

[Federal Register: May 21, 2007 (Volume 72, Number 97)]
[Notices]               
[Page 28534-28540]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21my07-86]                         


[[Page 28534]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55766; File No. SR-NYSE-2006-06]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Proposed New Rule 350A (``Business Entertainment'') 
Concerning Policies and Procedures Addressing Business Entertainment

 May 15, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on February 15, 2006, the New York Stock Exchange 
LLC (``NYSE'' or ``Exchange'') 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 substantially 
prepared by NYSE. On April 26, 2007, NYSE filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original rule 
filing in its entirety.
    \4\ The Commission also is separately publishing a notice by the 
National Association of Securities Dealers, Inc. (``NASD'') to 
propose new IM-3060 on business entertainment, which is 
substantially similar to NYSE's proposed rule text. See Securities 
Exchange Act Release No. 55765 (May 15, 2007) (SR-NASD-2006-044). 
The NYSE proposal and the NASD proposal primarily differ in that the 
NYSE proposal contains a ``Notice to Customers'' provision. See 
Section II(A)(1), Purpose section, and Section IV, Solicitation of 
Comments section, below.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes new Rule 350A (``Business Entertainment'') to 
address conflict of interest issues in connection with the provision of 
business entertainment by member organizations to representatives of 
customers or prospective customers. Below is the text of the proposed 
rule change. Proposed new language is italicized.

Business Entertainment

Rule 350A

    (a) General Requirements
    No member organization or person associated with a member 
organization shall, directly or indirectly, provide any business 
entertainment to a customer representative pursuant to the 
establishment of, or during the course of, a business relationship with 
any customer that is intended or designed to cause, or would be 
reasonably judged to have the likely effect of causing, such customer 
representative to act in a manner that is inconsistent with:
    (1) The best interests of the customer; or
    (2) The best interests of any person to whom the customer owes a 
fiduciary duty.
    (b) Definitions
    For purposes of this rule, the following definitions shall apply:
    (1) The term ``customer'' means:
    (A) a person that maintains a business relationship with a member 
organization via the maintenance of an account, through the conduct of 
investment banking, or pursuant to other securities-related activity; 
or
    (B) a person whose customer representative receives business 
entertainment for the purpose of encouraging such person to establish a 
business relationship with a member organization by opening an account 
with the member organization or by conducting investment banking or 
other securities-related activity with the member organization.
    (2) The term ``customer representative'' means a person who is an 
employee, officer, director, or agent of a customer, unless such person 
is a family member of the customer.
    (3) The term ``family member'' means a person's parents, mother-in-
law or father-in-law, spouse, brother or sister, brother-in-law or 
sister-in-law, son-in-law or daughter-in-law, and children.
    (4) The term ``business entertainment'' means any social event, 
hospitality event, sporting event, entertainment event, meal, leisure 
activity, or event of like nature or purpose, including business 
entertainment offered in connection with a charitable event, 
educational event or business conference, as well as any transportation 
or lodging related to such activity or event, in which a person 
associated with a member organization accompanies a customer 
representative.
    (A) If a customer representative is not accompanied by an 
appropriate associated person of the member organization, any expenses 
associated with the business entertainment will be considered a gift 
under Rule 350 unless exigent circumstances make it impractical for an 
associated person to attend. All instances where such exigent 
circumstances are invoked must be clearly and thoroughly documented and 
be subject to the prior written approval of a designated supervisory 
person or, in very limited circumstances where such prior approval 
cannot reasonably be obtained, to a prompt post-event review to be 
conducted and documented by such supervisory person.
    (B) Anything of value given or otherwise provided to a customer 
representative that does not fall within the definition of ``business 
entertainment'' is a gift under Rule 350.
    (C) In valuing business entertainment expenses pursuant to this 
Rule, a member organization's written policies and procedures must 
specify the methodology to be used by the member organization to 
calculate the value of business entertainment. In general, business 
entertainment expenses should be valued at the higher of face value or 
cost to the member organization.
    (D) For purposes of this Rule, the terms ``person associated with a 
member organization'' or ``associated person'' are defined to include: 
(1) A natural person who is registered or has applied for registration 
under the Rules of the NYSE; (2) a sole proprietor, partner, officer, 
director, or branch manager of a member organization, or other natural 
person occupying a similar status or performing similar functions, or a 
natural person engaged in the investment banking or securities business 
who is directly or indirectly controlling or controlled by a member 
organization, whether or not any such person is registered or exempt 
from registration with the NYSE or NASD.
    (c) Written Policies and Procedures
    (1) Each member organization must have written policies and 
supervisory procedures that:
    (A) define forms of business entertainment that are appropriate and 
inappropriate using quantitative and/or qualitative standards that 
address the nature and frequency of the entertainment provided, as well 
as the type and class of any accommodations or transportation provided 
in connection with such business entertainment; and
    (B) make clear that anything of value given or otherwise provided 
to a customer representative that does not fall within the definition 
of ``business entertainment'' is a gift under Rule 350; and
    (C) impose either specific dollar limits on business entertainment 
or require advance written supervisory approval beyond specified dollar 
thresholds; and
    (D) are designed to detect and prevent business entertainment that 
is intended as, or could reasonably be perceived to be intended as, an 
improper quid pro quo or that could otherwise give rise to a potential 
conflict of interest or

