[Federal Register Volume 70, Number 179 (Friday, September 16, 2005)]
[Notices]
[Pages 54788-54796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-5033]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52402; File No. SR-NYSE-2002-34]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 Thereto and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
Nos. 2 and 3 to the Proposed Rule Change Relating to the Amendment of 
Rule 342 (Offices-Approval, Supervision and Control) To Provide for a 
Uniform Definition of ``Branch Office''

September 9, 2005.

I. Introduction

    On August 16, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NYSE Rule 342 
(``Offices-Approval, Supervision and Control'') to provide for a new 
definition of the term ``branch office.'' On October 22, 2002, the NYSE 
submitted Amendment No. 1 to the proposed rule change.\3\ The proposed 
rule change, as amended by Amendment No. 1, was published for comment 
in the Federal Register on December 4, 2002.\4\ The Commission received 
five comment letters with respect to the proposal, as amended.\5\ In 
addition, the Commission received seven comment letters with respect to 
a similar filing by the National Association of Securities Dealers, 
Inc. (``NASD'') \6\ that specifically addressed the NYSE's proposed 
rule change.\7\ On March 31, 2003, the Exchange filed a response to the 
comment letters,\8\ and on April 20, 2004, and August 25, 2005, the 
Exchange filed Amendment Nos. 2 \9\ and 3 \10\ to the proposed rule 
change, respectively. This order approves the proposed rule change, as 
amended by Amendment No. 1; grants accelerated approval to Amendment 
Nos. 2 and 3 to the proposed rule change; and solicits comments from 
interested persons on Amendment Nos. 2 and 3.
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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 October 21, 2002 (``Amendment No. 
1'').
    \4\ See Securities Exchange Act Release No. 46888 (November 22, 
2002), 67 FR 72257 (``Notice'').
    \5\ See letters to Jonathan G. Katz, Secretary, Commission from 
Arthur F. Grant, President, Cadaret Grant, dated December 17, 2002 
(``Cadaret Letter'') and Brian C. Underwood, Senior Vice President--
Director of Compliance, A.G. Edwards & Sons, Inc., dated December 
18, 2002 (``A.G. Edwards Letter 1'') and December 27, 2002 (``A.G. 
Edwards Letter 2''); letter to Secretary, Commission from Kimberly 
H. Chamberlain, Vice President and Counsel, State Government 
Affairs, Securities Industry Association, dated December 23, 2002 
(``SIA Letter 1''); and e-mail to Katherine A. England, Assistant 
Director, Division, Commission from Jeffrey P. Halperin, Assistant 
Vice President, Corporate Ethics and Compliance, Metropolitan Life 
Insurance Company, dated January 7, 2003 (``MetLife Letter 1'').
    \6\ See Securities Exchange Act Release No. 48897 (December 9, 
2003), 68 FR 70059 (December 16, 2003) (SR-NASD-2003-104).
    \7\ See letters to Commission from Thomas Moriarty, President, 
InterSecurities, Inc., dated January 6, 2004 (``InterSecurities 
Letter''), Christopher Shaw, Vice President & Acting Chief 
Compliance Officer, Transamerica Financial Advisors, Inc., dated 
January 6, 2004 (``TFA Letter''); letters to Jonathan G. Katz, 
Secretary, Commission from Leonard M. Bakal, Vice President and 
Compliance Director, Metropolitan Life Insurance Company, dated 
January 14, 2004 (``MetLife Letter 2''), Mario DiTrapani, President, 
Association of Registration Management, dated January 6, 2004 (``ARM 
Letter''); John Polanin, Jr., Chairman, Self-Regulation and 
Supervisory Practices Committee, Securities Industry Association, 
dated January 9, 2004 (``SIA Letter 2''); and letters to Secretary, 
Commission from John Gilner, Vice President, Henry H. Hopkins, Vice 
President, and Sarah McCafferty, Vice President, T. Rowe Price 
Investment Services, Inc., dated January 5, 2004 (``Investment 
Services Letter''), and Minoo Spellerberg, Compliance Director, 
Princor Financial Services Corporation, dated February 6, 2004 
(``Princor Letter'').
    \8\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy Sanow, Assistant Director, Division, Commission, dated 
March 27, 2003 (``Response to Comments'').
    \9\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy Sanow, Assistant Director, Division, Commission, dated 
April 19, 2004 (``Amendment No. 2''). In Amendment No. 2, the 
Exchange responded to comments and amended proposed NYSE Rule 342.10 
by eliminating the 50-day limitation from its primary residence 
registration exception and adding a provision relating to 
supervisory procedures of primary residences and risk-based sampling 
criteria. See also discussion of Amendment No. 2 in Section II, 
Description of the Proposal, infra.
    \10\ See Form 19b-4 dated August 25, 2005 (``Amendment No. 3''). 
In Amendment No. 3, the Exchange amended proposed NYSE Rule 342.10 
and its discussion to clarify certain points made in Amendment No. 
2, issues related to the timing of the adoption of the Exchange's 
new definition of branch office, and other issues related to the 
Exchange's definition of branch office as compared with the NASD's 
rule proposal. See also discussion of Amendment No. 3 in Section II, 
Description of the Proposal, infra.
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II. Description of the Proposal

    Current NYSE Rule 342(c) requires that a member or member 
organization obtain the Exchange's prior written consent for each 
office established other than a main office. Office is generally 
defined as any location--other than a main office-from which the 
business of the member or member organization is

[[Page 54789]]

