member Organizations' 
compliance issues from the preceding year, a tool for planning 
surveillance and examinations, and more comprehensive information for 
evaluation of compliance systems and programs and identification of 
potential regulatory problems.
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    \9\ Some Member Organizations already submit the Annual Reports 
to the Exchange and/or make them available to Exchange examiners.
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(ii) Addition of Anti-Money Laundering Discussion to Annual Report
    The USA Patriot Act \10\ substantially expanded federal anti-money 
laundering regulations, and led to the enhancement of Exchange anti-
money laundering requirements through the adoption of NYSE Rule 445 in 
April 2002. The Exchange considers anti-money laundering compliance 
programs to be important enough to warrant consideration and discussion 
in the Annual Reports, and so the proposed rule change adds these 
programs to the list of specific areas of compliance that must be 
discussed in the Annual Reports.
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    \10\ Pub. L. 107-56, 115 Stat. 272 (2001).
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    The addition of anti-money laundering compliance programs to the 
aforementioned list continues the Exchange's practice of incrementally 
supplementing the list to reflect changes in the evolving regulatory 
environment. A similar augmentation recently occurred through NYSE Rule 
342.23, which added Members' and Member Organizations' internal 
controls to the Annual Report's list of required compliance 
discussions.\11\
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    \11\ See Securities Exchange Act Release No. 49882 (June 17, 
2004), 69 FR 35108 (June 23, 2004) SR-NYSE-2002-36).
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(iii) Designation of CCO
    The Exchange strongly believes that Member Organizations' 
compliance with Federal laws and Exchange regulations should be of the 
utmost priority. In furtherance of that belief, the Exchange previously 
addressed the critically important role of the compliance function by 
requiring the Series 14 (NYSE Compliance Official) examination and 
registration, which are intended to ensure the qualifications of key 
compliance professionals.\12\
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    \12\ The Series 14 Examination is a qualification examination 
intended to ensure that the individuals designated as having day-to-
day compliance responsibilities for their respective firms, or who 
supervise ten or more people engaged in compliance activities, have 
the knowledge necessary to carry out their job responsibilities. 
NYSE Rule 342.13(b) requires Members' and Member Organizations' 
compliance supervisors to pass the Series 14 Examination. See 
Securities Exchange Act Release No. 25763 (May 27, 1988), 53 FR 
20925 (June 7, 1988).
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    In further recognition of the increasing importance of the 
compliance function, the proposed rule change requires each Member 
Organization to formally designate a principal executive officer or 
general

[[Page 48999]]

