[Federal Register Volume 71, Number 170 (Friday, September 1, 2006)]
[Notices]
[Pages 52202-52204]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-14563]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54368; File No. SR-NYSE-2005-58]


Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/
k/a New York Stock Exchange LLC); Order Approving Proposed Rule Change 
and Amendment No. 1 Thereto Relating to Exchange Rule 312(f) Regarding 
Changes Within Member Organizations

 August 25, 2006.

I. Introduction

    On August 15, 2005, the New York Stock Exchange, Inc. (n/k/a New 
York Stock Exchange LLC) (``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 change and on May 5, 2006, NYSE filed Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change, as amended, concerns 
amendments to Rule 312(f) to, among other changes, permit the 
recommendation of purchases and sales of shares of companies controlled 
by and under common control with member organizations (other than 
MAPs), subject to appropriate customer disclosure of the relationship. 
The

[[Page 52203]]

proposed rule change, as amended, was published for comment in the 
Federal Register on May 26, 2006.\4\ The Commission received two 
comment letters on the proposal.\5\ On August 11, 2006, NYSE filed a 
response to the S&C Letter.\6\ 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\ Amendment No. 1 replaced the rule text in the original 
filing in its entirety and proposed to clarify that Rule 312(f) 
applies only to non-investment grade debt and equity securities. 
Amendment No. 1 also added Material Associated Persons (``MAPs''), 
as that term is used in Rule 17h-1T of the Exchange Act, to the 
class of persons for whose securities the solicitation of trades is 
prohibited.
    \4\ See Securities Exchange Act Release No. 53840 (May 19, 
2006), 71 FR 30458 (May 26, 2006).
    \5\ See letter from John Ramsay, Managing Director, Deputy 
General Counsel, Citigroup Global Markets Inc. (``Citigroup''), to 
Nancy M. Morris, Secretary, SEC, dated June 16, 2006 (the 
``Citigroup Letter'') and letter from Sullivan & Cromwell LLP 
(``S&C'') to Nancy M. Morris, Secretary, SEC, dated June 16, 2006 
(the ``S&C Letter'').
    \6\ See letter from Mary Yeager, Assistant Secretary, NYSE, to 
Catherine McGuire, Chief Counsel, Division of Market Regulation, 
SEC, dated August 11, 2006 (the ``NYSE Response'').
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II. Description of the Proposed Rule Change

    NYSE Rule 312(f) (the ``Rule''), in pertinent part, currently 
prohibits a member organization from soliciting transactions in its own 
publicly traded securities and from making any recommendations with 
respect to its publicly traded securities or the securities issued by 
any corporation controlling, controlled by or under common control with 
such member corporation (i.e., the securities of any parent, sister, or 
subsidiary corporation relative to the member organization). The 
Exchange's regulatory experience relative to Rule 312(f) has generally 
involved determinations as to the existence, or not, of a control 
relationship involving a member organization among the complicated 
interrelationships of, and equity investments by, financial 
organizations.
    The purpose of the proposed rule change is to retain a process for 
mitigating conflicts of interest that may arise when recommending the 
securities of companies in which a member organization may have an 
interest, while also reducing burdens on the industry and the Exchange 
with respect to making determinations regarding the existence of a 
control relationship by establishing clearer standards and reducing 
interpretative questions.

(i) Proposed Codification To Exclude Investment Grade Debt From Rule 
312(f)

    NYSE has interpreted Rule 312(f) to apply only to non-investment 
grade debt and equity securities.\7\ This proposal would codify that 
interpretation.
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    \7\ Another common interpretive inquiry with respect to Rule 
312(f) involves, and NYSE anticipates would continue to involve, a 
determination as to whether the security in question has ``debt-like 
characteristics.'' The Exchange has generally interpreted Rule 
312(f) restrictions to not apply to investment grade debt and 
securities that function as investment grade debt. The 
interpretation as to whether a security functions as investment 
grade debt is based on the totality of the circumstances, e.g., (1) 
Whether the shares of stock have fixed dividends; (2) whether the 
shares of stock are non-participatory in common dividends; (3) 
whether the shares of stock have limited voting rights; and (4) 
whether the shares of stock are non-convertible into common stock.
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(ii) Proposed Expansion To Include All Non-Investment Grade Debt and 
Equity Securities