conducted. Locations such as primary residences, operations offices/
centers, temporary locations, and offices of convenience are all 
required to be registered as branch offices.\11\Continued advances in 
technology used by firms to conduct, monitor, and surveil the 
activities at their branch offices and other remote locations, as well 
as changes in the structure of broker-dealers and in the lifestyles and 
work habits of the work force, have caused the Exchange to reexamine 
whether all business locations continue to need to be registered as 
branch offices of members and member organizations.
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    \11\ See Amendment No. 2, supra note 9.
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    There is currently no uniform standard that regulators use in 
defining this term. These disparate definitions impose unintended 
burdens on common members and member organizations in the form of 
compliance with multiple and different definitions of branch office, 
the filing of multiple forms to register and/or renew registration of 
such locations, different filing deadlines for such registrations, and 
continued monitoring of the rules of multiple self-regulatory 
organizations (``SROs'') and states for changes.\12\
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    \12\ Id.
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    The Exchange has participated in a joint regulatory initiative with 
the NASD and state securities regulators to develop a uniform 
definition of ``branch office'' in an attempt to eliminate unnecessary 
burdens on members. The Exchange, the NASD and the North American 
Securities Administrators Association (``NASAA'') have worked together 
to propose a uniform definition of branch office.\13\ Accordingly, the 
Exchange proposes to amend NYSE Rule 342 to provide for a new 
definition of the term ``branch office.'' The proposed amendment to the 
rule would limit the requirement to register certain business locations 
as branch offices to account for advances in technology used to conduct 
and monitor business, changes in the structure of broker-dealers and in 
the lifestyles and work habits of associated persons of broker-dealers.
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    \13\ Id.
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    As proposed, the term ``branch office'' would mean any location 
\14\ where one or more associated persons of a member or member 
organization regularly conducts the business of effecting any 
transactions in, or inducing or attempting to induce, the purchase or 
sale of any security, or where such location is held out as a branch 
office.\15\ The definition would provide for exceptions as noted below. 
The proposed definition would substantially mirror the Commission's 
definition of ``office'' in its Books and Records rules (SEC Rules 17a-
3 and 17a-4) under the Act.\16\ As noted above, the NASD has also filed 
with the Commission a proposed new branch office definition, which is 
substantially similar to the Exchange's proposal.\17\
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    \14\ Amendment No. 3 deleted the exclusion ``other than the main 
office'' from the definition of branch office as initially proposed. 
See Amendment No. 3, supra note 10.
    \15\ For purposes of this rule, the term ``associated person of 
a member or member organization'' would be defined in proposed NYSE 
Rule 342.10 as a member, allied member, or employee associated with 
a member or member organization. Id.
    \16\ 17 CFR 240.17a-3 and 17a-4.
    \17\ See SR-NASD-2003-104, supra note 6. The Commission is 
simultaneously approving the NASD's proposed rule change. See 
Securities Exchange Act Release No. 52403 (September 9, 2005).
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    Attempting to recognize current business, lifestyle, and 
surveillance practices, the Exchange provides flexibility in the form 
of seven exceptions from the proposed branch office registration 
requirement.\18\ As discussed in the Notice,\19\ in developing a 
definition, the NYSE considered the evolving nature of its members' and 
member organizations' business models and proposed exceptions to the 
registration requirement accordingly. For instance, any office of 
convenience, where an associated person occasionally and exclusively by 
appointment meets with customers and which is not held out to the 
public as a branch office, would be exempt from registering as a branch 
office.\20\ Other than meeting customers at these offices of 
convenience, all other functions of the associated person would be 
conducted and supervised through the designated branch office.
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    \18\ See proposed NYSE Rule 342.10 (A) through (G) and Amendment 
No. 2, supra note 9.
    \19\ See Notice, supra note 4.
    \20\ For example, bank-owned members and member organizations 
often establish small offices on bank premises, whereby a registered 
representative would be designated to a parent branch for 
supervision, but would visit different bank branches occasionally, 
and by appointment only, to meet with customers. Under the proposed 
definition, such locations would be exempt from registering as 
branch offices, where the bank location is not held out as a branch 
office. In exempting such offices of convenience from branch office 
registration, the NYSE imposed important safeguards for the public. 
In this regard, at such offices of convenience, associated persons 
would be limited to meeting customers occasionally and exclusively 
by appointment. Furthermore, at bank locations, the only permitted 
signage such offices of convenience could display, under regulations 
promulgated by the Office of the Comptroller of the Currency, would 
be ones advertising to the public that ``non-deposit investment 
products'' are being offered at such locations in order to prevent 
confusing customers who might otherwise believe that traditional 
riskless investments, such as deposits, are being offered by 
associated persons at such offices located on bank premises. Id.
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    The Exchange also proposes to exempt primary residences from the 
definition of branch office. In exempting primary residences, the 
Exchange imposes limitations on such locations to ensure that all 
activity is appropriately supervised and monitored by the firm. The 
limitations provide that: only one associated person, or multiple 
associated persons, who reside at that location and are members of the 
same immediate family, conduct business at the location; the location 
not be held out as a branch office; the associated person be assigned 
to a designated branch office for supervision, and such office be 
reflected on all business cards, stationery, advertisements, and 
communications to the public; the associated person not meet with 
customers at his or her residence; neither customer funds nor 
securities be handled at that location; the associated person's 
correspondence and communications with the public be subject to all 
supervisory provisions of the Exchange's rules including, but not 
limited to, NYSE Rules 342 and 472; \21\ electronic communications, 
including e-mails, be made through the firm's electronic system; all 
orders be entered through the designated branch office or an electronic 
system established by the member or member organization that is 
reviewable at the branch office; \22\ written supervisory procedures 
relating to the supervision of sales activities conducted at the 
residence be maintained by the member or member organization; and a 
list of the locations be maintained by the member or member 
organization.\23\
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    \21\ See Amendment No. 3, supra note 10.
    \22\ Id.
    \23\ The NYSE had originally proposed a limitation that the 
associated person's primary residence be used for less than 50 
business days in one calendar year. However, as discussed further, 
the Exchange eliminated the 50-day limitation from the proposed 
primary residence exception in response to comments. See Amendment 
No. 2, supra note 9.
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    The definition would also exempt from branch office registration 
any temporary location, other than the primary residence discussed 
above, that is used for securities business \24\ for less than 30 
business days in any calendar year. In granting this exemption, the 
NYSE imposes most of the same safeguards noted above for the exemption 
granted for a primary residence.\25\
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    \24\ See Amendment No. 3, supra note 10.
    \25\ The NYSE proposes to define ``business day'' to exclude any 
partial day, provided the associated person spends at least four 
hours on such business day at his or her designated branch office 
during the hours such office is normally open for business. See NYSE 
Rule 342.10 explanatory material.