partner of the Member Organization as its CCO. This requirement is 
consistent with NYSE Rule 311(b)(5), which mandates that ``principal 
executive officers'' exercise responsibility over each of the 
prescribed business areas of a Member Organization (e.g., compliance). 
Currently, each principal executive officer and general partner is 
generally required to pass an examination acceptable to the Exchange 
that pertains to knowledge of his or her functional responsibility.\13\ 
Based on the type of business that individual conducts, and the 
structure of his or her organization, acceptable examinations include 
the Series 9/10 (General Securities Sales Supervisor), Series 14, 
Series 24 (General Securities Principal), Series 27 (Financial and 
Operations Principal), or Series 28 (Introducing Broker/Dealer 
Financial and Operations Principal).\14\
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    \13\ See NYSE Interpretation Handbook, Rule 304A(a), (c)/01.
    \14\ In interpretations 342.30(d)/01 and 342.30(e)/01, the 
Exchange also proposes guidance regarding: the designation of CCOs; 
the interaction between CCOs and other executives during preparation 
of Annual Reports; the scope and subjects of the Annual Reports; and 
the reporting and certification process. The text of interpretations 
342.30(d)/01 and 342.30(e)/01 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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    The CCO designation requirement does not apply to Members, because 
such members, whose activities are limited to interaction with other 
members on the Floor of the Exchange, generally lack the organizational 
infrastructure or scope of business activities that would necessitate 
designation of a CCO.\15\
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    \15\ This exemption is consistent with other provisions of NYSE 
Rule 342. For example, under certain circumstances, some compliance 
officials at Member Organizations are exempt from the Series 14 
requirement. See NYSE Interpretation Handbook, Rule 342(a)(b)/02.
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(iv) CEO Certification
    The proposed rule change's CEO certification requirement reflects 
the Exchange's belief that Member Organizations' senior executives, 
particularly CEOs, should focus the highest degree of attention and 
resources on the compliance function. While subordinates with 
supervisory responsibility for specific business lines remain 
accountable for the discharge of compliance policies and written 
supervisory procedures, the Exchange considers CEOs ultimately to be 
accountable for the compliance and supervision of their Member 
Organizations.\16\ In keeping with those principles, the CEO 
certification requirement is intended to promote and expand dialogue 
between Member Organization CEOs and their officers who are responsible 
for compliance with Federal laws and Exchange regulations.\17\
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    \16\ Attestations similar to the yearly CEO certification 
requirement proposed herein are also required by Exchange Rule 
351(f), which calls for annual confirmation of compliance with 
Exchange Rule 472 (``Communications with the Public''). See 
Securities Exchange Act Release No. 45908 (May 10, 2002), 67 FR 
34968 (May 16, 2002) (SR-NYSE-2002-09).
    \17\ The proposed rule change's CEO certification requirement 
corresponds in substance to NASD Rule 3013, which the SEC favorably 
described as seeking ``to provide a mechanism to compel substantial 
and purposeful interaction between senior management and compliance 
personnel to enhance the quality of members' supervisory and 
compliance systems.'' Securities Exchange Act Release No. 50347 
(September 10, 2004), 69 FR 56107 (September 17, 2004) (SR-NASD-
2003-176).
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    The required annual certification consists of four elements:
    (i) Each Member or each Member Organization's CEO (or equivalent 
officer) must certify that processes are in place to: establish and 
maintain policies and procedures designed to achieve compliance with 
Exchange rules and applicable federal securities laws and regulations; 
modify such policies and procedures as business, regulatory and 
legislative changes dictate; and test the effectiveness of such 
policies and procedures on a periodic basis. This requirement goes to 
the essential nature of compliance, and assures an appropriately 
heightened attention to its details.
    (ii) Each Member Organization's CEO (or equivalent officer) must 
certify that he or she has conducted one or more meetings with the CCO 
during the preceding 12 months, during which they discussed and 
reviewed the matters described in the certification. Such meetings, 
which must entail discussion and review of the Member Organization's 
compliance efforts as of that date, should aid in the identification 
and resolution of significant ongoing and future compliance problems.
    (iii) Each Member Organization's CEO (or equivalent officer) must 
certify that his or her Member Organization's compliance processes are 
evidenced in a written report that was reviewed by the Member 
Organization's CEO, CCO, and such other officers as the Member 
Organization deems necessary, and submitted to the Member 
Organization's board of directors and audit committee, if any. The 
report must be produced prior to the execution of the proposed 
certification, must describe the manner in which the compliance 
processes are administered, and must identity the officers and 
supervisors who are responsible for its administration.\18\
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    \18\ See interpretation 342.30(e)/01.
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    (iv) Each Member Organization's CEO (or equivalent officer) must 
certify that he or she has consulted with the CCO, such other officers 
of the Member Organization as the Member Organization deems necessary, 
and, to the extent the Member Organization's CEO (or equivalent 
officer), CCO and such other officers deem appropriate in order to 
attest to the statements in the certification, outside consultants, 
lawyers and accountants. This requirement recognizes that the CCO's 
expertise in the matters underlying the certification make his or her 
role in the process critical, and make the CCO an indispensable party 
to the CEO's certification.
    The sentence ``[I]f any of these areas do not apply to the member 
or member organization, the report should so state,'' which currently 
concludes Rule 342.30, has been repositioned in the amended rule text 
to avoid the ambiguity that otherwise would have resulted from the 
addition of Rules 342.30(d) and 342.30(e).
2. Statutory Basis
    The NYSE believes that the proposed rule change is consistent with 
section 6(b) \19\ of the Act in general and section 6(b)(5) of the Act 
\20\ 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 facilitates the Exchange's review of 
the Membership's regulatory programs, strengthens Member Organizations' 
oversight of their compliance processes and procedures, and promotes 
increased involvement of Member Organization CEOs in their firms' 
compliance matters.
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    \19\ 15 U.S.C. 78f(b)
    \20\ 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 will impose 
any burden on competition that is 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 NYSE has not solicited but has received written comments on the 
proposed rule change.

[[Page 49000]]

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 the 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. 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 e-mail to [email protected]. Please include File 
Number SR-NYSE-2004-64 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-2004-64. 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 also will 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-2004-64 and should be submitted on or before 
September 12, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4547 Filed 8-19-05; 8:45 am]
BILLING CODE 8010-01-P