

[Federal Register: May 17, 2006 (Volume 71, Number 95)]
[Notices]               
[Page 28735-28738]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17my06-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53789; File No. SR-NYSE-2006-05]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/
k/a New York Stock Exchange LLC); Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto Relating to Amendments to the 
Interpretation of NYSE Rule 345 (Employees--Registration, Approval, 
Records)

May 11, 2006.
    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 17, 2006, the New York Stock Exchange, Inc.\3\ (n/k/a New 
York Stock Exchange LLC) (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the NYSE. On May 3, 2006, NYSE filed 
Amendment No. 1 to the proposed rule change.\4\ 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.
    \3\ The Exchange is now known as the New York Stock Exchange 
LLC. See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006).
    \4\ See Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE is filing with the SEC a proposed amendment to 
Interpretation (a)/02 (``Independent Contractors'') of NYSE Rule 345 
(``Employees--Registration, Approval, Records''). The proposed rule 
change would reduce the filing requirements in connection with the 
establishment of an ``independent contractor'' relationship between a 
natural person, who is required to be registered pursuant to NYSE Rule 
345, and a member organization.
    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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    (a) Background. Over the years, registered persons and member 
organizations have on occasion entered into arrangements wherein the 
registered person is designated an ``independent contractor'' of the 
member organization. Such arrangements are often pursued due to tax 
planning considerations on the part of the individual and/or cost 
saving considerations on the part of the organization. Specifically, 
persons asserting independent contractor status may be eligible for 
certain tax benefits, especially with respect to retirement planning. 
On the other hand, some member organizations have structured their 
business model so that certain overhead costs (e.g., office rent, 
secretarial services, etc.) are borne by the registered representative 
in the context of an independent contractor arrangement.
    NYSE Rule 345(a) requires that natural persons performing certain 
prescribed duties on behalf of a member organization be registered with 
and qualified by the Exchange.\5\ The Interpretation of NYSE Rule 
345(a) \6\ permits a registered representative to assert the status of 
``independent contractor'' provided that any registered representative 
associated with a member organization who is so designated be

[[Page 28736]]