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[[Page 54790]]

    In addition, the definition would exempt from registration 
locations where associated persons are primarily engaged in non-
securities activities (e.g., insurance) and from which an associated 
person effects no more than 25 securities transactions in a calendar 
year, provided that advertisements or sales literature identifying such 
location also set forth the location from which the associated persons 
would be directly supervised. Further, such activities attendant to the 
primary function and performed as an occasional accommodation to 
customers would be conducted through and supervised by the associated 
person's designated registered branch office.
    Similarly, the new definition would exempt non-sales locations, 
e.g., where operations activities are conducted, from registering as a 
branch office. Such locations would have to be established solely for 
customer service and/or back office functions, not be held out to the 
public as a branch office, and no sales activities would be conducted 
from such locations.\26\
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    \26\ The definition would also exempt the Floor of a registered 
national securities exchange where a member or member organization 
conducts a direct access business with public customers and a 
temporary location established in response to the implementation of 
a business continuity plan. See proposed NYSE Rule 342.10 (F) and 
(G).
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    However, as discussed further in Amendment No. 3 below, the 
Exchange also proposes that, notwithstanding the exclusions in NYSE 
Rule 342.10 (A)-(G), any location that is responsible for supervising 
the activities of persons associated with a member or member 
organization at one or more non-branch locations of such member or 
member organization would be considered to be a branch office.\27\ The 
Exchange is proposing this change in order to conform with a comparable 
provision in the NASD's rule proposal.\28\
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    \27\ See proposed NYSE 342.10 explanatory material and Amendment 
No. 3, supra note 10.
    \28\ See SR-NASD-2003-104, supra note 6.
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Amendment No. 2

    The difference between the NYSE's definition of branch office as 
initially proposed and the NASD's definition concerns the registration 
of certain primary residences as branch offices. The NASD proposes a 
functionality test to determine whether primary residences should 
register as a branch office, considering limitations on the activities 
that could be performed.\29\ In addressing the use of primary 
residences, important safeguards and limitations were imposed by both 
SROs on such locations to provide for the monitoring and oversight of 
activities. As originally proposed, the NYSE's primary residence 
registration exception incorporated the same limitations as the NASD, 
but also limited to 50, the number of business days associated persons 
would be permitted to engage in securities activities in their primary 
residences without requiring such residences to register as a branch 
office.
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    \29\ Id.
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    However, as discussed in more detail below, after analysis of the 
comments received from and related discussions with members and member 
organizations, the Exchange now proposes to eliminate the 50-day 
limitation from its primary residence registration exception. In 
eliminating the 50-day limitation on primary residences, the Exchange 
acknowledges that technological advances in surveillance/monitoring 
capabilities should help address the concerns noted above while 
accommodating evolving lifestyles and work habits of the industry. At 
the same time, the Exchange wishes to impose appropriate regulatory/
supervisory safeguards to help ensure that members and member 
organizations properly supervise such locations.
    As proposed in Amendment No. 2 and slightly amended in Amendment 
No. 3, Exchange members' and member organizations' written supervisory 
procedures would have to include criteria for on-site for cause reviews 
of an associated person's primary residence. Such reviews would have to 
utilize risk-based sampling or other techniques designed to assure 
compliance with applicable securities laws and regulations and with 
NYSE rules.\30\ Factors which should be considered when developing 
risk-based sampling techniques to determine the appropriateness of on-
site for cause reviews of selected residences and other remote 
locations would have to include, at a minimum: (1) The firm's size; (2) 
the firm's organizational structure; (3) the scope of business 
activities; (4) the number and location of offices; (5) the number of 
associated persons assigned to a location; (6) the nature and 
complexity of products and services offered; (7) the volume of business 
done; (8) whether the location has a Series 9/10-qualified person on-
site; (9) the disciplinary history of the registered person or 
associated person, including a review of such person's customer 
complaints and Forms U4 and U5; and (10) the nature and extent of a 
registered person's or associated person's outside business activities, 
whether or not related to the securities business.\31\
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    \30\ See also Amendment No. 3, supra note 10. Similarly, written 
supervisory procedures for such residences and other remote 
locations would have to be designed to assure compliance with 
applicable securities laws and regulations and with NYSE rules. See 
Amendment No. 2, supra note 9.
    \31\ See also Amendment No. 3, supra note 10.
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    Additional criteria should be utilized if applicable to the nature 
and type of business conducted by the member or member organization and 
the individual registered person(s) involved. Such supervisory 
procedures would, in the aggregate, be required to be sufficient to 
ensure compliance with the securities laws and Exchange rules.
    Given that such locations are physically remote from registered 
branch offices, members and member organizations, in establishing 
supervisory procedures, would have to be particularly proactive and 
preemptive in their approach to supervision. As a matter of reasonable 
supervision, firms should, before granting permission to work at these 
remote locations, review all applicable criteria to determine whether 
such person should be permitted to work at such location and whether 
he/she requires heightened supervision.
    The Exchange believes that initial review/approval, ongoing 
monitoring, and follow-up with respect to outside business activities 
by registered persons, whether or not related to the securities 
business, is particularly important, especially when such activities 
are conducted from such person's residence. The Exchange believes that, 
given the nature of these locations, registered persons could utilize 
their outside business activities to conceal violations of Commission 
and SRO rules. Accordingly, in developing risk-based criteria to 
determine the extent and frequency of on-site reviews, members and 
member organizations should give particular weight to this factor.
    The Exchange believes that the regulatory approach adopted by the 
Exchange for these locations is consistent with the approach that the 
Commission recently articulated in its Staff Legal Bulletin No. 17: 
Remote Office Supervision, regarding the supervision of small, remote 
offices.\32\ Supervisory procedures, which do not address the minimum 
requirements noted above, would be deemed inadequate for purposes of 
NYSE Rule 342, and could subject members and member organizations to 
disciplinary action for failure to supervise.\33\ The

[[Page 54791]]

Exchange will be reviewing such procedures and their implementation as 
part of its regular examination of members and member organizations.
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    \32\ See Division, SEC, Staff Legal Bulletin No. 17, dated March 
19, 2004.
    \33\ Whereas the federal securities laws, Section 15(b)(4)(E) of 
the Act, 15 U.S.C. 78o(b)(4)(E), provide for sanctions on a firm and 
its supervisors for failing to supervise a person who is subject to 
their supervision and commits a violation of the federal securities 
laws, the SRO supervision rules do not require a predicate violation 
to impose sanctions for failing to supervise. See Amendment No. 3, 
supra note 10.
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Amendment No. 3

