[Federal Register Volume 72, Number 147 (Wednesday, August 1, 2007)]
[Notices]
[Pages 42195-42210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14853]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56142; File No. SR-NYSE-2007-22]


Self-Regulatory Organizations; New York Stock Exchange, LLC.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to the Harmonization of NYSE and NASD Regulatory Standards, 
the Updating of Certain NYSE Terminology, and the Reorganization and 
Clarification of Certain NYSE Rules in Connection With the 
Harmonization Process

July 26, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 27, 2007, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by the Exchange. On July 26, 2007, NYSE filed Amendment No. 1 
to the proposed rule change. The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of amendments to NYSE rules, 
organized categorically, that would advance the process of harmonizing 
the regulatory standards of the Exchange and the National Association 
of Securities Dealers, Inc. (``NASD''). In addition, the proposed rule 
change would update certain terminology and otherwise reorganize and 
clarify current NYSE regulatory standards. The text of the proposed 
rule change is available on the Exchange's Web site (http://www.nyse.com), at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NYSE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NYSE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing amendments to certain NYSE Rules pursuant 
to its SRO Rule Harmonization initiative. In connection with this 
filing, the Exchange is also separately submitting to the Commission a 
report that provides an overview of the Exchange's approach in this 
regard.
Introduction
    Relative to the approval of the NYSE/ARCA merger,\3\ the Exchange 
agreed to initiate a comparison of its regulatory requirements (as 
prescribed by the NYSE Rulebook and associated interpretive materials) 
to corresponding NASD regulatory provisions. The purpose of the process 
was to achieve, to the extent practicable,\4\ substantive harmonization 
of the two regulatory schemes. To that end, this filing proposes 
amendments to an extensive range of NYSE rules which have been divided 
into four categories. In addition to organizing the rules conceptually, 
this serves to distinguish the review and recommendation process that 
has been applied to each category, discussed more fully below.
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    \3\ See Securities Exchange Act Release No. 53382 (February 27, 
2006) 71 FR 11251 (March 6, 2006) (order approving SR-NYSE-2005-77).
    \4\ The review process recognized the appropriateness of 
differing standards based upon the differences between the markets 
and membership of NYSE and NASD.
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    The categories are arranged as follows: Category 1 addresses Member 
Firm Organization/Structure and Governance; Supervision; Registration, 
Qualification and Continuing

[[Page 42196]]

Education; and Sales Practice (collectively, the ``Sales Practice 
Rules''); Category 2 addresses the Financial/Operational Rules; 
Category 3 addresses the Buy-In Rules; and Category 4 addresses the 
selective deletion of the term ``member'' and the complete deletion of 
the term ``allied member'' from the NYSE rules (``Member'' and ``Allied 
Member'' Rules).
Global Amendments
    Category 4 includes rules for which the only substantive proposed 
change is deletion of the terms ``member'' and/or ``allied member.'' 
Note, however, that the selective deletion of the term ``member'' and 
the complete deletion of the term ``allied member'' is proposed 
throughout the other three categories as well.
    These amendments are discussed more fully below under Category 4 
(``Member'' and ``Allied Member'' Rules). In brief, the Exchange is 
proposing to delete, where appropriate, the term ``member'' throughout 
the NYSE rules to reflect its revised meaning in light of the recent 
merger/reorganization of the Exchange. While ``member'' is still 
recognized as a categorical designation, its current definition \5\ is 
substantively different from its pre-merger definition, rendering its 
use in many NYSE rules outdated. Thus, many regulatory requirements 
that once pertained specifically to NYSE members no longer apply at 
all, or apply to members only in their capacity as member organization 
employees.
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    \5\ The term ``member'' currently refers to an employee of a 
member organization authorized to effect transactions on the Floor 
of the Exchange on behalf of such member organization, which holds a 
license to so trade.
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    The ``allied member'' designation is a regulatory category based on 
a person's ``control'' over a member organization.\6\ It is proposed 
that the term be simply deleted in rules where a person's control 
status is not relevant to the rule's application. In contexts where an 
individual's status as a member organization ``control person'' has 
regulatory relevance, the Exchange proposes to substitute the newly 
defined category of ``principal executive'' (see proposed Rule 416A 
amendments, below). Unlike the ``allied member'' designation, the 
``principal executive'' designation would not require a registration 
process, but would be used only for regulatory reporting and 
notification purposes.
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    \6\ See subsection (b) of NYSE Rule 304 (``Allied Members and 
Approved Persons'').
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Category 1 (``Sales Practice Rules'')
Background
    In order to initiate the rule harmonization process, the Exchange 
enlisted, through its Compliance Advisory Group (``CAG''),\7\ the 
assistance of several securities industry regulatory professionals from 
member organizations who volunteered to participate in various 
subcommittees in order to conduct an initial review of all relevant 
materials and to report their findings and recommendations to the 
Exchange and the NASD (collectively, the ``SROs''). The SROs were 
charged with the responsibility of considering the appropriateness of 
the committees' recommendations and working together to amend their 
respective rules accordingly.
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    \7\ The Exchange's Compliance Advisory Group is a committee 
consisting of representatives from the Exchange Member Firm 
Regulation Division as well as legal and compliance personnel from a 
cross-section of the NYSE member organization community. CAG meets 
on a periodic basis, generally monthly, to discuss regulatory and 
compliance matters of interest to the securities industry.
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    The review process formally began in February 2006 when the 
Exchange's Member Firm Regulation (``MFR'') Division, in conjunction 
with the CAG, organized four subcommittees and assigned each a group of 
rules within a specified regulatory category. The following four 
subcommittees were thus established: (1) Member Firm Organization/
Structure and Governance; (2) Supervision; (3) Registration, 
Qualification and Continuing Education; and (4) Sales Practice. 
Representatives from the Exchange, the NASD, and the Securities 
Industry Association (``SIA'') \8\ participated throughout this review 
process in a consultative role.\9\ The recommendations that resulted 
from these subcommittees' comparison of NYSE and NASD rules are, in 
large part, the basis for the Category 1 amendment proposals presented 
herein.
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    \8\ Note that SIA has since combined with the Bond Market 
Association to form the Securities Industry and Financial Markets 
Association (``SIFMA'').
    \9\ NASD did not participate in the Member Firm Organization/
Structure and Governance Subcommittee.
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    The subcommittee review process essentially consisted of 
identifying inconsistencies between the NYSE rules and the NASD rules, 
determining which SRO standard made more regulatory sense, and then 
recommending rule changes that would either conform an NYSE standard to 
its NASD counterpart or vice versa. In some instances, the 
subcommittees recommended a hybrid approach that included amendments to 
corresponding rules of both SROs.
    Each of the recommendations has been reviewed with the CAG Group 
and the NASD. These subsequent discussions allowed further exploration 
of the issues raised by the subcommittees and provided a better sense 
for which recommendations clearly warrant redress via the formal rule 
amendment process and which require further consideration.\10\
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    \10\ See NYSE Report submitted in conjunction with this filing 
for a further discussion and enumeration of such rules.
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    The Exchange has also taken the opportunity, where appropriate, to 
reorganize and clarify rule text related to the subcommittees' 
recommendations and to otherwise update, refine and clarify its 
regulatory standards.
Rule 311 Formation of Member Organizations
    NYSE Rule 311 governs the formation and approval of member 
organizations by the Exchange. The proposed amendments to Rule 311(b) 
would extend the application of the rule, which currently addresses 
partnerships and corporations, to include any type of entity (e.g., a 
limited liability company) applying to the Exchange to become a member 
organization.
    The proposed amendments would delete subsection (b)(7) of Rule 311 
which requires every employee who is associated as a member with a 
member organization to be designated with a title, such as vice 
president, consistent with such person's responsibilities and the usage 
of titles within such organization. Additionally, the amendments 
propose the deletion of subsection (h) which prescribes the number of 
partners to be named in a member organization in order for it to 
conduct business. These two provisions are being deleted as they are 
outdated and no longer necessary in light of the current spectrum of 
NYSE member organizations business models.
Rule 313 Submission of Partnership Articles--Submission of Corporate 
Documents
    NYSE Rule 313 requires member organizations to submit to the 
Exchange for approval certain documents which establish a partnership's 
or corporation's existence. The proposed amendments to Rule 313 add 
limited liability agreements to the enumeration of documents required 
to be submitted to and approved by the NYSE in order for an entity to 
be a member organization. The proposed amendments to Rule 313 also 
amend .23 of the supplementary material to provide that all 
corporations, not just

[[Page 42197]]

those organized under the laws of the State of New York, shall subject 
themselves to the restrictions set forth in .23.
Rule 322 (Guarantees by, or Flow Through Benefits for Members or Member 
Organizations)
    Rule 322.10 currently requires each member organization to provide 
written notice to the Exchange prior to: (1) Guaranteeing, endorsing or 
assuming, directly or indirectly, the obligations of another person or 
(2) receiving flow-through capital benefits. The practice by member 
organizations of guaranteeing the liabilities of other persons has long 
been recognized as a matter that gives rise to special risks with 
respect to the member organization's capital. Accordingly, as a matter 
of practice, the Exchange has carefully reviewed and vetted such 
submissions such that the ``prior notice'' requirement has effectively 
been treated as a ``prior approval'' requirement.
    The proposed amendments would codify this well-established approach 
by replacing the present requirement that ``notice'' of at least 10 
business days be given to the Exchange prior to entering into an 
arrangement prescribed by the rule with an explicit requirement that 
written Exchange approval be obtained prior to the finalization of any 
such arrangement.
    The NASD does not currently have an analogue to Rule 322. The 
Member Firm Organization/Structure and Governance Subcommittee 
recommended that NASD adopt a similar rule and NASD has taken the 
recommendation under advisement.
Rule 342 (Offices--Approval, Supervision and Control) and its 
Interpretation
Rule 342.13--Acceptability of Supervisors
    NYSE Rule 342.13(a) currently requires that persons who are to be 
assigned certain prescribed supervisory responsibilities \11\ have a 
``creditable'' three year record as a registered representative or have 
three years of ``equivalent experience'' before functioning as a 
supervisor.\12\
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    \11\ In this regard, Rule 342.13(a) references Rule 342(d) which 
requires that ``[q]ualified persons acceptable to the Exchange shall 
be in charge of: (1) Any office of a member or member organization, 
(2) any regional or other group of offices, (3) any sales department 
or activity.''
    \12\ Rule 342.13(a) also requires that persons assigned 
supervisory responsibility pursuant to Rule 342(d) must pass a 
qualification examination acceptable to the Exchange that 
demonstrates competence relevant to assigned responsibilities.
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    The Exchange proposes that Rule 342.13(a) be amended to eliminate 
the prescribed three-year experience requirement for supervisory 
personnel and conform with the standard outlined in NASD Rule 
1014(a)(10)(D) with respect to firms that are submitting an application 
to become registered as a broker dealer. In addition, as under NASD 
1014(a)(10)(D), the proposed amendments would require that supervisory 
candidates have one year of ``direct experience'' or two years of 
``related experience'' in the subject area to be supervised.
    With respect to existing broker dealers, the Exchange believes 
that, given a member organizations' first hand knowledge of their 
supervisory candidates, it is reasonable to provide greater flexibility 
than Rule 342.13(a) currently allows. Accordingly, the proposed 
amendments would allow member organizations to make informed 
determinations, on a case-by-case basis, as to the length and type of 
experience and training required for each supervisory candidate before 
he or she is deemed sufficiently prepared to assume particular 
responsibilities.
    In order to ensure regulatory jurisdiction over all principal 
executives, and to more closely conform with the standard prescribed 
under subsection (a) of NASD Rule 1021 (Registration Requirements) the 
Exchange proposes new Rule 342.13(c) which would require each person 
designated by a member organization as a ``principal executive,'' as 
that term is defined in Rule 416A, to pass an examination appropriate 
to the functions to be performed by such person.
Rule 342.19--Supervision of Producing Manager
    NYSE Rule 342.19 currently requires that a person designated to 
supervise the business of a Producing Manager (a branch office manager, 
regional/district sales manager, or a person who performs similar 
functions and that conducts a public business) must be senior to, or 
otherwise independent of, such Producing Manager. Currently, a 
component of determining whether such designated person is ``otherwise 
independent'' of a Producing Manager is whether the designated person 
receives an override or other income derived from the Producing 
Manager's customer activity that represents more than 10% of the 
designated person's gross income derived from the member organization 
over the course of a rolling twelve-month period. If the designated 
person exceeds the 10% threshold, Rule 342.19 requires that ``alternate 
senior or otherwise independent supervision'' of the Producing Manager 
be established.
    Member organizations have indicated that the ``10% override'' 
standard is difficult to calculate within the context of certain 
compensation models (e.g., where an override or other compensation may 
be tied to a formula applicable to the business of the entire branch 
office and not distinguishable from the Producing Manager's customer 
activity).
    Consequently, the Exchange proposes to delete the current Rule 
342.19 standard and offer the following alternative: If a designated 
supervisor receives an override or other income from the production of 
registered persons subject to his or her supervision, and the gross 
revenues of any Producing Manager under his or her supervision exceed 
10% of the total gross revenue of all registered persons subject to his 
or her supervision, then the producing manager would be ``flagged'' for 
either alternate supervision (as currently required by Rule 342.19) or 
``heightened supervision,'' which is the standard currently utilized by 
the NASD 3012(a)(C). The Exchange also proposes amending Rule 342.19(a) 
to add the NASD Rule 3012(a)(2)(C) definition of ``heightened 
supervision.'' Thus, proposed Rule 342.19(a) would define ``heightened 
supervision'' to mean: ``those supervisory procedures that evidence 
supervisory activities that are designed to avoid conflicts of interest 
that serve to undermine complete and effective supervision because of 
the economic, commercial, or financial interests that the supervisor 
holds in the associated persons and businesses being supervised.''
Rule 342.23--Internal Controls
    The Exchange proposes repositioning text, from Rule 401 to Rule 
342.23, which requires internal controls over certain prescribed 
business activities (e.g., activities pertaining to the transmittal of 
funds and securities from customer accounts, changes in customer 
address, and changes in customer investment objectives). Since Rule 401 
text currently refers back to requirements outlined in Rule 342.23, it 
makes sense to integrate the Rule 401 text into Rule 342.23 for 
purposes of easy reference and comprehension.
Rule 345 (Employees--Registration, Approval, Records) and its 
Interpretation
Adoption of ``Assistant Representative'' Registration Category
    The Exchange is proposing amendments to Rule 345(a) and its 
Interpretation to adopt ``assistant

