

[Federal Register: December 29, 2006 (Volume 71, Number 250)]
[Notices]               
[Page 78497-78499]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29de06-122]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 55003; File No. SR-NYSE-2006-109]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Relating to NYSE Regulation, 
Inc. Policies Regarding Exercise of Power to Fine NYSE Member 
Organizations and Use of Money Collected as Fines

December 22, 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 December 6, 2006, the New York Stock Exchange LLC (``Exchange'' or 
``NYSE'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared substantially by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change 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

    NYSE Regulation, Inc. (``NYSE Regulation'') proposed to adopt 
internal procedures to assure the proper exercise by NYSE Regulation of 
its power to fine member organizations of the Exchange and the proper 
use by NYSE Regulation of the funds so collected. The text of the 
proposed rule change is available at the Exchange, the Commission's 
Public Reference Room, and http://www.nyse.com.


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 Exchange 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 Exchange 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
    In conversation with the staff of the Commission, prior to 
Commission approval of rule changes related to the merger of the New 
York Stock Exchange, Inc. with Archipelago Holdings, Inc., the Exchange 
undertook to subsequently file with the Commission a proposed rule 
change regarding NYSE Regulation's use of fines collected from member 
organizations following disciplinary action by NYSE Regulation against 
such member organizations.\3\
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    \3\ See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77), at note 231 
(``Approval Order'').
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    The purpose of this proposed rule change is to provide increased 
transparency regarding the processes which NYSE Regulation has in place 
to insure that the power of the Exchange,

[[Page 78498]]

through NYSE Regulation, to impose fines on its members for 
disciplinary violations is exercised appropriately, and particularly to 
guard against the possibility that fines may be assessed to respond to 
budgetary needs rather than to serve a disciplinary purpose. The 
process proposed by NYSE Regulation is a combination of specific limits 
on the use of fine income coupled with active and ongoing board review 
of how income from fines is used by NYSE Regulation.
    Important to an understanding of this issue is the specific 
corporate governance arrangements which have already been put in place 
with Commission approval to insure the independence of NYSE Regulation, 
the subsidiary to which the Exchange has delegated the performance of 
its regulatory functions. This not-for-profit wholly-owned subsidiary 
of the Exchange is governed by a board of directors all of whom meet 
the independence policy applied to the board of NYSE Group, Inc. 
(``NYSE Group''), and a majority of whom do not serve on any other 
board within the NYSE Group (``non-affiliated directors''). This 
arrangement assures that the non-affiliated directors remain completely 
free from any suggestion that their interests in serving NYSE 
Regulation might at times conflict with a duty to NYSE Group or one of 
its other affiliates. The chief executive officer of NYSE Regulation, 
Richard Ketchum, reports only to the board of NYSE Regulation, and not 
to the chief executive or any other officer of NYSE Group. In addition, 
NYSE Regulation has its own compensation committee and nominating and 
governance committee, both of which must be comprised of a majority of 
non-affiliated directors. None of the employees of NYSE Regulation are 
entitled to own the stock of NYSE Group.
    The Exchange has the authority under the Act \4\ to assess its 
members to cover its costs of regulation, and the Exchange has 
delegated this authority to NYSE Regulation with respect to regulatory 
and certain other fees. Subject to the requirement to file fees with 
the Commission, NYSE Regulation determines, assesses, collects and 
retains examination, access, registration, qualification, continuing 
education, arbitration, dispute resolution and other regulatory fees. 
NYSE Regulation funds its examination programs for assuring financial 
responsibility and compliance with sales practice rules, testing, and 
continuing education through fees assessed directly on member 
organizations.
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    \4\ 15 U.S.C. 78a, et seq.
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    NYSE Regulation also receives funding from markets for which it 
provides regulatory services; at this time, the Exchange and NYSE Arca, 
Inc. There is also an explicit agreement among NYSE Group, the 
Exchange, NYSE Market, Inc. and NYSE Regulation to provide adequate 
funding to NYSE Regulation.
    Finally, the Exchange's Operating Agreement specifies that the 
Exchange, as the owner of NYSE Regulation, ``shall not use any assets 
of, or any regulatory fees, fines or penalties collected by, [NYSE 
Regulation] for commercial purposes or distribute such assets, fees, 
fines or penalties to [NYSE Group] or any other entity other than NYSE 
Regulation.''
    Notwithstanding all the foregoing, subsequent to the Approval Order 
and to comply with the undertaking made to the Commission staff and 
referenced in the Approval Order, NYSE Regulation has adopted the 
following additional internal procedures to assure the proper exercise 
of its power to fine member organizations and the proper use of the 
funds so collected.
    a. Fines will play no role in the annual NYSE Regulation budget 
process.
    As in any corporate entity, NYSE Regulation prepares an operating 
budget in advance of each fiscal year. Beginning this year with the 
preparation of the 2007 operating budget, fines will be budgeted at 
zero, that is, budgeted expenses of NYSE Regulation will be offset 
entirely by budgeted income that does not include any anticipated 
income from fines. Among other things, this means that fines will not 
offset amounts budgeted for compensation of NYSE Regulation employees 
or directors.
    During the course of a year, income from fines will be considered 
as available to fund non-compensation expenses of NYSE Regulation, 
which expenses were not anticipated in the budget process or which 
could not be included in the budget prepared in advance of the fiscal 
year because NYSE Regulation was unable to budget sufficient income 
from sources other than fines to offset the expenses.
    b. The use of fine income by NYSE Regulation will be subject to 
specific review and approval by the NYSE Regulation board of directors.
    On a quarterly basis, the staff of NYSE Regulation will provide to 
the board a report on the amount of fine income received to date during 
the year and recommendations regarding its proposed use to fund 
regulatory expenses as above described. The use of the fine income will 
be subject to board approval.
    Following each year, the staff of NYSE Regulation will provide the 
board a report reprising the fines imposed and the utilization of fine 
income by NYSE Regulation during that year. This report will analyze 
fines imposed by NYSE Regulation for consistency with precedent from 
both other NYSE disciplinary cases as well as publicly available 
disciplinary cases adjudicated by the National Association of 
Securities Dealers, Inc. and the Commission.
    Each year the board will also consider whether unused fine income 
has accumulated beyond a level reasonably necessary for future 
contingencies, and may determine to utilize any such excess to fund one 
or more special projects of NYSE Regulation, to reduce fees charged by 
NYSE Regulation to its member organizations or the markets that it 
serves, or for a charitable purpose.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(5) \5\ that an exchange have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \5\ 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

[[Page 78499]]

(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 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-2006-109 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2006-109. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSE-2006-109 and should be submitted on or before 
January 19, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E6-22399 Filed 12-28-06; 8:45 am]

BILLING CODE 8011-01-P