    In Amendment No. 3, the Exchange proposed additional changes to its 
rule text and discussion to clarify certain points made in Amendment 
No. 2, other issues related to the Exchange's definition of branch 
office as compared with the NASD's rule proposal, and issues related to 
the adoption of the Exchange's new branch office definition.
    The Exchange proposes the following changes to NYSE Rule 342:
    i. In NYSE Rule 342.10, the phrases ``other than the main office,'' 
and ``(``associated person'')'' have been deleted from the definition 
of branch office. In deleting the qualifier ``other than the main 
office,'' the Exchange is recognizing instances where a member 
organization's activities taking place in the main office (e.g., where 
one or more associated persons of a member or member organization 
regularly conduct the business of effecting any transactions in, or 
inducing or attempting to induce the purchase or sale of any security, 
or is held out as a branch office), would place the main office in the 
purview of the definition, and thus it should be registered as a branch 
office. Further, branch office registration would be triggered where 
associated persons are domiciled in the main office of a member or 
member organization and are engaging in the above activities. 
Accordingly, the Exchange recognizes that whether an office is a branch 
office is a function of the activities performed at the office even if 
such activities are performed at the main office. In addition, the 
latter deletion is being made by the NYSE to maintain a uniform 
definition of branch office.
    ii. The text of Rule 342.10(B)(v) has been changed from ``the 
associated person's correspondence and communications with the public 
are subject to the firm's supervision'' to ``the associated person's 
correspondence and communications with the public are subject to all 
supervisory provisions of the Exchange's rules including, but not 
limited to, Rules 342 and 472.'' This change was made to eliminate any 
possible ambiguity that might have suggested that associated persons 
working from home were subject to supervisory standards different from 
those of other associated persons subject to the supervision of a 
member or member organization.
    iii. The text of Rule 342.10(B)(vi) has been changed from 
``electronic communications (i.e., e-mail) are made through the member 
organization's electronic system'' to ``electronic communications 
(e.g., e-mail) are made through the member's or member organization's 
electronic system.'' This change was made to indicate that e-mail is 
only an example of electronic communications covered by the rule and to 
make it consistent with other sections in the rule.
    iv. The following changes have been made to conform to the NASD's 
rule proposal. NYSE Rule 342.10(B)(vii) has been changed to include 
orders entered in an electronic system established by the member or 
member organization that is reviewable at the branch office. NYSE Rule 
342.10(C) has been changed by adding ``securities business for'' to 
clarify that primary residences excluded from the definition of branch 
office may be used, on a limited basis, for securities business.
    v. In NYSE Rule 342.10 explanatory material, the phrase ``[t]he 
term `business day' as used herein'' has been changed to ``[f]or 
purposes of this Rule, the term `business day' '' to make its wording 
consistent with the wording used in other definitions in this section.
    vi. In NYSE Rule 342.10 explanatory material, the sentence ``[t]he 
term an `associated person of a member' for purposes of this Rule means 
member, allied member or employee associated with a member or member 
organization'' has been changed to ``[f]or purposes of this Rule, the 
term `associated person of a member or member organization' is defined 
as a member, allied member, or employee associated with a member or 
member organization'' to make its wording consistent with the wording 
used in other definitions in this section.
    vii. A new paragraph is being added to the Rule 342.10 explanatory 
material. As proposed, it provides that ``notwithstanding the 
exclusions in subparagraphs 342.10(A)-(G), any location that is 
responsible for supervising the activities of persons associated with a 
member or member organization at one or more non-branch locations of 
such member or member organization is considered to be a branch 
office.'' The Exchange thus recognizes instances where such locations 
could be discharging supervisory activities that warrant their 
registration as branch offices with the attendant regulatory 
responsibility and oversight. This amendment is being proposed to 
conform with a comparable provision in the NASD's rule proposal.
    viii. In NYSE Rule 342.10 explanatory material, the term 
``sufficient'' has been deleted from the sentence ``[f]or purposes of 
Rule 342.10(B)(viii) and (C), written supervisory procedures for such 
residences and other remote locations must be designed to assure 
compliance with applicable securities laws and regulations and with 
NYSE Rules,'' to make it more consistent with the prior sentence, 
``[f]or purposes of Rule 342.10(B)(viii), written supervisory 
procedures shall include criteria for on-site for cause reviews of an 
associated person's primary residence. Such reviews must utilize risk-
based sampling or other techniques designed to assure compliance with 
applicable securities laws and regulations and with NYSE rules.''
    ix. The Supplementary Material section of NYSE Rule 342 titled 
``Annual fee,'' which is currently numbered 342.10, will instead be 
numbered 342.11 due to a numbering conflict with other sections of NYSE 
Rule 342.
    x. Current NYSE Rule 342.11 (``Registered representative operating 
from residence'') has been deleted because other proposed amendments to 
NYSE Rule 342 make it redundant.
    Furthermore, to clarify its response to comments made in Amendment 
No. 2, the Exchange reiterates its belief that its proposal would 
actually result in reduced overall industry costs by virtue of the fact 
that the exclusion of certain primary residences and several other 
types of locations currently required to register would cause a decline 
in the overall number of branches. In support of this statement, the 
Exchange, after reviewing its database of branch offices, estimates 
that the proposed definition would reduce the number of branch offices 
from approximately 16,000 to approximately 12,800, a reduction of 
approximately 20 percent.
    In addition, the Exchange clarifies a footnote in Amendment No. 2 
to more accurately express the Exchange's intended point that whereas 
the federal securities laws provide for sanctions on a firm and its 
supervisors for failing to supervise a person who is subject to their 
supervision and commits a violation of the federal securities laws, the 
SRO's supervision rules do not require a predicate violation to impose 
sanctions for failing to supervise.
    In order to make use of a technique mandatory without requiring any 
particular technique that might not be appropriate for every member

[[Page 54792]]