[[Page 42198]]

representative'' as a registration category and to recognize the Series 
11 as its prerequisite qualification examination.\13\ This is being 
done to establish a registration category that would allow for the 
performance of functions not permitted to be performed by a non-
registered sales assistant without requiring full Series 7 
registration. Specifically, as defined in proposed Rule 345.10, a 
person registered as an ``assistant representative'' would be a member 
organization employee who could accept unsolicited orders for execution 
by the member organization. An assistant representative would not be 
permitted to solicit transactions or new accounts on behalf of the 
member organization, render investment advice, make recommendations to 
customers regarding the appropriateness of securities transaction, or 
effect transactions in securities markets on behalf of the member 
organization.
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    \13\ The Commission notes that NASD currently has a similar rule 
that governs Assistant Representatives. See NASD Rules 1041 
(Registration Requirements for Assistant Representatives) and 1042 
(Restrictions for Assistant Representatives).
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    Further, persons registered in this category may not be registered 
concurrently in any other category. Member organizations may only 
compensate assistant representatives on an hourly wage and may not 
directly or indirectly relate their compensation to the number or size 
of customer transactions effected. This provision would also prohibit 
assistant representatives from receiving bonuses or other like 
compensation related to a member organization's transaction-based 
activity.
Elimination of Prescribed Training Periods for Certain Registered 
Persons
    NYSE Rule 345 currently prohibits member organization employees 
from performing the functions of a registered representative unless 
such employee is registered, qualified and meets a designated four-
month training period.\14\
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    \14\ See Rule 345(a) and Supplementary Material section 
.15(b)(2).
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    Further, the Interpretation\15\ of Rule 345 currently provides that 
exam-qualified ``registered representatives'' and ``registered options 
representatives'' will not receive Exchange approval to perform 
functions pursuant to such qualifications without first completing a 
four-month training period. NASD Rules do not require such training 
periods.
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    \15\ See Rule 345.15/2 (``Qualifications--Categories of 
Registration'') in the NYSE Interpretation Handbook.
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    In order to harmonize Rule 345 with the NASD regulatory structure, 
and to provide member organizations the flexibility to train their 
registered personnel in a manner appropriate to the duties they will be 
assuming, the Exchange is proposing amendments to Rule 345 and its 
Interpretation to eliminate the prescribed four-month training period 
for registered representatives and for registered options 
representatives. The proposed amendments would allow member 
organizations to make informed decisions as to the extent and duration 
of training for such registered persons before they are permitted to 
perform functions requiring registration.
    Similarly, the Exchange is also proposing the elimination of the 
currently required two-month training period for ``limited 
registration'' candidates.\16\
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    \16\ Limited registration candidates' activities are limited to 
the solicitation or handling of the sale or purchase of instruments 
such as investment company securities and variable contracts, 
insurance premium finding programs, direct participation programs 
and municipal securities. (See Rule 345.15/02 in the NYSE 
Interpretation Handbook).
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Rule 345(b)
    Rule 345(b) currently prohibits any natural person, other than a 
member or allied member, to assume the duties of an officer with the 
power to legally bind such member or member organization unless such 
member or member organization has filed an application with and 
received the approval of the Exchange. The Exchange proposes to delete 
Rule 345(b) in its entirety. Proposed amendments to Rule 416A (see 
below) would require member organizations to notify the Exchange of all 
principal executives (defined as the designated principal executive 
officers of a member organization pursuant to NYSE Rule 311(b)(5) or 
their functional equivalents). There would no longer be a requirement 
that the Exchange approve such persons (which is consistent with NASD's 
regulatory structure). New Rule 345(b) would clarify that no person 
shall undertake any active duties whose performance requires a 
qualification examination until such person has satisfactorily met such 
examination requirement. This is included, in part, to reaffirm the 
exam qualification requirements applicable to such control persons.\17\
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    \17\ See, for example, Rule 311 and its Interpretation.
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Training Requirement for Members and Substitute Members
    The Exchange is proposing new Rule 345(c) which would prohibit any 
person from becoming active on the Floor as a member or a substitute 
thereof unless such person has been sufficiently trained under the 
guidance of an experienced member for such period of time as may be 
necessary before being permitted to execute orders without supervision. 
This requirement is proposed to help ensure that persons who will be 
performing the duties of a member are sufficiently prepared to do so.
Adoption of ``Qualified Investor'' Standard
    The Interpretation of Rule 345 \18\ currently allows Floor members 
and Floor clerks who have successfully completed the Series 7A 
examination to conduct a public business limited to accepting orders 
from ``professional customers'' as that term is defined in the 
Interpretation. The Exchange is proposing substituting the more 
generally recognized ``qualified investor'' standard, as that term is 
defined under section 3(a)(54) \19\ of the Act.
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    \18\ See Rule 345.15/02 in the NYSE Interpretation Handbook.
    \19\ 15 U.S.C. 78c(a)(54).
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Clarification of Employee Background Check Requirements
    The Exchange is also proposing revised language \20\ that 
reorganizes and clarifies member organization requirements with respect 
to investigating the background of persons they contemplate employing.
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    \20\ See Rule 345.11 in the Supplementary Material.
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Rule 346 (Limitations--Employment and Association With Members and 
Member Organizations)
Rule 346(b) Inclusion of Rule 407 Materials Related to ``Private 
Securities Transactions''
    NYSE Rule 407 (Transactions--Employees of Members, Member 
Organizations and the Exchange) provides, in part, that no employee of 
a member organization shall establish or maintain a securities or 
commodities account or enter into a private securities transaction 
without the prior written consent of his or her member organization. 
The Exchange is proposing amendments to 346 to more logically 
reposition current Rule 407 requirements \21\ with respect to ``private 
securities transactions'' (e.g., interests in oil or gas ventures, real 
estate syndications, tax shelters, etc.) and to harmonize the standards 
applicable to such transactions with those of NASD

[[Page 42199]]