    The proposed rule change would also broaden the application of the 
Rule to all non-investment grade debt and equity securities, including 
privately placed issues. The current Rule's prohibition applies only to 
publicly traded securities.
    In addition, the proposed rule change would extend the prohibition 
against solicited transactions to the non-investment grade debt and 
equity securities of companies controlling member organizations (e.g., 
parent companies) and MAPs. By their nature, MAPs can substantially 
influence a registered broker-dealer, and the inclusion of such 
entities along with controlling organizations \8\ acts to limit 
inevitable conflicts of interest.
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    \8\ See NYSE Rule 2.
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(iii) Proposed Amendment To Permit Certain Recommendations If Disclosed

    Finally, the proposed rule change would permit the recommendation 
of purchases and sales of shares of companies controlled by and under 
common control with member organizations (other than MAPs), subject to 
appropriate customer disclosure of the relationship (e.g., any 
recommendation would be subject to a requirement to disclose to the 
customer the existence and nature of the control relationship at the 
time of recommendation).\9\ The Exchange states that for these types of 
relationships disclosure is likely to function as an adequate method 
for addressing the conflicts of interest that could arise with respect 
to a member's recommendation to buy or sell securities of many 
affiliated entities. The Exchange proposes to retain the prohibition on 
the recommendation of purchases in the securities of the member 
organization, any controlling organization or a MAP given the greater 
potential for a conflict of interest inherent in such relationships.
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    \9\ See proposed Rule 312(f)(2). If the disclosure at the time 
of the recommendation is not made in writing, then the member must 
also provide this disclosure in writing prior to the completion of 
the transaction.
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III. Summary of Comments Received and NYSE Response

    The Commission received two comment letters (the Citigroup Letter 
and the S&C Letter) on the proposal and a response to the S&C Letter by 
NYSE.\10\ The Citigroup Letter expresses support for the proposed 
changes to Rule 312(f).
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    \10\ S&C Letter. See also NYSE Response. Because the Citigroup 
Letter did not express any disagreement with the proposed rule 
change, the NYSE Response does not address the Citigroup Letter.
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    The S&C Letter generally expresses support for the proposed rule 
change, but also notes reservations regarding: (1) The expansion of the 
Rule 312(f) restrictions to non-public securities, and (2) the 
prohibitions contained in Rule 312(f)(1) concerning solicitation of 
transactions in the securities of a member organization, its parent or 
a MAP.\11\
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    \11\ S&C Letter.
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    In responding to S&C's reservation regarding the extension of the 
coverage of Rule 312(f) to non-publicly traded securities, NYSE states 
that there is a ``need to assure coverage of all post-distribution 
transactions by member organizations in affiliated securities, and not 
solely those which are sold pursuant to public offerings.'' \12\ NYSE 
also expresses the view that the proposed change will not impose a 
significant burden on trading in non-publicly traded securities.\13\
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    \12\ NYSE Response.
    \13\ Id.
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    In responding to S&C's reservation regarding the prohibitions 
contained in Rule 312(f)(1), NYSE states that it ``respectfully 
disagree[s] with the suggestion that the prohibition against the 
solicitation of transactions in the securities of the member 
organization, parent or [MAP] is at present unwarranted [because] [t]he 
conflicts which the original rule was written to prevent have not 
disappeared.'' \14\ NYSE also clarifies that ``[i]t is not the 
transaction which is prohibited, but rather the recommendation of the 
transaction; the Rule allows unsolicited transactions.'' \15\
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    \14\ Id.
    \15\ Id.
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IV. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Exchange Act, and the 
rules and regulations thereunder applicable to a national securities 
exchange, and in particular, with the requirements of Section 6(b)(5) 
\16\ of the Exchange Act.

[[Page 52204]]

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. Section 3(f) of the Exchange Act also 
requires, among other things, whenever there is a requirement to 
consider or determine whether an action is necessary or appropriate in 
the public interest, to also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation.
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    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change, as amended, 
will act to assure adequate and continuing protection for investors 
while promoting efficiency, competition, and capital formation by 
permitting the recommendation of purchases and sales of shares of 
companies controlled by and under common control with member 
organizations (other than MAPs), subject to appropriate customer 
disclosure of the relationship, by expanding restrictions on effecting 
solicited transactions to include non-public securities, and by 
codifying NYSE interpretations as described above.

V. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NYSE-2005-58), as amended, 
be, and hereby is, approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-14563 Filed 8-31-06; 8:45 am]
BILLING CODE 8010-01-P