considered an employee of that member organization for purposes of the 
rules of the Exchange.
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    \5\ NYSE Rule 345(a) states that ``[n]o * * * member 
organization shall permit any natural person to perform regularly 
the duties customarily performed by (i) a registered representative, 
(ii) a securities lending representative, (iii) a securities trader 
or (iv) a direct supervisor of (i), (ii) or (iii) above, unless such 
person shall have been registered with, qualified by and is 
acceptable to the Exchange.''
    \6\ See NYSE Interpretation Handbook, Rule 345(a)/02.
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    Currently, the Interpretation subjects all such independent 
contractor arrangements to prior Exchange approval pursuant to the 
submission of written representations which the Interpretation 
categorizes into four sections. First, the Interpretation requires a 
representation from the member organization that it will supervise and 
control all activities of the independent contractor effected on its 
behalf to the same degree and extent that it regulates the activities 
of all other registered representatives and in a manner consistent with 
NYSE Rule 342. Second, it requires that a copy of the written agreement 
between the independent contractor and the member organization be 
submitted to the Exchange and that such agreement provides that the 
independent contractor will engage in securities-related activities 
solely on behalf of the member organization (except as otherwise 
explicitly may by permitted by the member organization in writing); 
that such securities-related activities will be subject to the direct, 
detailed supervision, control and discipline of the member 
organization; and that such person is not subject to a ``statutory 
disqualification'' as defined in Section 3(a)(39) of the Act.\7\ Third, 
the Interpretation requires the prospective independent contractor to 
submit an undertaking subjecting him or herself to the jurisdiction of 
the Exchange. And fourth, it requires the member organization to 
provide to the Exchange assurances that the prospective independent 
contractor is covered by the organization's fidelity insurance and that 
compliance has been had with applicable state Blue Sky provisions.
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    \7\ See 15 U.S.C. 78a et seq.
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    The proposed amendments would eliminate the requirement to submit 
these representations to the Exchange, as the regulatory purposes they 
serve (e.g., to provide notice to the Exchange of independent 
contractor arrangements; to ensure that member organizations are aware 
of their responsibility to supervise independent contractors; and to 
ensure that the Exchange is able to assert jurisdiction over such 
persons in the event of a violation of Exchange and/or Federal 
securities laws) can now be more efficiently accomplished in light of 
recent regulatory developments.
    Specifically, the Exchange branch office \8\ and Form U4 \9\ 
applications are now processed through the Central Registration 
Depository (``CRD'') System. Unlike previous versions, the revised 
version of Form U4 requires registration applicants to disclose if they 
maintain an independent contractor relationship with the member 
organization that will be carrying the registration. This disclosure 
provides notice to the Exchange of all independent contractor 
relationships between registered persons and member organizations, 
thereby obviating the need to submit duplicative notice.
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    \8\ Exchange branch office applications are processed via Form 
BR. See Securities Exchange Act Release No. 52543 (September 30, 
2005); 70 FR 58771 (October 7, 2005) (File No. SR-NYSE-2005-13). See 
also NYSE Information Memo No. 05-75 dated October 6, 2005.
    \9\ Uniform Application for Securities Industry Registration or 
Transfer. Form U4 includes information such as an individual's ten-
year employment history, five-year residential history, education, 
disciplinary actions, disclosure information, and the self-
regulatory organization of registration.
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    Further, by executing Form U4, the independent contractor signatory 
agrees to abide by the rules of any self-regulatory organization 
(``SRO''), including the Exchange, to which their member organization 
is subject, thereby establishing the jurisdictional reach formerly 
provided by the above-noted written representation to the Exchange. 
Specifically, the revised version of Form U4 requires registered 
persons who seek to become associated with a member organization to 
``submit to the authority of the jurisdictions and SROs and agree to 
comply with all provisions, conditions and covenants of the statutes, 
constitutions, certificates of incorporation, by-laws and rules and 
regulations of the jurisdictions and SROs as they are or may be 
adopted, or amended from time to time.'' \10\
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    \10\ See Form U4, Subsection 2 of Section 15A (Individual/
Applicant's Acknowledgement and Consent).
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    (b) Proposed Amendments. The Exchange strongly believes that there 
be no ambiguity as to the regulatory expectations with respect to 
independent contractor arrangements involving member organizations. 
Thus, while the Interpretation has been rewritten to eliminate the 
requirement that such arrangements be submitted to the Exchange for 
approval, the intent and substance of the Interpretation has been 
retained.
    As noted above, recent changes to Form U4 now require the 
identification by registered persons of independent contractor status, 
thus providing to the Exchange prompt notice and an up-to-date record 
of such persons.\11\ Given this recently established procedural 
control, it is proposed that the Interpretation of NYSE Rule 345(a) be 
amended to eliminate the requirement that member organizations submit 
separate written representations to the Exchange for approval of 
proposed independent contractor arrangements. The amended 
Interpretation would, however, retain current requirements with respect 
to regulatory expectations regarding such arrangements.
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    \11\ NYSE Rule 345.12 provides, in part, that an application for 
a natural person required to be registered with the Exchange shall 
be submitted on Form U4 and that information on Form U4 must be kept 
current and shall be updated by filing with the Exchange an 
amendment to that filing.
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    The proposed amendments to the Interpretation would prescriptively 
retain language, which is currently required to be included in member 
organizations' requests for approval of each independent contractor 
arrangement, that would unambiguously confirm that the claim of 
independent contractor status by a person does not compromise such 
person's characterization and treatment as an employee of their 
associated member organization firm for purposes of the rules of the 
Exchange.\12\
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    \12\ This is consistent with the Commission's long-standing view 
that independent contractors (who are not themselves registered as 
broker-dealers) involved in the sale of securities on behalf of a 
broker-dealer are ``controlled by'' the broker-dealer and, 
therefore, are associated persons of the broker-dealer for all 
purposes of the Act. See Securities Exchange Act Release No. 44992 
(dated October 26, 2001), Footnote 18. While a firm may accept 
independent contractor status for purposes other than the federal 
securities laws, such treatment does not alter such person's status 
as a person associated with a broker or dealer or the firm's 
responsibility to supervise under the federal securities laws. 
Further, the Commission does not recognize the concept of 
``independent contractors'' for purposes of the Act, even if such 
arrangement with an associated person satisfies the criteria for 
``independent contractor'' status for other purposes. See, e.g., In 
the Matter of Raymond James, Inc. (Initial Decision Release No. 296, 
Administrative Proceeding File No. 3-11692, September 15, 2005). 
(``...independent contractor status not relevant to whether 
independent contractor was acting within the apparent scope of his 
authority...the Commission does not recognize the concept of 
independent contractor for purposes of the Exchange Act''); In the 
Matter of William V. Giordano, (Securities Exchange Act Release No. 
36742, January 19, 1996) (in finding that an officer of a broker-
dealer firm failed reasonably to supervise such independent 
contractor, the Commission treated an independent contractor as an 
``associated person'' of the firm within the meaning of Section 
3(a)(18) of the Act). In its decision, the Commission noted that 
while a firm may accept independent contractor status for purposes 
other than the federal securities laws, such treatment does not 
alter such person's status as a person associated with a broker or 
dealer or the firm's responsibility to supervise under the federal 
securities laws. It also noted that the ``Commission does not 
recognize the concept of `independent contractors' for purposes of 
the Exchange Act, even if such arrangement with an associated person 
satisfies the criteria for `independent contractor' status for other 
purposes.'' See Hollinger v. Titan Capital Corp., 914 F.2d 1564, 
1572-76 (9th Cir. 1990) (broker-dealer is a ``controlling person'' 
under Act with respect to its registered representative, even if 
broker dealer and registered representative contractually agree that 
representative would be an independent contractor, and thus, broker-
dealers were required to supervise their representatives).