Rule 3040 (Private Securities Transaction of an Associated Person).
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    \21\ See Rule 407(b) and section .11 in the Supplementary 
Material.
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    Specifically, the Exchange proposes repositioning requirements 
pertaining to ``private securities transactions'' from Rule 407 to Rule 
346(b) since Rule 346 more directly addresses issues related to the 
outside activities of registered persons. Further, definitions of the 
terms ``private securities transactions'' and ``selling compensation'' 
are proposed that are substantially similar to the definitions found in 
corresponding NASD Rule 3040.\22\
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    \22\ See Rule proposed Rule 346 Supplementary Material sections 
.10, .11 and .12, respectively.
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Proposed Deletion of Rule 346(c)
    The Exchange proposes deleting Rule 346(c) which currently requires 
that prompt written notice be given to the Exchange ``whenever any 
member or member organization knows, or in the exercise of reasonable 
care should know, that any person, other than a member, allied member 
or employee, directly or indirectly, controls, is controlled by or is 
under common control with such member or member organization.'' This 
provision is redundant in light of the FORM BD requirement, pursuant to 
its question number 10, that each broker dealer disclose such control 
relationships. The proposed amendment would be consistent with the NASD 
regulatory structure which has no corresponding requirement.
Proposed Amendments to Rule 346(e), Rule 346(f) and 476A (Imposition of 
Fines for Minor Violation(s) of Rules)
    Rule 346(e) currently requires that persons who are assigned or 
delegated supervisory authority pursuant to Rule 342 must devote their 
entire time during business hours to their member organization, unless 
otherwise permitted by the Exchange. Over the past several years, the 
Exchange has had extensive experience reviewing and responding to 
approval requests pursuant to Rule 346(e) and has noted an increasing 
number of member organizations that have interrelated business 
arrangements with sister corporations active in various areas of the 
financial services industry. Also noted has been the corresponding 
increase in experience member organizations have gained in the 
allocation of supervisory responsibility when supervisory persons are 
assigned functions across corporate lines.
    Accordingly, the Exchange proposes amendments to Rule 346 that 
would eliminate the requirement of Exchange approval in order for 
supervisory persons to devote less than their entire time to the 
business of their member organization. In lieu thereof, the amended 
rule would require the prior written approval of the member 
organization, pursuant to the exercise of appropriate due diligence, 
for such arrangements. The amendments recognize that member 
organizations are best positioned to make such determinations.
    The proposed amendments \23\ would require the identification of 
any entity for which the supervisory person will be performing services 
during business hours and a description of such services. The member 
organization's written approval would be required to set forth the 
approximate amount of time the supervisory person is expected to devote 
to each entity, with particular attention paid to the approximate time 
expected for the person, based upon qualifications and experience, to 
be able to effectively discharge his or her supervisory 
responsibilities on behalf of the member organization. In addition, the 
amendments would require documentation that the member organization has 
made a good faith determination that the arrangement will not 
compromise the protection of investors or the public interest, 
compromise the supervisor's duties at the member organization, or give 
rise to a material conflict of interest. These provisions have been 
repositioned from Rule 346(e) to Rule 346(c).
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    \23\ See proposed Rule 346(c).
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    The nearest corresponding NASD requirement is found in NASD Rule 
3030 (Outside Business Activities of an Associated Person) which 
generally states that no registered associated person of a member shall 
be employed by, or accept compensation from, any other person as a 
result of any other business activity without providing prompt written 
notice to the member. This standard is similar to that currently 
outlined in NYSE Rule 346(b) which applies only to non-supervisory 
member organization employees. While this standard continues to be 
appropriate for non-supervisory persons, the Exchange believes that, 
given the responsibilities attendant to persons who have been delegated 
supervisory duties, a heightened standard of control such as that 
prescribed by the proposed amendments remains advisable.
    It is proposed that the Interpretation of Rule 346(e) be deleted 
since its application is specific to the regulatory standard being 
deleted, and would thus be rendered irrelevant upon approval of the 
proposed amendments to the Rule.
    Further, Rule 476A, which lists violations of Exchange rules that 
are subject to a fine not to exceed $5,000, includes Rule 346(e) as a 
``failure to obtain Exchange approval'' violation. Since the Exchange 
is proposing the elimination of the Exchange approval requirement under 
this provision (and since Rule 346, as amended, no longer contains a 
subsection (e), it is proposed that the reference to Rule 346(e) within 
Rule 476A be deleted as well.
Proposed Amendments to Rule 346(f)
    Rule 346(f) currently requires that, except as otherwise permitted 
by the Exchange, ``no member, allied member, approved person, employee 
or any person directly or indirectly controlling, controlled by or 
under common control with a member or member organization shall have 
associated with him or it any person who is known, or in the exercise 
of reasonable care should be known, to be subject to any `statutory 
disqualification.''' \24\ As written, this provision is overly broad in 
that its prohibitive reach ostensibly extends to persons not subject to 
the jurisdiction of the Exchange. Thus, amendments are proposed to Rule 
346(f) to reasonably clarify that its reach is limited to persons 
subject to the Exchange's jurisdiction. The amended language has also 
been repositioned as Rule 346(d). As violations of current Rule 346(f) 
are subject to Rule 476A, corresponding amendments to that rule that 
reflect this repositioning are proposed as well.
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    \24\ See Section 3(a) (39) of the Act for the definition of 
statutory disqualification.
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Rules 351 (Reporting Requirements) and 401A (Customer Complaints)
    NYSE Rule 351(d) requires each member organization to report to the 
Exchange statistical information regarding customer complaints relating 
to such matters as may be specified by the Exchange.\25\ Current 
Exchange policy requires that all complaints, including oral 
complaints, be reported pursuant to this provision.\26\
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    \25\ See NYSE Information Memo Nos. 06-28 (May 4, 2006), 05-29 
(April 22, 2005), 04-11 (March 9, 2004), 03-38 (September 19, 2003), 
03-36 (August 25, 2003), and 98-16 (April 14, 1998).
    \26\ See NYSE Information Memo No. 03-38 dated September 19, 
2003.
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    Amendments to Rule 351(d) are proposed that would limit reportable 
complaints to those that are ``written,'' consistent with NASD Rule 
3070(c). Furthermore, proposed new NYSE Rule 351.15 limits the 
definition of the term ``customer complaint'' to written statements of 
a customer, or any person acting on behalf of a customer, other than a 
broker or dealer, alleging a

[[Page 42200]]

grievance involving the activities of those persons under the control 
of a member organization.
    NYSE Rule 401A currently requires that member organizations 
acknowledge and respond to all complaints subject to the reporting 
requirements of Rule 351(d). As noted above, the Exchange is proposing 
to limit Rule 351(d) reportable complaints to those that are written. 
However, the Exchange believes that both written and oral complaints 
should be acknowledged and responded to pursuant to Rule 401A. Thus, it 
is proposed that the Rule 401A reference to Rule 351(d) be deleted to 
clarify that verbal complaints remain within the scope of Rule 401A. 
Note that Rule 401A requires member organizations to maintain written 
records of such acknowledgements, responses and other prescribed 
complaint-related follow-up activities, and further requires that such 
records be retained in accordance with NYSE Rule 440 (Books and 
Records).
Rule 352 (Guarantees, Sharing in Accounts, and Loan Arrangements)
    Rule 352 restricts the extent to which member organization 
personnel may share in customer account profits or losses. Rule 352(b) 
generally prohibits member organizations, allied members and registered 
representatives from sharing profits or losses in any customer account. 
However, Rule 352(c) permits such sharing in proportion to financial 
contributions made to a joint account.
Rule 352(c)
    The Exchange proposes to amend Rule 352(c) to exempt from the 
proportional contribution requirement joint accounts with immediate 
family members held by principal executives or registered 
representatives of a member organization. This amendment would avoid 
intrusive regulation into accounts that may naturally entail profit and 
loss participation on a disproportionate basis, as with joint accounts 
between husband and wife, while retaining coverage of the rule for 
other accounts. Similarly, NASD Rule 2330(f)(1)(A) generally permits an 
NASD member or a person associated with an NASD member to share in 
profits and losses with a customer, provided such sharing is 
proportionate to the financial contributions of each account holder 
while NASD Rule 2330(f)(1)(B) exempts from this proportionality 
requirement accounts shared between an associated person and a customer 
who is an immediate family member of such associated person.
    The amendments make clear that any sharing arrangement entered into 
pursuant to Rule 352(c) is subject to the Rule 352(a) provision that no 
member organization shall guarantee or in any way represent that it 
will guarantee any customer against loss in any account or on any 
transaction; and no employee of such member organization shall 
guarantee or in any way represent that either he or she, or his or her 
employer, will guarantee any customer against loss in any customer 
account or on any customer transaction.
    The amendments define the term ``immediate family'' in Rule 352(c) 
to include parents, mother-in-law or father-in-law, husband or wife, 
children or any relative to whose support the principal executive or 
registered representative contributes directly or indirectly. This 
definition harmonizes with the standard under NASD Rule 2330(f)(1)(B). 
The existing definition of ``immediate family'' in Rule 352(g) is 
retained for other provisions in the Rule, essentially allowing persons 
acting in the capacity of a registered representative or principal 
executives to lend to or borrow from a more extensive range of family 
members. Accordingly, it is proposed that Rule 352(g) be amended to 
confirm that its provisions are not applicable to Rule 352(c). The 
broader Rule 352(g) standard is also consistent with the corresponding 
NASD standard.\27\
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    \27\ See subsection (c) of NASD Rule 2370 (Borrowing From or 
Lending to Customers).
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Rule 352(d)
    The Exchange is also proposing non-substantive amendments to Rule 
352(d) that streamline the reference to the exemption from the rule's 
general prohibition against sharing in profits. Specifically the 
revised provision would read that, notwithstanding the general 
prohibition against sharing in profits under paragraph (b), a person 
acting as an investment adviser (whether or not registered as such) may 
receive compensation based on a share of profits or gains in an account 
if all of the conditions in Rule 205-3 of the Investment Advisers act 
of 1940 (as may be amended from time to time) are satisfied. The 
provision retains its notice that all advisory compensation 
arrangements should be reviewed by member organizations and their 
counsel in light of applicable State and Federal law (e.g., ERISA).
Rule 353 (Rebates and Compensation)
    First proposed in 1978 and adopted in 1979,\28\ Rule 353(a) enacted 
into Exchange regulations anti-rebate provisions which had previously 
been contained in the Registered Representative Agreement.\29\ In 
pertinent part, the Rule provides:

    \28\ See Securities Exchange Act Release No. 15811 (May 11, 
1979).
    \29\ See NYSE Information Memo 79-42 (July 16, 1979).

    No member, allied member, registered representative or officer 
shall, directly or indirectly, rebate to any person, firm, or 
corporation, any part of the compensation he receives for the 
solicitation of orders for the purchase or sale of securities or 
other similar instruments for the accounts of customers of his 
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member organization employer * * *

    The Rule has for some time been consistently interpreted by the 
Exchange to prohibit rebate arrangements directly between natural 
persons (without the knowledge or involvement of the broker dealers 
carrying such persons' registration) but not to prohibit arrangements 
when payments are made broker dealer to broker dealer and remitted to 
duly registered individuals. The Exchange has, upon request, provided 
``good business practice'' safeguards regarding how to best structure 
such arrangements pursuant to Rule 353.
    Amendments to the Rule are proposed that would incorporate those 
safeguards and clarify relevant regulatory requirements applicable to 
these arrangements. The amendments would also re-title the rule from 
``Rebates and Compensation'' to ``Rebates and Commission Sharing 
Arrangements'' to better reflect the focus of the amended text. NASD 
has no analogue to Rule 353.\30\
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    \30\ NASD Rule 2420 (Dealing with Non-Members) states that no 
member may deal with a non-member unless at the same prices, for the 
same commissions or fees, and on the same terms and conditions as 
are by such member accorded to the general public. NASD IM-2420-2 
(Continuing Commissions Policy) states that continuing commissions 
are permitted so long as the person receiving them is registered 
with the NASD.
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    Proposed amendments to Rule 353(a) would reaffirm that the rule 
prohibits rebate arrangements ``directly'' to natural persons. 
Specifically, the revised text states that ``[n]o employee of any 
member organization shall, directly remit to or receive from any 
person, firm, or corporation, any part of the compensation received for 
effecting transactions in securities or other similar instruments for a 
customer account, or directly pay or receive such compensation, or any 
part thereof, as a bonus, commission, fee or other consideration for 
business sought or procured for the employee or for any member 
organization of the Exchange.''
    Proposed Rule 353(b) would clarify that registered employees of 
member organizations may participate in the remittance or receipt of 
such

[[Page 42201]]