organization, the Exchange also amended the explanatory material in 
NYSE Rule 342.10 relating to written supervisory procedures of an 
associated person's primary residence, to clarify that the criteria for 
on-site for cause reviews of an associated person's primary residence 
would have to utilize risk-based sampling or other techniques designed 
to assure compliance with applicable securities laws and regulations 
and with NYSE rules. Furthermore, the Exchange notes that it has added 
factors (e.g., the firm's size, the firm's organizational structure, 
the number and location of offices, and the number of associated 
persons assigned to a location) to be considered when member firms 
develop risk-based sampling techniques to determine the appropriateness 
of on-site for cause review of residences and other remote locations. 
The Exchange believes that these additional factors will better enable 
member firms to make such determinations.
    Finally, the Exchange emphasizes that a registered representative 
in a branch office classified as a ``small office'' pursuant to 
Interpretations /01 and /02 of NYSE Rule 342.15 may not be the 
supervisor of that or any other office or non-branch location unless he 
or she is Series 9/10 qualified, regardless of that person's 
designation as the registered representative ``in charge'' of the 
office.
    In proposing a uniform definition with exclusions, the Exchange 
recognizes that, in an evolving business and regulatory environment, it 
cannot capture every conceivable business arrangement/structure its 
members or member organizations seek to utilize. Accordingly, the 
Exchange will review, on a case-by-case basis, instances where a firm's 
proposal does not fall squarely within the rule and/or its exclusions.
    With respect to the timing of the adoption of the Exchange's 
proposed definition of branch office, the Exchange states that the 
proposed new definition of branch office is ``the product of a 
coordinated effort among regulators to reduce inconsistencies in the 
definitions used by the Commission, NASD, the NYSE, and state 
securities regulators in identifying locations where broker/dealers 
conduct securities or investment banking business.'' \34\ The proposed 
new definition is intended ``to facilitate the creation of a branch 
office registration system through the Central Registration Depository 
(``CRD'') to provide a more efficient, centralized method'' for members 
and member organizations ``to register branch office locations as 
required by the rules and regulations of states and self-regulatory 
organizations.'' \35\ It is expected that both the Exchange and the 
NASD will revise their forms to incorporate the respective new 
definitions of branch office, and that the new forms will become 
operational on CRD during the fourth quarter of 2005.\36\
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    \34\ See Amendment No. 3, supra note 10 (referencing SR-NASD-
2003-104).
    \35\ Id.
    \36\ See Securities Exchange Act Release No. 51923 (June 24, 
2005), 70 FR 38229 (July 1, 2005) (SR-NYSE-2005-13).
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    The Exchange believes that implementing its new definition of 
branch office prior to revising the CRD and the related forms will make 
the transition to the new branch office registration system and forms 
smoother, since its members' and member organizations' familiarity with 
the new definition will allow them to concentrate on the subsequent 
technical changes in the branch registration process. The Exchange does 
not believe that changing its definition of branch office prior to the 
aforementioned CRD changes will create confusion or in any way 
undermine the coordinated transition to the new branch office 
registration system.

III. Summary of Comments and NYSE's Response

    As noted above, the Commission received five comment letters with 
respect to the Notice,\37\ and seven comment letters with respect to a 
similar filing by the NASD \38\ that specifically addressed the NYSE's 
proposed rule change.\39\ The NYSE filed a response letter to address 
concerns raised by the commenters.\40\
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    \37\ See supra note 5.
    \38\ See supra note 6.
    \39\ See supra note 7.
    \40\ See Response to Comments, supra note 8.
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Comment Letters

    The commenters generally applauded the NYSE, the NASD, and NASAA 
for their efforts in creating a uniform definition of branch office, 
reducing the regulatory burdens currently imposed upon firms, and 
accounting for advances in technology and changes in the structure of 
broker-dealer firms and in the lifestyle and work habits of associated 
persons of broker-dealers.\41\ One commenter noted that this attempt at 
uniformity would only be successful if all exchanges, regulatory 
agencies, and states adopt consistent definitions and uniformly 
interpret those definitions.\42\
---------------------------------------------------------------------------

    \41\ See A.G. Edwards Letter 2, ARM Letter, InterSecurities 
Letter, MetLife Letter 1, MetLife Letter 2, Princor Letter, SIA 
Letter 1, SIA Letter 2, TFA Letter, supra notes 5 and 7.
    \42\ See A.G. Edwards Letter 2, supra note 5.
---------------------------------------------------------------------------

    However, the commenters believed that the proposed amendments to 
the definition of branch office would substantially increase the number 
of offices that must be inspected and that NYSE member firms would have 
to annually inspect every office, including homes, vacation homes or 
convenience offices, meeting the definition of a ``branch office.'' 
\43\ Similarly, another commenter believed that imposition of the new 
definition of branch office would result in firms needlessly having to 
closely monitor where work was being performed and for how long, and 
that the logistical difficulties created by the NYSE proposal would 
encourage some firms to prohibit people from working outside the 
office.\44\ Furthermore, the likelihood that firms would choose not to 
track but rather to register everybody or preclude activity outside the 
branch office would be increased by the serious consequences for an 
inadvertent failure to register.\45\
---------------------------------------------------------------------------

    \43\ See A.G. Edwards Letter 1, A.G. Edwards Letter 2, SIA 
Letter 1, supra note 5.
    \44\ See SIA Letter 1, supra note 5.
    \45\ Id.
---------------------------------------------------------------------------

    A few commenters also believed that, if the proposed NYSE 
definition is adopted, the number of registered branch offices would 
increase dramatically and result in substantial increased costs for 
large and small firms.\46\ One commenter observed that the substantial 
costs associated with this proposed definition would not be limited to 
branch office supervision, but that additional costs would include 
costs associated with tracking employees' activity to determine whether 
or not they fall within the 50- or 30-day exclusions and a substantial 
increase in registration costs and fees.\47\ Accordingly, it would be 
possible that the registration, bonding, personnel, and supervisory 
costs associated with this proposed definition would outweigh any cost 
savings through central registration.\48\
---------------------------------------------------------------------------

    \46\ See SIA Letter 1, MetLife Letter 1, supra note 5.
    \47\ See SIA Letter 1; see also MetLife Letter 1, supra note 5.
    \48\ See SIA Letter 1, supra note 5.
---------------------------------------------------------------------------

    Furthermore, the commenters generally believed that the proposal 
presents a huge burden for firms with far-reaching branch networks and 
were generally against the 50-day cap on working from home and the 30-
day cap on working at other locations in order to qualify under the 
primary residence exception.\49\ They believed that there

[[Page 54793]]

would be no customer protection or regulatory interest served by 
requiring annual inspections of a location merely based on the number 
of days someone works from a location, if the location is not ``held 
out'' to the public, if no customer funds or securities are maintained 
at the location, and if the location is not used to conduct functions 
that occur in an office of supervisory jurisdiction.\50\ Specifically, 
according to some commenters, what matters should be the type of 
activities performed at the site, the records maintained, the number of 
registered representatives working there, the ability to conduct 
supervision, and how the location is held out to the public, and not on 
an arbitrary criteria such as the number of days spent at the 
location.\51\ Similarly, some of the commenters believed that real 
investor protection comes from limiting the types of activities 
performed outside the branch office and providing appropriate 
supervision of all associated persons, regardless of where they are 
conducting their business. As long as these two criteria are satisfied, 
the 50-day cap on working from home and the 30-day cap on working at 
other locations is unnecessary, unduly cumbersome, and of little 
value.\52\ Another commenter believed that the SROs should not require 
the registration of a representative's residence under most 
circumstances. This commenter believed that the primary effect of 
adding a requirement to register homes and other locations that are not 
held out to the public would be an increase in fees that firms must pay 
to their regulators.\53\
---------------------------------------------------------------------------