[[Page 28535]]

undermine the performance of a customer representative's duty to a 
customer or to any person to whom the customer owes a fiduciary duty; 
and
    (E) establish standards to ensure that persons designated to 
supervise and administer the written policies and procedures are 
sufficiently qualified; and
    (F) require appropriate training and education for all personnel 
who supervise, administer, or are subject to the written policies and 
procedures.
    (2) A member organization's written policies and procedures may 
distinguish, and set specifically tailored standards for, business 
entertainment in connection with events that are deemed to be primarily 
educational, charitable, or philanthropic in nature, provided that such 
standards comply with the requirements of this rule and are explicitly 
addressed in the written policies and procedures.
    (d) Recordkeeping
    (1) Each member organization's written policies and procedures must 
require the maintenance of detailed records of business entertainment 
expenses provided to any customer representative. The member 
organization is not required to maintain records of:
    (A) business entertainment when the total value of the business 
entertainment, including all expenses associated with the business 
entertainment, does not exceed $50 per day; or
    (B) additional expenses incurred in connection with otherwise 
recorded business entertainment that do not, in the aggregate, exceed 
$50 per day.
    (2) Each member organization's written policies and procedures must 
include provisions reasonably designed to prevent member organization 
associated persons from circumventing the recordkeeping requirements in 
contravention of the spirit and purpose of this rule (e.g., a pattern 
of providing a customer representative with business entertainment 
valued at $48).
    (3) Each member organization's written policies and procedures must 
require that, upon a customer's written request, the member 
organization will promptly make available to the customer any records 
regarding business entertainment provided to customer representatives 
of that customer.
    (e) Notice to Customers
    Each member organization must have a system in place to give notice 
(e.g., via the member organization's Web site, a disclosure document, 
or other appropriate means) to customers that utilize customer 
representatives subject to this rule that, upon a customer's written 
request, the member organization will promptly provide detailed 
information regarding the manner and expense of any business 
entertainment provided to their customer representative(s) by such 
member organization.
    (f) Exemptions
    (1) General Exemptions
    This rule does not apply to any member organization that does not 
engage in business entertainment. For any member organization that 
engages in business entertainment, this rule applies only with respect 
to business entertainment provided to customer representatives.
    (2) Specific Exemption for Member Organizations with Business 
Entertainment Expenses Below $7,500
    A member organization whose business entertainment expenses in the 
course of its fiscal year are below $7,500 shall be subject only to 
paragraphs (a), (b), (c)(1)(D) and (E) of this rule and shall otherwise 
be exempt from paragraphs (c), (d) and (e). Each member organization 
that relies on this exemption must be able to evidence that its 
business entertainment expenses are below the $7,500 threshold.

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

    In its filing with the Commission, 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, and the most significant aspects of such statements are 
set forth in Sections A, B, and C below.