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[[Page 28737]]

    Further, while the proposed amendments make clear that independent 
contractors are fully subject to the same regulatory scheme as 
registered employees of member organizations, it is proposed that the 
regulatory attestations currently required to be included in member 
organization approval requests be prescriptively retained; the purpose 
being to highlight those aspects of the regulatory scheme that have 
historically given rise to dispute in connection with independent 
contractor arrangements. Accordingly, the proposed amendments would 
continue to specifically require compliance with the following 
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regulatory requirements:

    (1) The member organization must directly supervise and control 
all activities effected on its behalf by independent contractors to 
the same degree and extent that it is required to regulate the 
activities of all other persons registered with such member 
organization consistent with NYSE Rule 342 and all other applicable 
Exchange rules. (This would explicitly confirm that the standard of 
supervision for registered independent contractors is identical to 
that of registered employees, since the supervisory requirements of 
NYSE Rule 342 apply to member organizations and their employees.)
    (2) The member organization must ensure that independent 
contractors are covered by the organization's fidelity insurance 
bond; \13\ determine whether such persons are subject to a 
``statutory disqualification'' (independent contractor status does 
not avoid full compliance with statutory disqualification 
regulations; the independent contractor would be expected to be 
fingerprinted and subject to a background check in the same manner 
as any employee); and ensure that independent contractors are in 
compliance with applicable state Blue Sky provisions.
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    \13\ These regulations are consistent with the Commission's 
Division of Market Regulation 1982 letter restating its policy 
toward independent contractors. In the 1982 letter, the Division 
stated that independent contractor salesperson whose activities are 
subject to control by a broker-dealer must be registered with a 
self-regulatory organization and should be covered by the employer 
broker-dealer's fidelity bond. See Letter from Douglas Scarff, 
Director, Division of Market Regulation, to Gordon S. Macklin, NASD, 
Charles J. Henry, Chicago Board Options Exchange, Robert J. 
Birnbaum, American Stock Exchange, and John J. Phelan, NYSE.
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    (3) The member organization must ensure that any permitted dual 
employment arrangement involving an independent contractor be in 
compliance with NYSE Rule 346 (``Limitations-Employment and 
Association with Members and Member Organizations'').
    (4) The member organization must ensure that the initiation and 
cessation of independent contractor status and other required 
amendments be appropriately and timely evidenced via Form U4 or 
U5,\14\ as applicable. It is expected that independent contractor 
status will be indicated on Form U4 at the time of initial 
registration. If such status is discontinued, either by termination 
of the relationship or by the independent contractor becoming an 
employee, prompt amendment of Form U4 would be required.
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    \14\ Uniform Termination Notice for Securities Industry 
Registration.