compensation pursuant to an agreement which provides that:
    (1) All remittances or payments to or from the registered employee 
are made pursuant an arrangement between the member organization and 
another registered broker-dealer;
    (2) the terms of the payment arrangement are memorialized in a 
written agreement signed by authorized officers of both broker dealers;
    (3) all such remittances or payments are duly recorded on the 
respective organizations' books and records; and
    (4) affected customers receive prior, specific, plain language 
written disclosure of the payment arrangement. (Such disclosure must 
provide payment parameters and methods; mere ``boiler plate'' 
disclosure would not satisfy the provisions of this subsection).
    These provisions are intended to prevent improper payment 
arrangements between individuals that are under the broker dealers' 
``regulatory radar.'' They are further meant to assure that sharing in 
commission-based income is limited to registered persons, as well as to 
assure the transparency of such arrangements not only to the broker 
dealers but also to affected customers.
    Proposed Rule 353.10 distinguishes other permissible arrangements 
that could be interpreted as types of commission sharing. Specifically 
noted are payments made pursuant to a carrying agreement under Rule 
382, since such agreements: May involve netting of commissions by the 
carrying firm; are by definition limited to broker-dealers; are made 
under an arrangement disclosed to the customers; and are in writing. 
Also included is a reference to Section 28(e) of the Act which provides 
a safe harbor that protects money managers from liability for breach of 
fiduciary duty solely on the basis that they paid more than the lowest 
commission rate in order to receive brokerage and research services 
provided by a broker-dealer if a manager determines in good faith that 
the amount of commissions was reasonable in relation to the brokerage 
and research services received.
    Proposed Rule 353.10 also makes clear that any commission-sharing 
arrangements established pursuant to Rule 353 must comply with all 
other applicable SRO rules and federal regulations and may not 
otherwise compromise services to affected customers (e.g., with respect 
to ``best execution'' obligations).
Rule 388 (Prohibition Against Fixed Rates of Commission)
    Rule 388 currently states that the Exchange does not require its 
members to charge fixed or minimum rates of commission, and provides 
that nothing in the Rules of the Exchange shall be construed as 
authorizing the charging of fixed rates.
    The Exchange adopted Rule 388 on April 3, 1975 in response to Rule 
19b-3 \31\ of the Act and in conjunction with the Securities Acts 
Amendments of 1975,\32\ which moved the securities industry toward 
fully negotiated commission rates. The Commission rescinded Rule 19b-3 
in 1988 upon the enactment of Section 6(e)(1) \33\ of the Act which 
specifically prohibited exchanges from imposing fixed rates of 
commissions. Since the purpose of Rule 388 has been achieved by Section 
6(e)(1), it has been rendered redundant and serves no practical 
purpose. Accordingly, it is proposed that it be rescinded. The NASD has 
no comparable rule.
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    \31\ 17 CFR 240.19b-3.
    \32\ Elements of the SEC rule were enacted in amendments to the 
Act at Section 6(e)(1).
    \33\ 15 U.S.C. 78f(e)(1).
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Rule 401 (Business Conduct) \34\
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    \34\ See also discussion under ``Rule 342'' above of the 
repositioning of Rule 401(b) text into Rule 342.23.
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    Rule 401 states, in part, that each member organizations shall at 
all times adhere to the principles of good business practice in the 
conduct of its business affairs. The Exchange is proposing to add 
supplementary material to Rule 401 \35\ that would codify the 
understanding that principles of good business conduct extend to 
compliance with all regulatory provisions to which a member 
organization is subject (including applicable provisions of federal 
securities law, the rules and regulations of any SRO of which a member 
organization is a member, state securities law, ERISA, etc.). This 
would clarify that the principles of good business practice required by 
Rule 401 extend, for example, to the product-specific provisions of 
NASD Rule 2210 (Communications with the Public) and its interpretive 
material \36\ which are not specifically addressed in corresponding 
NYSE Rule 472 (Communications with the Public) as well as to NASD Rule 
2440 (Fair Prices and Commissions) and NASD IM-2440 (Mark-up Policy).
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    \35\ See proposed Rule 401.10.
    \36\ For example, unlike NYSE Rule 472 and its interpretation, 
NASD IM-2210-2 addresses ``communication with the public'' issues 
specific to Variable Life Insurance and Variable Annuities. 
Likewise, NASD IM-2210-8 addresses communications issues specific to 
Collateralized Mortgage Obligations.
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Rule 407 (Transactions--Employees of Members, Member Organizations and 
the Exchange)
    The proposed amendments to Rule 407 are discussed above in the 
context of the ``Rule 346'' amendments.
Rule 408 (Discretionary Power in Customers'' Accounts)
    NYSE Rule 408 provides, in part, that no employee of a member 
organization shall exercise discretionary power in any customer's 
account or accept orders for an account other than the customer without 
first obtaining written authorization of the customer. The Exchange is 
proposing amendments to Rule 408(a) that would require member 
organizations to obtain the signature of any person or persons 
authorized to exercise discretion in such accounts, of any substitute 
so authorized, and the date such discretionary authority was granted. 
The proposed amendment would conform Rule 408(a) to corresponding 
requirements in NASD Rule 3110(c) and would promote better member 
organization controls to ensure that exercise of discretionary power 
over accounts is properly authorized.
    Rule 408(c) prohibits effecting purchases or sales which are 
excessive in size or frequency in view of the financial resources of 
such customer. It is proposed that Rule 408(c) be amended to harmonize 
it with NASD 2510(a) which prohibits transactions that are excessive in 
size or frequency in light of the ``financial resources and character'' 
of the account. Specifically, the Exchange proposes amending Rule 
408(c) to take into consideration the ``character'' of an account by 
requiring consideration of the customer's ``account history, investment 
objectives and age.''
    In addition, The Exchange proposes amendments to Rules 408(d) and 
408.11 that would delete the term, ``institutional account'' and 
replace it with the term, ``qualified investors'' as the latter is a 
readily identifiable standard under the federal securities laws.
Rules 409A (SIPC Disclosures) and 436 (Interest on Credit Balances)
    The Exchange is proposing the deletion of Rule 436 and its 
Interpretation and the repositioning of their substance into Rule 409A. 
The purpose is to both clarify the intent of Rule 436 and place the 
revised text in a more suitable context.
    Rule 409A currently provides, in part, that member organizations 
must advise

[[Page 42202]]

each customer in writing, upon the opening of an account and at least 
annually thereafter, that they may obtain information about the 
Securities Investor Protection Corporation (SIPC), including the SIPC 
Brochure, by contacting SIPC, and shall provide the Web site address 
and telephone number of SIPC. The proposed amendments to Rule 409A 
would add that member organization account statements must contain a 
disclosure to the effect that free credit balances not maintained for 
purposes of reinvestment in securities will be ineligible for SIPC 
coverage.
    The purpose of consolidating Rule 436 and its Interpretation into 
Rule 409A is to position all of our provisions relating to SIPC and its 
consequences for customers in one rule for easier application and more 
logical placement. During the course of our rule review, we have 
attempted to align kindred and related rules into a more coherent 
structure. Rule 436, as it presently exists, was created to implement 
certain aspects of the Banking Act of 1933 (generally referred to as 
the Glass Stiegel Act). Specifically, Rule 436 and its Interpretation 
436/01 provide that no member organization, unless subject to 
supervision by State banking authorities, shall pay interest on any 
credit balance created for the purpose of receiving interest thereon, 
however, interest may be paid on ``free'' credit balances left with a 
member organization for the purpose of reinvestment or temporarily 
being held awaiting investment. Accordingly, the Interpretation 
provides that member organizations should devise a method for 
determining whether the credit balance is left for investment or 
reinvestment purposes to ensure that such funds are fully protected by 
SIPC. Rule 436 has been interpreted to mean that free credit balances 
are to be used for reinvestment purposes, which falls fore square to 
the proposed change in Rule 409A(2) regarding SIPC not covering 
balances that are not being used for reinvestment purposes.
Rule 412 (Customer Account Transfer Contracts)
Background
    NYSE Rule 412 regulates the process by which member organizations 
transfer customer accounts through the Automated Customer Account 
Transfer Service (``ACATS'').\37\ NYSE Rule 412 generally requires 
that, in order for a customer's account to be transferred to another 
firm through ACATS, the customer must formally initiate the transfer 
process by providing ``authorized notice'' to the receiving 
organization. In the context of Rule 412, authorized notice means the 
customer's signature on a transfer initiation form (i.e., a signed 
``TIF''). However, in certain circumstances (notably, bulk transfers) 
obtaining a signed TIF from each and every customer may not be 
practicable. Thus, Rule 412(f) permits member organizations to seek an 
exemption from the authorized notice requirement and to effect bulk 
transfers using ``negative consent letter'' notice to affected 
customers in lieu of individually executed TIFs. Currently, such 
exemptions are granted by the Exchange on a case-by-case basis.
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    \37\ ACATS is an automated system, administered by the National 
Securities Clearing Corporation (``NSCC'') that standardizes the 
transfer of customer accounts from one broker dealer to another. See 
also NYSE Information Memo No. 04-20 (April 8, 2004).
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Proposed Amendments
    Amendments to NYSE Rule 412(f) are proposed that would allow member 
organizations to effect a bulk transfer of customer accounts through 
the use of negative consent letters without first obtaining approval 
from the NYSE. The standards the Exchange proposes to codify and apply 
to this process are the same as those currently applied by the Exchange 
pursuant to its case-by-case review procedures and are essentially 
consistent with the NASD's regulatory guidance in this area.\38\ The 
Exchange believes that codification of bulk transfer standards will 
better enable membership to standardize and coordinate their bulk 
transfer procedures. Exchange staff will, of course, remain available 
to provide interpretive guidance and practical advice when needed.
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    \38\ See NASD Notice to Members 02-57 (Bulk Transfer of Customer 
Accounts).
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    In order for a member organization to qualify for the proposed 
``bulk transfer'' exemption, two sets of standards must be met. First, 
the transfer in question must involve a large enough number of accounts 
such that it would be impracticable to obtain each customer's 
authorized notice as otherwise required by NYSE Rule 412(a). In 
addition, the circumstances necessitating the transfer must be an 
extraordinary, firm-driven corporate event outside the delivering \39\ 
firm's ordinary course of business (e.g., a merger, the sale of a 
branch office or business division from one firm to another, an 
introducing firm moving their business to a new clearing firm, etc.).
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    \39\ In the context of Rule 412(f), the term ``delivering firm'' 
refers to the broker-dealer with which the customer has a direct 
business relationship (i.e., the ``introducing'' or 
``correspondent'' firm if the delivering firm is not self-clearing.) 
Likewise, in the context of Rule 412(f), the term ``receiving firm'' 
refers to the ``introducing'' or ``correspondent'' firm (or self-
clearing firm) on the receiving end of the transfer.
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    Second, the delivering firm would be required to provide affected 
customers with notice regarding the prospective bulk transfer through 
the use of a negative consent letter.\40\ The proposed amendments set 
forth the disclosure requirements to be contained in such letters. 
Specifically, an acceptable negative consent letter would be required 
to include: A synopsis of the circumstances necessitating the transfer 
(a merger, the sale of a branch office from one firm to another, an 
introducing firm moving their business to a new clearing firm, etc.); 
notification of the customer's right to opt out of the transfer; 
sufficient notice (generally, a minimum of 30 calendar days) for 
customers to opt out of the transfer; disclosure of any previously 
established fees associated with the transfer; information explaining 
the manner in which the customer can effect a transfer to another 
broker-dealer, if the customer so chooses; and a statement regarding 
the compliance of both the delivering and receiving firm with SEC 
Regulation S-P.\41\
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    \40\ The rationale behind requiring that the negative consent 
letter be sent by the delivering firm is that it is the organization 
that the customers ``know'' (i.e., the firm most prominently 
featured on the customers'' statements and with whose personnel 
(e.g., their registered representative) they generally interact. The 
presumption is that customers are more likely to open mail from a 
firm they know rather than from a firm with which the customer has 
no business relationship (the ``receiving firm''), in which case the 
mail might be disregarded as an advertisement or solicitation.
    \41\ See Securities Exchange Act Release No. 42974 (June 22, 
2000), 65 FR 40334 (June 29, 2000) (``Privacy of Consumer Financial 
Information'').
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    The proposed amendments would also require that both the delivering 
and the receiving firms agree in writing to any bulk transfer pursuant 
to Rule 412(f). This is to ensure that the proposed provisions are not 
used, for example, by a registered representative who is moving to 
another firm to take his customers with him via bulk transfer without 
the knowledge or consent of the delivering firm. Absent the explicit 
approval of both firms, any transfer of customer accounts under such 
circumstances must be effected pursuant to each customer's authorized 
notice and would be fully subject to the provisions of Rule 412. As 
noted above, only extraordinary, firm-driven corporate events outside 
the delivering firm's ordinary course of business can serve as the 
basis for a Rule 412(f) exemption. The proposed amendments would 
preclude member organizations from transferring customer accounts