    \49\ See A.G. Edwards Letter 1, A.G. Edwards Letter 2, MetLife 
Letter 1, SIA Letter 1, supra note 5; see also ARM Letter, 
InterSecurities Letter, Investment Services Letter, MetLife Letter 
2, Princor Letter, SIA Letter 2, and TFA Letter (supporting the 
NASD's decision to eliminate the fifty-day limitation for the 
primary residence exception), supra note 7.
    \50\ See A.G. Edwards Letter 1, A.G. Edwards Letter 2, ARM 
Letter, SIA Letter 1, supra notes 5 and 7.
    \51\ See ARM Letter, SIA Letter 1, SIA Letter 2, supra notes 5 
and 7; see also A.G. Edwards Letter 2, supra note 5.
    \52\ See A.G. Edwards Letter 2, SIA Letter 1, supra note 5; see 
also MetLife Letter 2 (against the 50-day requirement in the primary 
residence exception as being burdensome, time-consuming and 
difficult to enforce), supra note 7.
    \53\ See MetLife Letter 1, supra note 5.
---------------------------------------------------------------------------

    Moreover, one commenter believed that the definition of ``office'' 
in the SEC's Books and Records Rule, Rule 17a-3(h)(1),\54\ is not 
identical to the definition contained in the Exchange's proposal. The 
commenter believed that, if the SEC definition is not interpreted so 
that any location that is excluded from the definition of ``branch 
office'' in this rule would also be excluded from the SEC definition, 
there would be significantly higher costs and additional regulatory 
burdens. Furthermore, an inconsistent interpretation of the definition 
under the Books and Records Rule could lead to a situation where a 
state could require that records be maintained or produced at a 
location that is not a ``branch office'' within the NYSE proposal.\55\ 
Similarly, another commenter expressed concern that the mere act of 
registering a primary residence as a branch office could be 
misinterpreted as satisfying the ``holding out'' requirement in SEC 
Rule 17a-4(l) of the Act \56\ and therefore lead to a situation where a 
state would require that records be maintained or produced at a 
location that would not otherwise be deemed a ``branch office'' under 
SEC rules. This commenter requested that the NYSE and/or the Commission 
clarify that this would not be the case.\57\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17a-3(h)(1).
    \55\ See A.G. Edwards Letter 2, supra note 5.
    \56\ 17 CFR 240.17a-4(l).
    \57\ See SIA Letter 1, supra note 5.
---------------------------------------------------------------------------

NYSE's Response to Comments

    The Exchange agrees, in part, with some of the comments relating to 
the proposed branch office definition's exceptions and has, thus, 
excepted primary residences and other locations from the definition, if 
certain appropriate supervisory and business limitations safeguards are 
satisfied by the member or member organization. In justifying the 
Exchange's initial proposal to impose a 50-day limitation for the 
primary residence exception, the Exchange stated that, notwithstanding 
the need for flexibility, adequate supervision could be most 
effectively accomplished when associated persons are assigned to, and 
have some actual physical presence at, a supervised location. By 
limiting the number of full business days that associated persons could 
conduct business at non-branch locations, members and member 
organizations could better supervise such persons while still providing 
them the flexibility that their lifestyles require today. The Exchange 
believed that the proposed 50- and 30-day limitations in the proposed 
exceptions would provide further flexibility by excluding partial 
business days at a broker's designated branch office during the hours 
such office is normally open for business.\58\
---------------------------------------------------------------------------

    \58\ See Response to Comments, supra note 8. Furthermore, if an 
associated person, i.e., registered representative (``RR''), works 
primarily from his or her home, the Exchange believed that such 
location should be registered as a branch office subject to all 
attendant requirements including firm supervision and examination. 
Although an RR could not hold out his or her residence as a branch 
office, in reality customers would generally come to know that the 
RR is working from home. As a result, the Exchange believed that it 
would be likely that RRs would eventually meet with customers at 
their homes, or that customers would stop by to drop off checks or 
securities certificates. In addition, when an RR works primarily 
from home, he or she would keep records there and might not be 
diligent in ensuring that all required records are provided to the 
designated branch office. Id.
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    However, as noted above, after analysis of and in response to the 
comments received, the Exchange has eliminated its 50-day limitation on 
the primary residence registration exception. In eliminating the 50-day 
limitation on primary residences, the Exchange acknowledges that 
technological advances in surveillance/monitoring capabilities should 
help address the concerns posed by associated persons working from 
home, combined with the rest of the limitations in the exemption. At 
the same time, the Exchange still proposes to impose appropriate 
regulatory/supervisory safeguards, such as on-site review of such 
residences and remote locations, to help ensure that members and member 
organizations properly supervise such locations.\59\
---------------------------------------------------------------------------

    \59\ See Amendment No. 2, supra note 9.
---------------------------------------------------------------------------

    In response to the comments that the new definition would present 
logistical obstacles and result in substantial time and effort to track 
each associated person's whereabouts and to register those locations 
that satisfy the 30-day threshold, the Exchange notes that the 30-day 
business day exclusion was proposed to address changes in lifestyle and 
work habits for associated persons.\60\ The Exchange indicates that 
flexible work schedules usually are prearranged and are something such 
persons and their firms should be aware of on a prospective basis. 
However, the Exchange recognizes that exigent circumstances could arise 
where such information would not be clearly foreseeable to such persons 
and their firms. Since the Exchange has no interest in inadvertent rule 
violations that arise as the result of unforeseen circumstances, the 
Exchange intends to provide flexibility through interpretative relief 
for such unforeseen circumstances. Once the thresholds have been met, 
the Exchange represents that members and member organizations would be 
given a 30-day window to submit applications for registering such 
locations as branch offices. Pending branch office approval, associated 
persons could continue conducting business from such locations. If 
approved, the location would be a branch office. If not approved, the 
associated person would have to

[[Page 54794]]

immediately cease conducting business at the location.\61\
---------------------------------------------------------------------------

    \60\ These same concerns were raised with respect to the 50-day 
threshold; however, the NYSE has eliminated the 50-day threshold in 
response to the comments received.
    \61\ See Response to Comments, supra note 8.
---------------------------------------------------------------------------