    Further, the proposed amendments would require member organizations 
to obtain the written attestation of each individual seeking to assert 
independent contractor status that he or she will be subject to the 
direct supervision, control and discipline of the member organization, 
and will be bound by the relevant rules, standards and guidelines of 
the member organization. Each prospective independent contractor would 
also be required to attest in writing that he or she will be deemed an 
employee of the member organization and, as such, will be fully subject 
to the jurisdiction of the Exchange. The purpose behind requiring this 
written concurrence is to better assure that prospective independent 
contractors are fully aware of the regulatory arrangement they are 
entering into. The proposed amendments retain an updated \15\ version 
of a ``Consent to Jurisdiction'' form that would be required for this 
purpose. Though submittal of executed forms to the Exchange for 
approval would no longer be required, member organizations would be 
required to retain them along with the corresponding independent 
contractor agreement and would be required to timely provide them to 
the Exchange upon request.
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    \15\ The amendments to ``Consent to Jurisdiction'' consist of 
the deletion of dated references (such as the ``Constitution'' of 
the Exchange); replacing the term ``registered representative'' with 
the term ``registered person'' to reflect the proposed amendment, 
discussed below, that would eliminate the prohibition against 
supervisory persons asserting independent contractor status; and 
non-substantive changes that improve it stylistically.
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    The current Interpretation limits the application of independent 
contractor status to persons without supervisory responsibilities.\16\ 
The proposed amendments would remove the prohibition against 
supervisory persons asserting the status of independent contractor, 
except for those persons designated as principal executive officers 
(e.g., Chief Executive Officer, Chief Financial Officer, Chief 
Operations Officer, etc.) who must remain direct employees of the 
member organization given their unique senior principal executive 
responsibilities over the various areas of their associated member 
organization.\17\
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    \16\ That prohibition has been relaxed as to registered 
representatives ``in charge'' of an office under NYSE Rule 342.15. 
See Securities Exchange Act Release No. 48762 (November 7, 2003), 68 
FR 64942 (November 17, 2003) (SR-NYSE-2003-26).
    \17\ 17 See NYSE Rule 311(b)(5) and its Interpretation.
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    Permitting supervisors to assert independent contractor status 
would not affect the individual's ability to supervise, nor would it 
reduce accountability for failure to fulfill their supervisory, 
regulatory, and other professional obligations. Regardless of whether 
an individual is deemed an independent contractor, he or she will be 
required to have the same qualifications and act in the same capacity 
as any other person similarly charged with supervisory 
responsibilities. Given these safeguards, and the broad range of 
activities currently characterized as ``supervisory,'' the restriction 
on supervisory persons becoming independent contractors would seem to 
serve no practical nor regulatory purpose. The proposed elimination of 
the restriction will serve to increase the range of choices available 
to supervisory persons without detracting from the standards to which 
they are held.
    In sum, the Exchange believes that the proposal will reduce 
unnecessary administrative burdens on member organizations, while still 
fully subjecting persons who choose to assert independent contractor 
status to member organizations' internal policies and procedures, and 
the jurisdictional reach of the Exchange.
2. Statutory Basis
    The Exchange believes that the 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) \18\ which 
requires, among other things, that the rules of the Exchange are 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade and in general to 
protect investors and the public interest. The proposed amendments are 
consistent with that section in that they permit firms to structure 
their employment relationships with registered persons in a manner 
consistent with Exchange rules and without any diminution of

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Exchange jurisdiction and oversight with respect to their activities.
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    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposal does not impose any burden 
on competition 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

    Comments were neither solicited nor received.

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 Exchange 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NYSE-2006-05 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-2006-05. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the NYSE.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NYSE-2006-05 
and should be submitted on or before June 7, 2006.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-7466 Filed 5-16-06; 8:45 am]

BILLING CODE 8010-01-P