[[Page 42203]]

pursuant to Rule 412(f) at the behest of individual brokers who have 
been terminated or who have resigned from the firm. Any such customer 
account transfer would require the affirmative consent of each customer 
pursuant to a duly executed TIF and would be fully subject to Rule 412 
and its Interpretation.\42\
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    \42\ See proposed Rule 412.40.
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Rule 416A (Member and Member Organization Profile Information Updates 
and Quarterly Certifications Via the Electronic Filing Platform
    Rule 416A requires member organizations to establish and regularly 
maintain firm profile information via the Exchange's Electronic Filing 
Platform (``EFP''). It further requires member organizations to comply 
with any Exchange request for such information. Information is recorded 
on an EFP template.
    In light of the proposed elimination of the ``allied member'' 
designation, the Exchange proposes amending Rule 416A to create a new 
reporting designation to be known as ``principal executives'' which 
would capture each member organization's control persons. The proposed 
\43\ designation would be defined to include persons designated by a 
member organization as a ``principal executive officer,'' as such terms 
is defined in subsection (b)(5) of NYSE Rule 311 (Formation and 
Approval of Member Organizations), or their functional equivalents. 
Thus, the ``principal executives'' designation would encompass each 
Chief Executive Officer, Chief Financial Officer, Chief Operations 
Officer, Chief Compliance Officer, Chief Legal Officer, or any person 
assigned comparable functions or responsibilities (e.g., a person in a 
Limited Liability Company with principal executive responsibilities but 
with other than a principal executive title).
---------------------------------------------------------------------------

    \43\ See proposed .10 of the rule's ``Supplementary Material.''
---------------------------------------------------------------------------

    The proposed amendments would essentially codify existing Exchange 
EFP reporting requirements \44\ with respect to these key personnel 
contacts, which are also required to be reported via FORM BD.\45\ A key 
benefit of reporting these key contact persons to the Exchange as well 
as on FORM BD is that the EFP system has interactive functionalities 
that allow the Exchange to specifically target one or more contact 
persons to receive ``e-mail blasts'' with time-sensitive instructions 
or regulatory information. The proposed rule would also allow for 
requiring the designation of other categories of persons as otherwise 
directed by the Exchange.
---------------------------------------------------------------------------

    \44\ See NYSE Information Memo No. 01-11, dated June 19, 2001.
    \45\ See item 2(a) in Schedule A of FORM BD (Direct Owners and 
Executive Officers).
---------------------------------------------------------------------------

    Unlike the ``allied member'' designation, there would be no exam 
qualification requirement particular to the ``principal executive'' 
designation per se (see also the deletion of ``allied member'' 
examination requirement from Rule 304A) though, of course, each 
principal executive would be required to take and pass any 
qualification examinations necessary to perform their assigned 
functions.
Rule 445 (Anti-Money Laundering Compliance Program)
Background
    NYSE Rule 445 requires each member organization to develop and 
implement an anti-money laundering (``AML'') program consistent with 
ongoing obligations under the Bank Secrecy Act.\46\ The prescribed AML 
program obligations include the development of internal policies, 
procedures and controls; the designation of a person or persons to 
implement and monitor the day-to-day operations and internal controls 
of the program (commonly referred to as the ``AML Officer''); ongoing 
training for appropriate persons; and an independent testing function 
for overall compliance.
---------------------------------------------------------------------------

    \46\ 31 U.S.C. 5311 et seq.
---------------------------------------------------------------------------

    The Exchange is proposing amendments to NYSE Rule 445 to clarify 
the term ``prompt notice'' and to harmonize other aspects of its AML 
program requirements with those prescribed by NASD.\47\
---------------------------------------------------------------------------

    \47\ See NASD Rules 3011, IM-3011-2 and IM-3011-2.
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Proposed Amendments
Prompt Notice
    In addition to requiring that each member organization designate a 
person or persons to implement and monitor the day-to-day operations 
and internal controls of its AML compliance program, NYSE Rule 445(4) 
further requires that ``prompt notice'' be given to the Exchange 
regarding any change in such designation. The Exchange proposes 
amending NYSE Rule 445(4) to clarify that the term ``prompt notice'' 
means not later than 30 days following any change in such information, 
consistent with the requirements prescribed under NYSE Rule 
416A(b).\48\ NASD IM-3011-2 (``Review of Anti-Money Laundering 
Compliance Person Information'') requires that the updating of such 
designation be within ``17 business days after the end of each calendar 
quarter. * * *'' The Exchange believes that the more stringent 
requirement herein proposed is reasonable and will provide more current 
information regarding AML contact persons.
---------------------------------------------------------------------------

    \48\ See section (b) of NYSE Rule 416A (``Member and Member 
Organization Profile Information Updates and Quarterly 
Certifications Via the Electronic Filing Platform''), which requires 
member organizations to update their required membership profile 
information promptly, but in any event not later than thirty days 
following any change in such information.
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Prior Written Approval
    The Exchange proposes deleting the first sentence of NYSE Rule 
445(4)(C), which sets forth a ``prior written approval requirement'' 
for member organizations in instances where the designated person under 
Rule 445(4) is employed not by the member organization, but by an 
affiliate of the member organization.\49\ NASD Rules do not have a 
comparable approval requirement.\50\ Similarly, the Exchange proposes 
deletion of Rule 445.30, as this section, which provides an exemption 
to the approval requirement, would be rendered irrelevant.
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    \49\ See NYSE Rule 445(4) (B), which provides that a person may 
be designated under 445(4) when the person is employed by an entity 
that directly or indirectly controls, or is controlled by, or is 
under common control with the member organization.
    \50\ See also NASD IM-3011-2. See also NASD Notice to Members 
06-07.
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Independent Testing
    NYSE Rule 445.20 sets forth three categories of persons who are 
currently deemed insufficiently independent to conduct the required 
testing requirement pursuant to NYSE Rule 445(3). Specifically, the 
Rule prohibits such testing from being conducted by (1) A person who 
performs the functions being tested, or (2) the designated AML 
compliance officer, or (3) a person who reports to either the person 
performing the functions being tested or the AML compliance officer.
    The Exchange proposes to amend NYSE Rule 445.20 to harmonize it 
with corresponding NASD IM 3011-1 \51\ by adding an exception which 
would allow a person categorized in subsections (1) or (2) to conduct 
the testing when four conditions are satisfied. First, the member 
organization must have no other qualified internal personnel to conduct 
the testing. Second, the member organization must establish written 
policies and procedures to address conflicts that may arise from 
allowing the testing to be conducted by a person who reports to the 
person(s) whose activities are the subject of the

[[Page 42204]]

testing. Third, the person who conducts the testing must, to the extent 
possible, report the test results to a person at the member 
organization who is senior to the person described in Rule subsections 
(1) and (2). If the person does not report the results consistent with 
this provision, the member organization must document a reasonable 
explanation for not doing so. Fourth, the member organization must 
document its rationale, which is required to be reasonable, for 
determining that it has no alternative than reliance on these 
conditions to comply with the testing requirement.
---------------------------------------------------------------------------

    \51\ See also NASD Notice to Members 06-07.
---------------------------------------------------------------------------

    This exception to the general ``independent testing'' standard is 
proposed to allow small firms the flexibility to use appropriate 
internal personnel to conduct the testing required by Rule 445, while 
requiring that controls be in place to retain the effectiveness of the 
testing process.
Category 2 (``Financial/Operational Rules'')
Background
    In order to address certain Financial/Operational Rules not 
encompassed by the CAG subcommittee review process, the Exchange 
organized an in-house Financial/Operations Rule Committee and enlisted 
the participation of volunteers from SIFMA's Capital, Operations and 
Clearing Firms Committees and the NASD.
Proposed Amendments
Rule 325 (Capital Requirements for Member Organizations)
Restructuring of the Rule
    NYSE Rule 325 requires member organizations subject to Rule 15c3-1 
\52\ under the Act to comply with the capital requirements prescribed 
therein and with the additional net capital requirements established by 
the NYSE. The Exchange is proposing to restructure the text of Rule 325 
into two separate sections: General Provisions \53\ and Notification 
Provisions.\54\ This non-substantive change will separate the net 
capital notification requirements contained in current Rule 325(b)(1) 
and (b)(2) from the other provisions of Rule 325.
---------------------------------------------------------------------------

    \52\ 17 CFR 240.15c3-1.
    \53\ See proposed Rule 325(a), (b) and (c).
    \54\ See proposed Rule 325(e).
---------------------------------------------------------------------------

Rule 325(c)
    NYSE Rule 325(c)(1) currently provides that a long put option or a 
long call option, which is not an obligation of a clearing agency or 
has not been endorsed or guaranteed by a member organization, has no 
net capital value under any provision of Rule 325. The Exchange is 
proposing to rescind this provision because the substance of this 
requirement is covered in Rule 15c3-1 under the Act.
    Subsection (c)(2) of current Rule 325 provides for net capital 
requirements on certain proprietary day trading positions subject to a 
special margin requirement. The Exchange is proposing to rescind Rule 
325(c)(2). This provision is no longer necessary because the SEC's 
capital rule requires firms to be in compliance on a moment to moment 
basis.
    Additionally, the Exchange is proposing to adopt, as new Rule 
325(c), a provision from NASD Rule 3130(e) which will require a member 
organization to suspend all business operations during any period of 
time during which the member organization is not in compliance with 
applicable net capital requirements as set forth in Rule 15c3-1 under 
the Act.
Rule 326 (Growth Capital Requirement, Business Reduction Capital 
Requirement, Unsecured Loans and Advances)
    NYSE Rule 326(a) currently sets forth the conditions that trigger 
restrictions on business growth for member organizations. NYSE Rule 
326(b) requires reduction of business by member organizations if 
certain conditions exist, as prescribed by the rule. The Exchange is 
proposing to expand the application of Rule 326(a) and (b) to apply to 
all broker-dealers, not just those which carry customer accounts. 
However, the proposed amendments clarify that non-carrying firms will 
not be subject to the automatic and self operative Rule 326(a) and (b), 
unless specifically directed by the Exchange.
    The Exchange is also proposing to amend Rule 326(a)(1) and (b)(1). 
The current provisions require a condition triggering a growth 
restriction or business reduction to be known to the Exchange for five 
consecutive business days. The five day period is intended to provide 
breathing room so that these conditions can be corrected. The proposed 
amendments to Rule 326(a)(1) and (b)(1) provide that the condition must 
be known to either the member organization or the Exchange for five 
consecutive business days. The Exchange is proposing this change so 
that there is no benefit in not advising the Exchange about these 
conditions.
    NYSE Rule 326(a)(2) provides for restrictions on the growth of a 
member organization's business at the discretion of the Exchange, much 
as subsection (b)(2) of Rule 326 allows for the mandated reduction in 
business at the discretion of the Exchange. Amendments to these 
provisions are proposed to clarify that the Exchange may exercise its 
discretion with respect to financial or operational conditions relating 
to a member organization's business.
    Further, the proposed new Rule 326(a)(3) clarifies that ``expansion 
of business'' may include: Net increase in the number of registered 
representatives or other producing personnel; exceeding average 
commitments over the previous three months for market making or block 
positioning; initiation of market making in new securities or any new 
firm trading or other commitment in securities or commodities in which 
a market is not made (other than riskless trades associated with 
customer orders); exceeding average commitments over the previous three 
months for underwritings; opening of new branch offices; entering into 
any new line of business or deliberately promoting or expanding any 
present lines of business; making unsecured or partially secured loans, 
advances, drawings, guarantees or other similar receivables; and such 
other measures as the Exchange deems appropriate under the 
circumstances in the public interest or for the protection of investors 
and member organizations.
    The Exchange proposes to reposition the provisions in current Rule 
326.10 which define ``expansion of business'' into subsection (a)(3) of 
Rule 326. In addition, the Exchange is proposing to reposition the 
provisions of current Rule 326.11, which define ``Business Reduction,'' 
into subsection (b)(3) of the rule. The Exchange is also proposing to 
add certain conditions contained in NASD IM-3130(e) into new subsection 
(b)(3) to harmonize the SROs' examples of business reductions by member 
organizations. The additions include: Promptly paying all free credit 
balances to customers; promptly effecting delivery to customers of all 
fully-paid securities in the member's possession or control; accepting 
no new customer accounts; restricting the payment of salaries or other 
sums to partners, officers, directors, shareholders, or associated 
persons of the member; and accepting unsolicited customer orders only.
    Current NYSE Rule 326(c) restricts all member organizations from 
making unsecured loans or advances to certain individuals or entities 
associated with the member organization when certain conditions are 
met. Current Rule 326(d) requires all member organizations to recall 
unsecured loans or advances when certain business reduction criteria

