[Federal Register Volume 70, Number 177 (Wednesday, September 14, 2005)]
[Notices]
[Pages 54427-54429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-5007]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52391; File No. SR-NYSE-2004-47]


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

September 7, 2005.

I. Introduction

    On August 14, 2004, the New York Stock Exchange, Inc. (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule relating to amendments to Rule 352 
concerning guarantees and sharing in accounts. On July 6, 2005, the 
Exchange filed Amendment No. 1 to its proposed rule change. The 
proposed rule change, as amended, was published for comment in the 
Federal Register on August 5, 2005.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 52179 (July 29, 
2005), 70 FR 45461 (August 5, 2005).
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II. Description of the Proposed Rule Change

Background

    Rule 352 (the ``Rule'') 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 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

[[Page 54428]]

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.\4\ 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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    \4\ 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.\5\
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    \5\ 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.'' \6\ 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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    \6\ 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-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.

[[Page 54429]]

 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.

III. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, 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) \7\ 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 Commission believes that the proposed rule change, as 
amended, 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.
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    \7\ 15 U.S.C. 78f(b)(5).
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IV. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-NYSE-2004-47), as amended, 
be, and hereby is, approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    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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Jonathan G. Katz,
Secretary.
[FR Doc. E5-5007 Filed 9-13-05; 8:45 am]
BILLING CODE 8010-01-P