

[Federal Register: June 26, 2006 (Volume 71, Number 122)]
[Notices]               
[Page 36380-36382]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26jn06-87]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54012; File No. SR-NYSE-2006-05]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/
k/a New York Stock Exchange LLC); Order Approving Proposed Rule Change 
as Amended by Amendments No. 1 and 2 Amending an Interpretation of NYSE 
Rule 345 (Employees--Registration, Approval, Records)

June 16, 2006.

I. Introduction

    On February 17, 2006, the New York Stock Exchange, Inc. (n/k/a New 
York Stock Exchange LLC) (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposal to amend 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. On 
May 3, 2006, NYSE filed Amendment No. 1 to the proposed rule change. 
The proposed rule change, as amended, was published for comment in the 
Federal Register on

[[Page 36381]]

May 17, 2006.\3\ On June 14, 2006, NYSE filed Amendment No. 2 to the 
proposed rule change.\4\ The Commission received no comments regarding 
the proposal. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53789 (May 11, 
2006), 71 FR 28735.
    \4\ In Amendment No. 2, the Exchange makes minor, non-
substantive changes to the rule text contained in Exhibit 5 of the 
proposed rule change. This is a technical amendment and is not 
subject to notice and comment.
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II. Description of the Proposal

    The NYSE proposes to amend Interpretation (a)/02 (``Independent 
Contractors'') of NYSE Rule 345 (``Employees--Registration, Approval, 
Records''). 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 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 independent contractor 
arrangements to prior Exchange approval pursuant to the following four 
conditions: (1) The member organization must provide written assurances 
to the Exchange that it will supervise and control all activities of 
the independent contractor effected on its behalf to the same degree 
and extent that it supervises and controls the activities of all other 
registered representatives and in a manner consistent with NYSE Rule 
342; (2) a copy of the written agreement between the independent 
contractor and the member organization must be submitted to the 
Exchange which provides that the independent contractor will engage in 
securities-related activities solely on behalf of the member 
organization (except as otherwise explicitly 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; that the person is not subject to a 
``statutory disqualification'' as defined in Section 3(a)(39) of the 
Act \7\ and that nothing therein will negate any of the foregoing; (3) 
the prospective independent contractor must submit an undertaking 
subjecting himself to the jurisdiction of the Exchange; and (4) the 
member organization must provide the Exchange assurances that the 
prospective independent contractor is covered by the organization's 
fidelity insurance and that the independent contractor is in compliance 
with applicable state Blue Sky provisions.
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    \7\ See 15 U.S.C. 78c(a)(39).
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    The NYSE is eliminating the requirement that member organizations 
submit separate written representations to the Exchange for approval of 
proposed independent contractor arrangements. The amended 
Interpretation retains current requirements with respect to regulatory 
expectations regarding the arrangements. Accordingly, the proposed 
amendments would continue to specifically require compliance with the 
following regulatory requirements:
    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 the member organization consistent 
with NYSE Rule 342 and all other applicable Exchange rules.\8\ For 
example: (a) 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''); (b) the member 
organization must ensure that independent contractors are covered by 
the organization's fidelity insurance bond, determine whether such 
persons are subject to a ``statutory disqualification'' and ensure that 
independent contractors are in compliance with applicable state Blue 
Sky provisions; and (c) 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 
(``Uniform Application for Securities Industry Registration or 
Transfer'') or U5 (``Uniform Termination for Securities Industry 
Registration''), as applicable.\9\ Independent contractor status must 
be indicated on Form U4 at the time of initial registration. If the 
status is discontinued, either by termination of the relationship or by 
the independent contractor becoming an employee, Form U4 must be 
amended promptly.
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    \8\ The Exchange notes that 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.
    \9\ Form U4 is the uniform form used to register personnel in 
the securities industry. Form U4 is filed with Web CRD, the system 
developed jointly by the National Association of Securities Dealers 
and the North American Securities Administrators Association to 
register associated persons. Form U4, among other things, requires 
an associated person to state whether he is an independent 
contractor. By signing Form U4, an associated person acknowledges 
that he is subject to the rules of the self-regulatory organization 
(``SRO'') with which he is registering as well as to the securities 
laws.
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    Further, the proposed amendments would require member organizations 
to obtain the written attestation of each individual seeking to assert 
independent contractor status that he will be subject to the direct, 
detailed supervision, control and discipline of the member 
organization; will be bound by the relevant rules, standards and 
guidelines of the member organization; and will be deemed an employee 
of the member organization and, as such, will be fully subject to the 
jurisdiction of the Exchange. The proposed amendments retain an updated 
\10\ version of a ``Consent to Jurisdiction'' form that would be 
required for this purpose. Though member organizations will no longer 
need to submit executed Consent to Jurisdiction forms to the Exchange 
for approval, member organizations would be required to retain them 
along with the corresponding independent contractor agreement and 
timely provide them to the Exchange upon request.
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    \10\ 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 
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.\11\ 
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

[[Page 36382]]

remain direct employees of the member organization given their unique 
senior principal executive responsibilities over the various areas of 
their associated member organization.\12\
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    \11\ 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).
    \12\ See NYSE Rule 311(b)(5) and its Interpretation.
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III. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange \13\ and, in particular, the requirements of 
Section 6 of the Act.\14\ Specifically, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\15\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, and processing information with respect 
to, and facilitating transactions in securities, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \13\ In approving this proposed rule change, as amended, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change should reduce 
unnecessary administrative burdens on the NYSE as well as member 
organizations. Persons who assert independent contractor status are 
subject to the member organizations' internal policies and procedures 
and the jurisdictional reach of the Exchange to the same extent as any 
other registered person. The Exchange would still receive notice of 
independent contractor arrangements. The Rule helps ensure that member 
organizations are aware of their responsibility to supervise 
independent contractors.
    Specifically, the revised Form U4: (1) Obviates the need to submit 
duplicative notice because the Form U4 provides the Exchange prompt 
notice and an up-to-date record of such persons \16\ by requiring the 
identification by registered persons of independent contractor status; 
and (2) establishes jurisdictional reach by requiring 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.'' \17\
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    \16\ 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.
    \17\ See Form U4, Subsection 2 of Section 15A (Individual/
Applicant's Acknowledgement and Consent).
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    The Exchange believes that permitting supervisors to assert 
independent contractor status should not affect the individual's 
ability to supervise, nor would it reduce accountability for failure to 
fulfill their supervisory, regulatory, and other professional 
obligations. The Commission notes that regardless of whether an 
individual is deemed an independent contractor, he will be required to 
have the same qualifications and act in the same capacity as any other 
person similarly charged with supervisory responsibilities.
    Finally, the Commission reiterates its longstanding position that 
the designation of an independent contractor has no relevance for 
purposes of the securities laws.\18\ In this regard, the Commission 
notes that member organizations may not avoid their obligation to 
control and supervise the activities of their registered persons by 
designating them as independent contractors.\19\
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    \18\ See letter to Gordon S. Macklin, President, NASD, Charles 
J. Henry, Chicago Board Options Exchange, Robert J. Birnbaum, 
American Stock Exchange and John J. Phelan, NYSE from Douglas 
Scarff, Director, Division of Market Regulation, dated June 18, 
1982.
    \19\ See Section 15(b)(4)(E) of the Act, 15 U.S.C. 78o(b)(4)(E).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (File No. SR-NYSE-2006-05), as 
amended, is hereby approved.
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-9986 Filed 6-23-06; 8:45 am]

BILLING CODE 8010-01-P