[[Page 42205]]

are met. The Exchange is proposing to reposition the requirements in 
current Rule 326(c) and (d) regarding unsecured loans and advances in 
subsections (a)(3) and (b)(3), as part of the enumeration of examples 
of ``expansion of business'' and ``business reduction,'' and to afford 
their application to all such loans regardless of counterparties.
    Current NYSE Rule 326.12 imposes an automatic restriction on member 
organizations that introduce accounts on a fully disclosed basis to, or 
clear on an omnibus basis through, a restricted member organization. 
The Exchange is proposing to reposition Rule 326.12 into 326.10 in 
light of other proposed amendments to the rule and to amend this 
provision so that the restrictions will not flow automatically to the 
introducing firm when its clearing firm is restricted. The proposed 
rule provides that the Exchange may apply this requirement at its 
discretion.
    NYSE Rule 326.13 currently allows member organizations to enter 
into subordination agreements, which are not allowable as good capital 
under NYSE Rule 325, to increase the member organization's total 
subordinated liabilities and capital available, and for the protection 
of customers. The Exchange is proposing to rescind .13 inasmuch as 
recourse to non-allowable capital has not been utilized.
    The Exchange is proposing to add new Rule 326.11 that illustrates 
conditions under which the Exchange may exercise its discretion to 
reduce or limit a member organization's business. These conditions are 
contained in NASD IM-3130(e) and include situations such as non-current 
and/or inaccurate books and records, lack of full compliance with Rule 
15c3-3 \55\ under the Act and the inability to promptly clear and 
settle transactions.
---------------------------------------------------------------------------

    \55\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

    Lastly, the Exchange is proposing to change the title of Rule 326 
to ``Business Growth Restrictions and Business Reduction Requirements'' 
and to make certain changes to the subheadings within the Rule.
Rule 382 (Carrying Agreements)
    NYSE Rule 382 governs Exchange requirements for carrying agreements 
and provides for the contractual allocation of key functions involved 
in the opening and operation of customer accounts and the settlement 
and clearance of transactions in such accounts.
    The Exchange is proposing to amend subsection (a) to provide that 
standardized forms of agreements between member organizations and 
introducing firms that are registered broker-dealers, which have been 
previously approved by the Exchange, need not be submitted to the 
Exchange for approval.
    Additionally, the Exchange is proposing to amend Rule 382(a) to 
provide that carrying arrangements previously approved by another SRO 
with a comparable rule to NYSE Rule 382, e.g., NASD Rule 3230, will not 
require submission to and approval by the Exchange.
    The Exchange is proposing amendments to Rule 382(b) to address 
third party piggy-back arrangements by requiring that carrying 
agreements for accounts held on a fully disclosed basis specifically 
identify and allocate respective functions and responsibilities of each 
introducing and carrying organization that is directly or indirectly a 
party to such agreements.
    Amendments to Rule 382(b) are proposed that will clearly delineate 
which functions and responsibilities must be allocated to the carrying 
organization and will require that the carrying agreements so state.
    Amendments to Rule 382(b) are also proposed to state that the 
carrying agreement may provide that the opening and approval of 
accounts in a manner consistent with NYSE Rule 405, the maintenance of 
books and records in a manner consistent with Rules 17a-3 and 17a-4 
under the Act and the transmission of orders to the carrying 
organization for execution may be allocated to an introducing 
organization, which is other than a registered broker or dealer. Such 
amendments would, in recognition of present industry practice, permit 
entities which are other than registered brokers or dealers, as the 
introducing party which directly interfaces with the customer, to 
undertake the mechanical aspects of order transmission and the 
ministerial aspects of bookkeeping and of opening and approving 
accounts.
    The term ``opening and approving'' is intended to limit the scope 
of the amended rule to the acceptance of new accounts, but only in 
circumstances where it has gathered sufficient information to satisfy 
the Exchange's Rule 405 precept as the standard for recording 
investment objectives and other basic documentation. By establishing 
Rule 405 as the norm to follow (even by a person not formally subject 
to its fiat) and by asserting it as a prerequisite to an acceptable 
Rule 382 agreement, it is believed that investor protection is 
reasonably served. Under the proposed amendments, more continuous and 
stringent regulatory requirements such as ``monitoring of accounts'' 
would not be permitted to be allocated to an entity which is not a 
registered broker or dealer.
    The Exchange is proposing to add to current Rule 382(c), which 
requires written notification to customers whose accounts are held on a 
fully disclosed basis, that upon the opening of such account, the 
customer shall be notified in writing by the party designated by the 
agreement to make such notification of the responsibilities allocated 
to each respective party, and of any subsequent material change to such 
allocation or to the relationship of the parties, if any, promptly upon 
the occurrence of any such change. The proposed amendments to the Rule 
reposition this provision into new subsection (b)(4).
    The Exchange is proposing to add Rule 382(e)(2) which provides that 
carrying agreements may provide for the receipt of customer funds or 
securities by the introducing organization and delivery thereof to the 
carrying organization in a manner consistent with Rules 15c3-1 and 
15c3-3 under the Act, provided that the introducing organization 
maintains appropriate procedures and systems for the receipt and 
delivery of such funds or securities to ensure compliance with all 
relevant rules under the Act.
    Additionally, amendments are proposed to codify current Exchange 
practice by adding a new subsection (f) to Rule 382 to require that 
each carrying organization provide the Exchange with written notice 10 
business days prior to its commencement of the carrying the accounts of 
any new correspondents, identifying such new correspondents and 
furnishing such additional information as may be requested by the 
Exchange. Moreover, each such carrying organization must, 
contemporaneously, represent to the Exchange that it has the financial 
and operational resources and support staff to take on such additional 
correspondent activity.
    The proposed amendments also codify the principle that, to the 
extent that a particular function is allocated to one of the parties, 
the other parties to the agreement shall supply to the responsible 
organization all data in its possession pertinent to the proper 
performance and supervision of that function. The agreement shall 
include an acknowledgement by each relevant party of this obligation.
Rule 416 (Questionnaires and Reports)
    NYSE Rule 416(b) requires that, unless a specific temporary 
extension of time has been granted, a fee of $500 shall be imposed for 
each day that such report is not filed in the prescribed time. Requests 
for such extensions of time

[[Page 42206]]

must be submitted to the Exchange at least three business days prior to 
the due date. The Exchange is proposing to amend subsection (b) to 
clarify that each ``day'' means each ``business day'' for purposes of 
determining whether a report is filed in the prescribed time. The 
proposed amendments also provide that the fee imposed by the Exchange 
when reports are not filed on time may be waived by the Exchange, in 
whole or in part.
    The Exchange is proposing to add a new subsection .25 to the 
Supplementary Material of Rule 416 which will consist of language moved 
from current NYSE Rule 418.25.\56\ This provision requires member 
organizations, approved to use an alternative method of computing net 
capital under Appendix E of Rule 15c3-1 under the Act, to file 
supplemental and alternative reports, as may be prescribed by the 
Exchange. The NASD does not currently have such a provision but stated 
that it may propose to adopt a similar requirement.
---------------------------------------------------------------------------

    \56\ See Securities Exchange Act Release No. 52269 (August 16, 
2005) 70 FR 49349 (August 23, 2005) (SR-NYSE-2005-19). See also NYSE 
Information Memo 05-62.
---------------------------------------------------------------------------

Rule 418 (Audit)
    Under current NYSE Rule 418, the Exchange may require member 
organizations, at any time, to conduct an audit of its financial 
statements in accordance with Exchange Rules and Rule 17a-5 under the 
Act.\57\ The Exchange is proposing to amend this provision by removing 
the reference to Exchange Rules and replacing it with language that 
allows the Exchange to require an audit or other similar procedure as 
the Exchange may deem necessary for the protection of investors or in 
the public interest. The Exchange is also proposing to rescind 
subsection .10 of Rule 418, which requires member organizations that 
are subject to this rule to file with the Exchange an agreement 
covering its annual audit during the following year because the 
substance of this provision is covered by Rule 17a-5 under the Act.
---------------------------------------------------------------------------

    \57\ 17 CFR 240.17a-5.
---------------------------------------------------------------------------

    NYSE Rule 418.12 requires member organizations that fail to file an 
audited financial and operational report in the time period prescribed 
by the Exchange to pay a $200 penalty for each day of delayed filing. 
The Exchange is proposing to amend this provision to clarify that each 
``day'' means each ``business day.''
    In light of proposed amendments to the NYSE Rules to remove the 
terms ``allied member'' and ``member'' (where appropriate) from the 
rulebook, the Exchange is proposing to amend Rule 418.15 to require 
that the financial statements be signed by two principal executives of 
the member organization and that such financial statements be made 
available to all principal executives of the member organization. NASD 
has expressed that it may propose to adopt a similar provision to NYSE 
Rule 418.15.
    The Exchange is proposing to rescind Rule 418.20 which requires, in 
part, that all pertinent audit working papers and underlying 
documentation be retained for at least three years and that it be 
available for review by a representative of the Exchange at the office 
of the respondent or at the office of the independent public 
accountant. This provision is not required under Act rules and the NASD 
does not have a similar provision in their rules. Further, this 
provision has not been exercised during the time that this rule has 
been in effect. As noted above, Rule 418.25 has been repositioned into 
.25 of Rule 416.
Rule 420 (Reports on Borrowing and Subordinated Loans for Capital 
Purposes)
    Currently, the NYSE and the NASD use subordinated loan forms which 
reflect the requirements of Appendix D to Rule 15c3-1 under the Act but 
differ in minor provisions and in certain procedural ways. The Exchange 
is proposing to unify the procedures of NYSE and NASD in this area. 
Specifically, the Exchange is proposing to consolidate paragraphs (a) 
and (b) of Rule 420 to combine the subordination agreement requirements 
for the lending of both cash and notes collateralized by securities. 
The proposed amendments also add that loans of cash or collateralized 
notes made to a member organization are subject to the requirements of 
Rule 420(a). In addition, Rule 420(a)(2), which calls for an opinion of 
counsel as required by NYSE Rule 313(d), will be modified to provide 
that an opinion will no longer be required when the loan is made by a 
holding company or principal executive of a member organization or by a 
bank, as defined in Section (3)(a)(6) \58\ of the Act, unless so 
directed by the Exchange.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78c(3)(a)(6).
---------------------------------------------------------------------------

    NYSE Rule 420(c) requires a general partner of a member 
organization to promptly report to the NYSE any borrowings of cash or 
securities, the proceeds of which will be contributed to the net 
capital of the member organization. The rule further imposes certain 
standards for the documents evidencing such borrowings as the Exchange 
deems appropriate and requires that such documents be submitted to and 
approved by the Exchange before the cash or securities involved may 
qualify as net capital. The Exchange is proposing to codify current 
Exchange practice by amending this provision to apply to borrowings of 
participants in LLC's. The NASD does not have a similar rule to NYSE 
Rule 420 but has indicated it may propose to adopt similar requirements 
for carrying firms only.
Rule 422 (Loans of and to Directors, etc.)
    NYSE Rule 422 prohibits unsecured loans between members of the 
Board or of employees of the NYSE and member organizations, absent the 
prior consent of the NYSE board of directors. This provision was 
amended post-merger to include subsidiaries of NYSE Group. The Exchange 
is proposing to rescind Rule 422 in its entirety because the substance 
of this provision is contained in the supplementary guidelines to 
NYSE's internal ethics code.
Rule 431 (Margin Requirements)
    Staff is proposing to amend Rule 431(e)(8)(C)(ii) to clarify that, 
for purposes of this subsection, amounts agreed to be extended by a 
member organization shall be deducted in determining capital under Rule 
326 if the loan commitment is irrevocable; amounts agreed to be 
extended shall be presumed irrevocable commitments, unless a broker-
dealer can evidence otherwise.
Rule 440 (Books and Records)
    NYSE Rule 440 requires member organizations to make and preserve 
books and records as the Exchange may prescribe, and as prescribed by 
Rule 17a-3 \59\ under the Act. The recordkeeping format, medium and 
retention period is to comply with Rule 17a-4 under the Act.\60\ The 
Exchange is proposing to rescind Rule 440.10(2), which requires member 
organizations, at a minimum of once per month, to account for all U.S. 
government bearer instruments by physical examination and comparison 
with its books and records. This provision is outdated, as there are 
few, if any, U.S. government instruments in bearer form and the 
requirement to account for any physical instruments is included in Rule 
17a-13 \61\ under the Act and is generally referenced in subsection .10 
of the rule.
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17a-3.
    \60\ 17 CFR 240.17a-4.
    \61\ 17 CFR 240.17a-13.