    The Exchange would also address the industry's concerns regarding 
the perceived logistical problems associated with the Exchange's 
proposed definition by providing the same threshold flexibility in the 
registration/approval process of primary residences for locations that 
exceed the ``25 securities transaction'' exclusion permitted under 
proposed NYSE Rule 342.10(E). Furthermore, the Exchange will provide 
interpretative guidance as to what constitutes a ``securities 
transaction'' for purposes of this exclusion from the definition of 
branch office. For example, transactions effected pursuant to a 
dividend reinvestment plan, or similar types of transactions would be 
excluded in calculating the 25 securities transactions threshold. In 
aggregate, the Exchange believes that the registration/approval process 
and exclusions from the 25 securities transactions threshold should 
alleviate some of the industry's perceived concerns with regard to the 
proposed definition.\62\
---------------------------------------------------------------------------

    \62\ Id.
---------------------------------------------------------------------------

    Moreover, the Exchange believes that the commenters' concern that 
registering primary residences and other locations used for securities 
business would impose substantial costs overlooks current NYSE rules 
that require all offices, including residential offices, to be 
registered. In addition, each branch office location is currently 
required to be inspected on an annual basis. Accordingly, the Exchange 
believes that adoption of the proposed rule would reduce the number of 
locations that would be required to be registered by NYSE members and 
member organizations by eliminating locations such as exempt 
residences, locations engaged in customer service and back office 
operations, offices of convenience, and locations used primarily for 
non-securities activities.\63\ In support of this statement, the 
Exchange, after reviewing its database of branch offices, estimates 
that the proposed definition would reduce the number of branch offices 
from approximately 16,000 to approximately 12,800, a reduction of 
approximately 20 percent.\64\
---------------------------------------------------------------------------

    \63\ Id. See also, Amendment No. 2, supra note 9. The proposal 
would actually result in reduced overall industry costs by virtue of 
the fact that the exclusion of certain primary residences and 
several other location types currently required to register would 
cause a decline in the overall number of branches. Id. Finally, the 
Exchange disagrees with the commenters' view that the 50-day 
limitation that was initially proposed raises potential 
inconsistencies with the SEC's books and records rule. On the 
contrary, the Exchange believes that its proposed definition is not 
inconsistent with the SEC's books and records requirement and, in 
fact, incorporates the substance of SEC Rule 17a-3(h)(1), 17 CFR 
240.17a-3(h)(1). The Exchange believes that the act of registering a 
primary residence as a branch office would not, in and of itself, 
constitute ``holding out'' for purposes of the SEC's new record 
keeping requirements. In dealing with primary residences, the 
Exchange has imposed many of the conditions required under SEC Rule 
17a-4(l), 17 CFR 240.17a-4(l). Where a primary residence exceeds the 
50-day threshold and thus would be required to register as a branch 
office (as initially proposed), it would not necessarily be required 
to maintain records at that office. Rather records could be 
maintained at the designated branch office that is responsible for 
supervision of the home office, provided that the member or member 
organization adheres to the criteria of the rule. See Response to 
Comments, supra note 8.
    \64\ See Amendment No. 3, supra note 10.
---------------------------------------------------------------------------

    In summary, the Exchange represents that, in proposing its 
definition of ``branch office,'' among other things, it is the 
Exchange's intent to reduce regulatory burdens for the industry and to 
provide for a consistent approach among various securities regulators 
with respect to branch offices and other business locations.\65\
---------------------------------------------------------------------------

    \65\ See Response to Comments, supra note 8.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 2 and 3, including whether 
Amendment Nos. 2 and 3 are 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-2002-34 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-2002-34. 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 Exchange. 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-2002-34 and should be submitted on or before 
October 7, 2005.

V. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the Act and the rules and 
regulations promulgated thereunder applicable to a national securities 
exchange and, in particular, with the requirements of Section 6(b) of 
the Act.\66\ Specifically, the Commission finds that approval of the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act \67\ in that it is designed to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \67\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Given the continued advances in technology used to conduct and 
monitor businesses and changes in the structure of broker-dealers and 
in the lifestyles and work habits of the workforce, the Commission 
believes it is reasonable for the Exchange to reexamine whether all 
business locations need to be registered as branch offices of broker-
dealer members and member organizations. The Commission also supports 
the Exchange, the NASD and state securities regulators' joint, 
regulatory effort to eliminate inconsistencies and duplication by 
developing a uniform definition of ``branch office.'' The Commission 
believes that such regulatory coordination and cooperation

[[Page 54795]]

will result in an effective and efficient regulation that will serve 
the entire broker-dealer community by recognizing the many different 
business models and streamlining the branch office registration process 
significantly. In addition, the Commission believes that the proposed 
definition strikes the right balance between providing flexibility to 
broker-dealer firms to accommodate the needs of their associated 
persons, while at the same time setting forth parameters that should 
ensure that all locations, including home offices, are appropriately 
supervised. In this regard, the Commission emphasizes the 
responsibility of firms to supervise their associated persons, 
regardless of their location and reminds all broker-dealers of their 
statutory duty to supervise.\68\ The Commission also believes that the 
ability to identify the personnel located at each branch office is an 
important improvement to the CRD database and will provide regulators 
valuable information.
---------------------------------------------------------------------------

    \68\ See Section 15(b)(4)(E) of the Act, 15 U.S.C. 78o(b)(4)(E).
---------------------------------------------------------------------------

    Furthermore, the Commission believes that the seven proposed 
exceptions to registering as a branch office constitute a reasonable 
approach to recognize current business, lifestyle, and surveillance 
practices and provide associated persons with flexibility with respect 
to where they perform their jobs. For instance, because associated 
persons may have to work from home due to illness, or to provide 
childcare or eldercare for certain family members, the Commission 
believes it is appropriate to except primary residences from the 
definition of branch office. In this regard, the Commission believes 
that the Exchange has also directly responded to negative comments on 
the 50-day cap on working from home and, accordingly, eliminated such 
limitation from its primary residence exception. This change made the 
proposed definition substantially similar to the definition proposed by 
the NASD. Moreover, the definition would also exempt from branch office 
registration any temporary location, other than the primary residence, 
provided it is used less than 30 business days in any calendar year.
    The Commission finds it reasonable for the Exchange to not only 
propose conditions on the primary residence and temporary location 
exceptions (e.g., the location can not be held out to the public as an 
office, neither customer funds nor securities can be handled there) but 
to also impose appropriate supervisory safeguards and limitations to 
help ensure that members and member organizations properly supervise 
and monitor such locations. For instance, the Exchange proposes to 
require that written supervisory procedures for such residences and 
other remote locations include criteria for on-site for cause reviews 
of an associated person's primary residence and that such reviews 
utilize risk-based sampling or other techniques designed to assure 
compliance with securities laws and regulations. The Exchange also 
included a list of factors which should be considered when developing 
risk-based sampling techniques for on-site reviews of such 
locations.\69\ The Commission agrees with the Exchange that effective 
supervision can be achieved using advanced and sophisticated technology 
in the supervision and review of associated persons in such exempt 
locations. In this regard, the Commission expects the Exchange to 
review such written supervisory procedures and their implementation as 
part of its regular examination of members and member organizations.
---------------------------------------------------------------------------

    \69\ The Commission notes that the factors proposed in NYSE Rule 
342, which should be considered when developing risk-based sampling 
techniques to determine the appropriateness of on-site for cause 
reviews of primary residences and other remote locations, are 
substantially similar to the factors proposed by the NASD in SR-
NASD-2003-104. See SR-NASD-2003-104, supra note 6. However, while 
the NASD's list of factors would broadly apply to the internal 
inspections and review of their members' businesses, including 
offices of supervisory jurisdiction (``OSJs''), branch offices, and 
non-branch offices, the NYSE's proposed list of factors would apply 
only to primary residences and other remote locations. However, the 
Commission notes that the NYSE provides for branch office 
inspections in NYSE Rule 342/03 of the NYSE Interpretation Handbook 
(``Handbook''). Under NYSE Rule 342/03 of the Handbook, an annual 
branch office inspection program must include, but is not limited 
to, testing and independent verification of internal controls 
related to the following areas: Safeguarding of customer funds and 
securities; maintaining books and records; supervision of customer 
accounts serviced by branch office managers; transmittal of funds 
between customers and registered representatives and between 
customers and third parties; validation of customer address changes, 
and validation of changes in customer account information.
---------------------------------------------------------------------------

    In addition, under both exceptions noted above, the NYSE has 
provided additional flexibility by defining ``business day'' to exclude 
any partial day, provided the associated person spends at least four 
hours on such business day at his or her designated branch office 
during the hours such office is normally open for business. The 
Commission believes that this should prevent associated persons from 
regularly conducting business from other remote locations for the 
majority of a business day, without such activity being counted towards 
the 30-day limitation. The Commission expects the Exchange to monitor 
and ensure that, where the 30-business day (other location) exemption 
is utilized by associated persons, members and member organizations are 
maintaining records adequate to demonstrate compliance with the 
``business day'' limitations.
    Finally, the Commission believes it is reasonable for the Exchange 
to establish and implement its new definition of branch office before 
the changes to the CRD and the related forms are implemented. This 
should make the transition to the new branch office registration system 
and forms smoother by providing Exchange members and member 
organizations with sufficient time to become familiar with the new 
definition and to focus on the subsequent technical changes in the 
branch registration process. As the Exchange represents, changing the 
definition of branch office prior to the aforementioned CRD changes 
should not create confusion, or in any way undermine the coordinated 
transition to the new branch office registration system.

Accelerated Approval of Amendment Nos. 2 and 3

    The Commission finds good cause for approving Amendment Nos. 2 and 
3 to the proposed rule change prior to the thirtieth day after the 
amendment is published for comment in the Federal Register pursuant to 
Section 19(b)(2) of the Act.\70\ Amendment No. 2 responded to comment 
letters by amending proposed NYSE Rule 342 to eliminate the 50-day 
limitation from its primary residence registration exception, adding a 
provision requiring written supervisory procedures of primary 
residences and other remote locations, and listing factors which should 
be considered in developing risk-based sampling techniques. The 
Commission finds that, given the objections raised with respect to the 
50-day limitation and the potential logistical difficulties that could 
have resulted in complying with and enforcing the rule, it is 
appropriate and responsive for the Exchange to eliminate this condition 
from its proposed exception. Also, elimination of the 50-day limitation 
renders the NYSE's proposal virtually identical to the NASD's proposal, 
serving the industry's desire for uniformity. Furthermore, the 
Commission believes that requiring written supervisory procedures for 
primary residences and other remote locations and providing a list of 
factors

[[Page 54796]]

which should be included in the development of the risk-based sampling 
techniques in the proposed rule text will clarify members' and member 
organizations' obligations in monitoring the use of these exceptions, 
as well as provide for effective supervision and review of associated 
persons in such exempt locations.
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    Amendment No. 3 provides a more comprehensive list of factors to be 
considered in the development of the risk-based sampling techniques, 
makes technical and clarifying changes to the rule text, and provides a 
discussion on the timing of the adoption of the Exchange's new 
definition of branch office. The Commission believes that the proposed 
changes in Amendment No. 3 provide for a clearer understanding of the 
implementation of the proposed branch office definition. Specifically, 
the Commission agrees with the Exchange that branch office registration 
should be primarily determined by the functions performed in an office. 
For instance, the Exchange's proposed deletion of the qualifier ``other 
than the main office'' from the definition of branch office recognizes 
that the definition of branch office and its corresponding registration 
should be triggered based on the activities performed at the location, 
even if the activities are performed at the main office. Similarly, the 
Exchange also proposes that, despite the seven exceptions to the 
definition of branch office, any location responsible for supervising 
the activities of persons associated with a member or member 
organization at one or more non-branch locations of such member or 
member organization should nevertheless register as a branch office. 
The Commission notes that this rule change is similar to one proposed 
by the NASD in its branch office filing. Finally, the Commission notes 
that the additional technical and clarifying changes made to NYSE Rule 
342.10 raise no new issues of regulatory concern.
    Accordingly, the Commission believes that accelerated approval of 
Amendment Nos. 2 and 3 is appropriate.

VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5) of the Act.\71\
---------------------------------------------------------------------------

    \71\ XXX
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\72\ that the proposed rule change (SR-NYSE-2002-34) and Amendment 
No. 1 thereto are approved, and that Amendment Nos. 2 and 3 thereto are 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\73\
---------------------------------------------------------------------------

    \73\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. E5-5033 Filed 9-15-05; 8:45 am]
BILLING CODE 8010-01-P