---------------------------------------------------------------------------

[[Page 42207]]

Category 3 (``Buy-In Rules'')
Background
    In order to address the operational ``Buy-In Rules'' not 
encompassed by the CAG subcommittee review process, the Exchange 
organized an in-house committee and enlisted the participation of the 
NASD and the Ad Hoc Buy-in Subcommittee of the SIFMA Securities 
Operations Division. The SIFMA subcommittee, which predates the SRO 
Rule Harmonization Initiative, was established to identify and 
standardize various Buy-in rules and procedures in conjunction with 
Street Side contracts including Stock Loans.\62\ The proposed 
amendments discussed below result from the combined recommendations of 
these participants.
---------------------------------------------------------------------------

    \62\ The Exchange previously worked with this committee to amend 
and harmonize its rules with those of other SROs. See Securities 
Exchange Release No. 52842 (November 28, 2005), 70 FR 72321 
(December 2, 2005) (SR-NYSE-2005-50). See also NYSE Information Memo 
05-100.
---------------------------------------------------------------------------

    The NYSE Buy-In Rules apply to transactions in Exchange-listed 
securities that are not subject to the rules of a Qualified Clearing 
Agency such as the Depository Trust Clearing Corporation (``DTCC'') 
\63\ or the National Securities Clearing Corporation (``NSCC''),\64\ 
including the Continuous Net Settlement (``CNS'') \65\ transactions 
that settle through them.
---------------------------------------------------------------------------

    \63\ The Depository Trust Clearing Corporation is a member of 
the U.S. Federal Reserve System, a limited-purpose trust company 
under New York State banking law and a registered clearing agency 
with the SEC.
    \64\ NSCC, is a central counterparty that provides centralized 
clearance, settlement and information services for broker-to-broker 
equity, corporate bond and municipal bond, exchange-traded funds and 
unit investment trust trades in the United States. NSCC provides 
clearing and settlement, risk management, central counterparty 
services and a guarantee of completion for trades. NSCC also nets 
trades and payments among its participants, reducing the volume of 
securities and payments that need to be exchanged each day.
    \65\ CNS is an automated accounting system that centralizes the 
settlement of compared security transactions and maintains an 
orderly flow of security and money balances. CNS nets daily 
transactions, including open positions to create a single long or 
short position for each participant, minimizing security movements 
and associated costs.
---------------------------------------------------------------------------

    In an effort to promote harmonization of the SRO Operational, 
Clearing and Settlement Rules (collectively referred to as the ``Buy-In 
Rules) the Exchange is proposing amendments to NYSE Rules 140 (Members 
Closing Contracts--Conditions), 282 (Buy-in Procedures); 283 (Members 
Closing Contracts--Procedure); 285 (Notice of Intention to Successive 
Parties); 286 (Closing Portion of Contract); 287 (Liability of 
Succeeding Parties); 288 (Notice of Closing to Successive Parties); 289 
(Must Receive Delivery); and 290 (Defaulting Party May Deliver After 
`Buy-in' Notice).
Proposed Amendments
    The Exchange proposes to reposition Rules 140, 283, 285, 286, 287, 
288, 289, and 290 into Rule 282 so that Rule 282 will serve as a 
complete repository for all requirements and procedures related to buy-
ins.\66\ The substance of the repositioned rules is not being altered. 
In addition to making these requirements more readily accessible, the 
amendments will bring the rule closer to the format of its NASD Rule 
11810 (Buying-In) and IM-11810 (Sample Buy-In Forms).
---------------------------------------------------------------------------

    \66\ See proposed Rules 282.25, .30, .35, .40, .45, .50, and 
.55.
---------------------------------------------------------------------------

    In addition to this consolidation, the following amendments to Rule 
282 are proposed in order to clarify certain technical requirements 
with respect to buy-in processes:
    Rule 282(1)(b) requires that the defaulting member organization 
receiving a buy-in notice must send a signed, written response to the 
initiating organization stating its position with respect to the 
resolution of the item no later than 5 p.m. ET on the date of issuance 
of the buy-in notice. The Exchange proposes the addition of 
Supplementary Material section .15 that would clarify that ``[f]or 
purposes of Rule 282(b), e-mail and electronic systems shall be 
acceptable as the functional equivalent of a writing, in lieu of paper 
form, provided that it is retainable and susceptible of acknowledgement 
to the same degree and extent as the written response.'' \67\
---------------------------------------------------------------------------

    \67\ See Rules 17a-3 and 17a-4 under the Act and NYSE Rules 440 
(Books and Records).
---------------------------------------------------------------------------

    NYSE Rule 282(c) states that if the ``buy-in'' notice has not been 
returned by 5 p.m. ET on the ``buy-in'' notice date, or the ``buy-in'' 
notice is returned as ``DK'd,'' or the ``buy-in'' notice is returned 
with the indication that the contract is known but that delivery cannot 
be made, a ``buy-in'' shall be executed on the ``effective date'' by 
the initiating member organization by purchasing all or part of the 
securities necessary to satisfy the amount requested in the ``buy-in'' 
notice. Proposed amendments to Rule 282(c) would clarify that if a 
notice of buy-in is not acknowledged by the failing party by 5 p.m. ET 
on the day of issuance, the notice will be deemed accepted. However, 
prior to the proposed execution date, the seller has a right to request 
proof of fail obligation in order to prove otherwise. This conforms 
with the NASD's current requirement.
    Rule 282(1)(h) requires that the initiating member organization 
executing the buy-in shall immediately upon execution, but no later 
than 5 p.m. ET, notify the defaulting member organization as to the 
quantity purchased and the price paid. The Exchange is proposing to 
amend Rule 282(1)(h) to clarify that if there is a system outage at the 
Clearing Firm or the Depository, then notification by the initiating 
member organization executing a buy-in must take place prior to the 
opening on the next business day.
    The Exchange proposes the addition of provision Rule 282(2) to 
clarify that fails that are subject to the rules of a Qualified 
Clearing Agency must comply with the procedures or requirements of the 
Qualified Clearing Agency.''
    It is also proposed that Rule 282 be amended to adopt certain 
provisions of NASD IM 11810 (Sample Buy-In Forms) because these 
provisions are applicable to both NYSE and NASD membership. 
Specifically, the Exchange proposes adding section (f) (Securities in 
Transit) as new Rule 282.60; section (h) (`Close-Out' Under Committee 
or Exchange Rulings) as new Rule 282.65; section (i) (Failure to 
Deliver and Liability Notice Procedures) as new Rule 282.70; section 
(j) (Contracts Made for Cash) as new Rule 282.75; section (l) (Buy-In' 
Desk Required) as new Rule 282.80; and section (m) (Buy-In of Accrued 
Securities) as new Rule 282.85.
Background/Reference Rule Synopses
Rule 140 (``Members Closing Contracts--Conditions'')
    Rule 140 states that a member organization may close a contract as 
provided in Rule 283 in the event that the other party to the contract 
does not recognize the contract or the other party to the contract 
neglects or refuses to exchange written contracts pursuant to Rule 137.
Rule 283 (``Members Closing Contracts--Procedure'')
    Rule 283 refers to the procedure for closing contracts. According 
to Rule 283, oral or written notice must be provided to the other party 
at least thirty minutes prior to closing.
Rule 285 (``Notice of Intention to Successive Parties'')
    According to Rule 285, a member organization that receives notice 
that a contract is to be closed for its account for non-delivery shall 
immediately re-transmit notice to any other member organization from 
whom the securities involved are due.

[[Page 42208]]

Rule 286 (``Closing Portion of Contract'')
    According to Rule 286, when notice of intention to close a 
contract, or re-transmitted notice thereof, is given for less than the 
full amount due, it shall be for not less than one trading unit.
Rule 287 (``Liability of Succeeding Parties'')
    According to Rule 287, the closing of a contract must be for the 
account and liability of each succeeding party in interest, and, if 
notice of such contract being closed is transmitted, then such closing 
shall automatically close all contracts with respect to which such re-
transmitted notice shall have been delivered prior to the closing.
Rule 288 (``Notice of Closing to Successive Parties'')
    Under Rule 288, if a contract, other than a contract the close-out 
of which is governed by the rules of a Qualified Clearing Agency, has 
been closed, the member organization who closed, or gave order to 
close, the contract shall notify the member organization for whose 
account the contract was closed. In addition, the rule requires the 
member organization receiving such a notification, or receiving such 
notice that a contract has been closed pursuant to the rules of a 
Qualified Clearing Agency, shall immediately notify each succeeding 
party in interest and other member organizations to which re-
transmitted notice pursuant to Rule 285 has been sent. The rule also 
requires any statements of resulting money differences to be rendered 
immediately.
Rules 289 (``Must Receive Delivery'') and 290 (``Defaulting Party May 
Deliver After `Buy-in' Notice'')
    Rules 289 and 290 clarify the requirements and timeframes upon 
which a defaulting member organization may deliver against a ``buy-in'' 
notice. Rule 289 requires an initiating member organization to accept 
physical delivery of some or all of the securities that are the subject 
of a buy-in, thereby halting the buy-in execution for those securities 
if those securities are tendered prior to the buy-in. Rule 290 permits 
a defaulting member organization to deliver securities subject to a 
notice of buy-in until 3 p.m. Eastern Time on the day of the execution 
of the buy-in.
Rule 282 (``Buy-in Procedures'')
    Rule 282 describes procedures to be followed when a securities 
contract, except a contract where its close-out is governed by the 
rules of a Qualified Clearing Agency (such as DTC and NSCC), which has 
not been completed by the seller in accordance with its terms, may be 
closed-out by the buyer (i.e., the initiating member organization). 
According to the Rule, the close-out may not be sooner than three 
business days after the due date for delivery. Rule 282 allows the 
member organization failing to receive the securities to execute the 
buy-in.
    The Supplementary Material of Rule 282 is intended to ensure that 
member organizations comply with the closeout requirements of 
Regulation SHO.\68\ Specifically, member organizations are obligated to 
comply with the marking, locate, and delivery requirements of 
Regulation SHO for sales of equity securities under the Act. Member 
organizations are required to have policies and procedures in place to 
comply with these rules, including closeout procedures.\69\
---------------------------------------------------------------------------

    \68\ 17 CFR 242.200 through 242.203.
    \68\ At the same time the changes noted above were being 
developed, the SEC implemented Regulation SHO--Regulation of Short 
Sales, which shares a similar purpose with the buy-in rules--the 
reduction of fails to deliver. Rule 203 to Regulation SHO imposes 
locate and borrowing/delivery requirements on broker-dealers that 
sell equity securities, including closeout requirements on certain 
open fail to deliver positions.
---------------------------------------------------------------------------

Rule 430 (Partial Delivery of Securities to Customers on C.O.D 
Purchases)
    Rule 430 prescribes that no member organization ``may accept for a 
customer a purchase order for any security, other than obligations of 
the United States Government, unless it has first ascertained that the 
customer placing the order or its agent will receive against payment 
securities in an amount equal to any execution confirmed to the 
customer, even though such an execution may represent the purchase of 
only a part of a larger order.'' The Exchange proposes deleting Rule 
430 in its entirety as the substance of the rule is incorporated in 
NYSE Rule 387(a)(4).
    Rule 387(a)(4) prohibits a member organization from accepting an 
order from a customer pursuant to an arrangement whereby payment for 
securities purchased or delivery of securities sold is to be made to or 
by an agent of the customer unless the member organization ``has 
obtained an agreement from the customer that the customer will furnish 
his agent instructions with respect to the receipt or delivery of the 
securities involved in the transaction promptly upon receipt by the 
customer of each confirmation, or the relevant data as to each 
execution, relating to such order (even though such execution 
represents the purchase or sale of only a part of the order)'' and that 
in any event the customer will assure that such instructions are 
delivered to his agent no later than as prescribed by Rule 387(a)(4).
Category 4 (``Member'' and ``Allied Member'' Rules)
    As noted above, amendments are proposed throughout this filing that 
update terminology in light of the Exchange's current organizational 
structure. Of particular significance is the proposed deletion, where 
appropriate, of the term ``member'' and the elimination of the term 
``allied member'' as a regulatory category.\70\ The selective deletion 
of the term ``member'' reflects the fact that it has been redefined in 
the context of the NYSE/ARCA business model.\71\ The term ``allied 
member,'' which is a regulatory category based on a person's 
``control'' over a member organization is being eliminated because it, 
has likewise been rendered outdated. Category 4 includes those rules 
for which the only proposed substantive change is the deletion of 
either or both of these terms.
---------------------------------------------------------------------------

    \70\ Note that there are pending amendments to certain NYSE 
Rules which propose deletion of the terms ``allied member'' and/or 
``member'' and thus, are not included in this filing (SR-NYSE-2006-
50 deletes term ``member'' from NYSE Rules 726 and 791; SR-NYSE-
2006-111 deletes the terms ``allied member'' and ``member'' from 
NYSE Rule 421; and SR-NYSE-2007-06 deletes the terms ``allied 
member'' and ``member'' from NYSE Rule 440A.
    \71\ For additional information, see Securities Exchange Act 
Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) 
(Order Approving SR-NYSE-2005-77).
---------------------------------------------------------------------------

Member
    NYSE Rule 2(a) provides that the term ``member,'' when used to 
denote a natural person approved by the Exchange, means a natural 
person associated with a member organization who has been approved by 
the Exchange and designated by such member organization to effect 
transactions on the Floor of the Exchange or any facility thereof.
    This definition reflects the fact that, since the creation of NYSE 
Group, Inc. in 2006, ``members'' are not, by virtue of their 
membership, equity owners of NYSE Group or any of its subsidiaries. 
Thus, the term ``member'' no longer has the same regulatory meaning in 
the context of the NYSE/ARCA business model.
Background
    Following the NYSE/ARCA merger, NYSE Market issued Trading Licenses 
that entitled their holders to have physical and electronic access to 
the trading facilities of NYSE Market, subject to the limitations and 
requirements specified in the rules of the Exchange. An organization 
may

[[Page 42209]]

acquire and hold a Trading License only if and for so long as such 
organization is qualified and approved to be a member organization of 
the Exchange. Organizations that obtain licenses to trade on NYSE 
Market (``Trading Licenses'') are member organizations. In addition, 
broker-dealers that submit to the jurisdiction and rules of the 
Exchange, without obtaining a Trading License and thus without having 
rights to directly access the trading facilities of NYSE Market, will 
be member organizations.\72\
---------------------------------------------------------------------------

    \72\ See Footnote 71, supra.
---------------------------------------------------------------------------

    A member organization holding a Trading License may designate a 
natural person, known as a member, to effect transactions on its behalf 
on the floor of NYSE Market, subject to such qualification and 
approvals as may be required in the rules of the Exchange.
Proposed Amendments
    The Exchange is proposing, where applicable, to delete references 
to the term ``member'' as a category of Exchange association except to 
the extent its usage distinguishes, from a regulatory perspective, a 
natural person who is licensed to trade on the Floor of the Exchange on 
behalf of a member organization. All other references to members will 
be deleted. If necessary, the term ``employee'' is added to rules where 
the current text does not otherwise capture persons acting as members.
Allied Member
Background
    In 1939, the Exchange created the category of ``allied member'' to 
make a non-member general partner of a member organization directly 
responsible to the Exchange and directly subject to Exchange control 
and discipline. The allied member designation identifies an individual 
who is a ``control'' person, including but not limited to, a principal 
executive officer of the member organization. Allied membership status 
was intended to remedy situations where disciplinary action was taken 
by the Exchange against member organizations because of actions of 
their non-member general partners for which the member organization was 
not entirely responsible, and over which they could not have exercised 
full control.
    NYSE Rule 2(c) currently defines the term ``allied member'' as a 
natural person who is a general partner of a member organization or 
other employee of a member organization who controls,\73\ or is a 
principal executive officer of, such member organization and who has 
been approved by the Exchange as an allied member.\74\ There currently 
are approximately 1,393 allied members of the Exchange. Allied 
membership, especially as presently administered, has no direct 
analogue at the NASD.
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    \73\ See NYSE Rule 2(f). The term ``control'' means the power to 
direct or cause the direction of the management or policies of a 
person whether through ownership of securities, by contract or 
otherwise. A person shall be presumed to control another person if 
such person, directly or indirectly: (i) Has the right to vote 25 
percent or more of the voting securities; (ii) is entitled to 
receive 25 percent or more of the net profits; or (iii) is a 
director, general partner or principal executive officer (or person 
occupying a similar status or performing similar functions) of the 
other person. Any person who does not so own voting securities, 
participate in profits or function as a director, general partner or 
principal executive officer of another person shall be presumed not 
to control such other person. Any presumption may be rebutted by 
evidence, but shall continue until a determination to the contrary 
has been made by the Exchange.
    \74\ NYSE Rule 304 sets forth the eligibility requirements for 
allied membership. NYSE Rule 304A sets forth the examination/
registration requirements for allied membership.
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Proposed Amendments
    The Exchange is proposing that the term ``allied member'' be 
deleted from both the NYSE rulebook and as a category of Exchange 
association as it has become outdated within the context of the new 
NYSE corporate structure. The Exchange is proposing to replace the term 
in the NYSE rulebook with the term ``principal executive'' to retain a 
means of identifying each member organization's control ``persons.'' 
The proposed designation would be defined to include persons designated 
by a member organization as a ``principal executive officer,'' as such 
terms is defined in subsection (b)(5) of NYSE Rule 311 (Formation and 
Approval of Member Organizations) or their functional equivalents.\75\
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    \75\ See also proposed new Rule 416A.10 which defines the term 
``principal executive.''
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    Rule 311(b)(5) currently states that a member organization may not 
be approved by the NYSE Board of Directors unless, among other things, 
the Board of Directors of such member organization designates its 
principal executive officers who shall be members or allied members and 
shall exercise senior principal executive responsibility over the 
various areas of business of such corporation in such areas that the 
rules of the Exchange shall prescribe, including: Operations, 
compliance with rules and regulations of regulatory bodies, finances 
and credit, sales, underwriting, research and administration.
    The Exchange is proposing to modify the Rule 311(b)(5) definition 
of principal executive officer by deleting the requirement that a 
principal executive officer be a member or allied member of the 
Exchange.
    Generally, throughout this filing, in instances where the 
provisions of a rule apply to an allied member in his or her capacity 
as a principal executive officer (or functional equivalent, e.g., 
``senior officer'' or ``partner'') of the member organization, it is 
proposed that the term ``principal executive'' be substituted. In 
instances where the provisions of a rule apply to an allied member in 
his or her capacity as an employee of a member organization, it is 
proposed that the rule text be amended accordingly.
    The Exchange is aware that the elimination of the allied member 
designation raises certain issues with respect to Exchange registration 
requirements as well as its jurisdiction over certain member 
organization personnel. Specifically, once the allied member category 
is eliminated, the Chief Financial Officer (CFO) and Chief Operations 
Officer (COO), designations which require qualification pursuant to the 
Series 27 (Financial and Operations Principal) or Series 28 (Broker/
Dealer Financial and Operations Principal) examinations, may not be 
registered with the Exchange because the Exchange does not have a 
registration category for the Series 27 or Series 28.\76\ In order to 
address this concern, the Exchange is proposing to recognize the NASD's 
requirement to use the Financial and Operations Principal CRD 
registration categories, Series 27/28,\77\ for such exam-qualified 
individuals.
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    \76\ Rule 345(b) requires natural persons other than members or 
allied members who assume the duties of an officer with the power to 
bind the member or member organization to file Form U4 and receive 
approval of the Exchange.
    \77\ See Rule 311(b)(5) interpretation in the NYSE 
Interpretation Handbook which delineates the requirements for CFO/
COO of Introducing and Clearing Firms.
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    Further, Chief Executive Officers (CEO) are not required by 
Exchange rules to pass an examination; their only current qualification 
requirement is that they be members or become allied members. As noted 
above, in order to ensure regulatory jurisdiction over all principal 
executives, and to conform with the standard prescribed under NASD Rule 
1021(a), the Exchange has proposed amendments to Rule 342 that would 
require each person designated by a member organization as a 
``principal executive,'' as that term is defined in Rule 416A, to pass 
an examination appropriate to the

[[Page 42210]]

functions to be performed by such person.\78\
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    \78\ See proposed new Rule 342.13(c).
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    Forms U4 and U5 (among other forms) will require updating in order 
to delete allied member registrations and to replace it with another 
classification for principal executive officers (or persons occupying 
similar status or having similar functions), voting stockholders, and 
employee directors.
    The deletion of the ``allied member'' category of Exchange 
association will not hinder the Exchange's enforcement and disciplinary 
efforts with respect to individuals who fall into this category. 
Specifically, the NYSE Division of Enforcement can assert jurisdiction 
absent allied member status under NYSE Rule 476 and may bring 
disciplinary matters based on a predicate violation pursuant to the 
individual's supervisory position within the member organization. An 
employee's status as an allied member has not been and will not be the 
sole or preferred route to enforcement or disciplinary actions against 
these individuals.
    Additionally, NYSE Market Surveillance, in conducting its 
investigations, looks at the supervision of the member organizations, 
its supervisory procedures and the capacity in which the individual is 
employed (i.e., supervisory position), not necessarily the employee's 
status as an allied member of the Exchange.
2. Statutory Basis
    The Exchange believes the statutory basis for proposed rule change 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and in particular, with the requirements of Section 6(b)(5) \79\ of the 
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 proposed changes will provide greater 
harmonization between Exchange and NASD rules of similar purpose, 
resulting in less burdensome and more efficient regulatory compliance 
for dual-member organizations. Where proposed amendments do not 
entirely conform to existing NASD rules, the Exchange believes the 
standards they would establish otherwise further the objectives of 
Section 6(b)(5) by providing greater regulatory clarity and 
practicality.
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    \79\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NYSE consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2007-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2007-22. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the NYSE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2007-22 and should be 
submitted on or before August 22, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\80\
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    \80\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-14853 Filed 7-31-07; 8:45 am]
BILLING CODE 8010-01-P