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

1. Purpose
    The Exchange is proposing new Rule 350A (``Business Entertainment'' 
or the ``Rule'') to address conflict of interest issues in connection 
with the provision of business entertainment by member organizations to 
representatives of customers or prospective customers. Specifically, 
the proposed rule addresses the concern that customer representatives' 
decisions to direct business (e.g., order flow) to a given member 
organization may be influenced by lavish entertainment provided by a 
member organization or a person associated with a member organization 
(``associated person''), rather than on the basis of the brokerage 
services to be provided. Such conduct is potentially violative of both 
Commission and self-regulatory organization rules (e.g., best execution 
obligations).\5\
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    \5\ Although not explicitly defined by the Commission, when 
acting as an agent for its customers, a broker-dealer owes such 
customers a duty of best execution. See NYSE Rule 123A.41 which 
provides that a broker handling a market order is to use due 
diligence to execute the order at the best price or prices available 
under the published market procedures of the Exchange.
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    The Exchange has worked closely with industry representatives and 
the NASD to develop a substantially uniform industry business 
entertainment standard to address the potential for such conflicts of 
interest. The Exchange initially contemplated a strictly prescriptive 
approach that established specific quantitative dollar standards for 
all broker-dealers. However, for the reasons discussed in detail below, 
such an approach was ultimately deemed impracticable as it neither 
reasonably addressed the regulatory issue in question nor the business 
realities of Exchange membership. In light of the practical 
difficulties associated with the imposition of a single quantitative 
standard across the spectrum of broker-dealer business models, the 
proposed rule takes a more principle-based approach with flexible 
prescriptive elements and guidelines.

Background

    In attempting to codify business entertainment guidelines, the 
Exchange was faced with developing an approach that addresses 
regulatory concerns, is practical, and does not unreasonably nor unduly 
interfere with broker-dealers' legitimate commercial and business 
relationships. The primary merit of adopting a strictly prescriptive 
approach with fixed dollar limits is that it provides bright line 
standards that, arguably, could facilitate industry compliance. 
However, imposing a fixed dollar standard is not without practical 
problems. For example, it does not take into account regional 
differences--which is to say that what might be considered ``lavish'' 
or ``excessive'' in one city might not necessarily be deemed so in 
another. Further, what might be considered appropriate entertainment 
for an investment banking/institutional client base might be considered 
lavish and/or excessive in a retail customer context.
    Since terms such as ``lavish'' or ``excessive'' can be subjective 
and standards of appropriateness may vary

[[Page 28536]]

according to factors noted above, the NYSE concluded that the idea of 
prescribing industry-wide dollar amount standards was impracticable. A 
specific dollar threshold could not be established that would 
justifiably apply to all broker-dealers, taking into account variances 
in size and business model, and the range of customer types (e.g., 
investment banking, institutional, retail, and those with fiduciary 
obligations such as investment advisers and pension fund 
representatives).
    Further, a uniform standard would give rise to unintended effects 
related to firm participation in, or sponsorship of, charitable events. 
There is also frequent linkage between education and entertainment that 
would likely become problematic. In many instances, firms combine 
legitimate educational functions with lodging, meals and entertainment, 
making it difficult to separate business expenses from entertainment 
expenses under a prescriptive regulatory scheme.
    Thus, the Exchange is proposing a more flexible, principle-based 
approach that would require each firm to develop, within a prescribed 
regulatory framework, standards that are effective and appropriate for 
its business model that would be administered via procedures that are 
transparent and well documented.

Outline of the Proposed Rule

General Prohibition
    Subsection (a) of proposed Rule 350A imposes the general 
prohibition that ``no member organization or person associated with a 
member organization shall, directly or indirectly, provide any business 
entertainment to a customer representative pursuant to the 
establishment of, or during the course of, a business relationship with 
any customer that is intended or designed to cause, or would be 
reasonably judged to have the likely effect of causing, such customer 
representative to act in a manner that is inconsistent with: (1) The 
best interests of the customer or (2) the best interests of any person 
to whom the customer owes a fiduciary duty.''
    The general nature of this prohibition recognizes that no rule of 
this type can identify and specifically address each and every 
potential conflict-of-interest scenario that may arise. Note, however, 
that the prohibition against provision of entertainment ``directly or 
indirectly'' is intended to prevent circumvention of the spirit of the 
rule. For instance, it would be a violation of the Rule if an 
associated person of a member organization were to either utilize his 
or her personal funds in an effort to evade the dictates of the Rule, 
or to encourage an employee of a member organization subsidiary to 
provide entertainment on behalf of the member organization. Note also 
that the purpose of the proposed Rule is to address customer 
representative conflicts of interest that could adversely affect the 
customer. The Rule would not apply to business entertainment provided 
by an associated person directly to individual (natural person) 
customers or potential customers.

Definition of Key Terms

    Proposed Rule 350A(b) defines the terms ``customer,'' ``customer 
representative'' and ``business entertainment'' as follows:
``Customer''
    The term ``customer'' means ``(1) A person \6\ that maintains a 
business relationship with a member organization via the maintenance of 
an account, through the conduct of investment banking, or pursuant to 
other securities-related activity, or (2) a person whose customer 
representative receives business entertainment for the purpose of 
encouraging such person to establish a business relationship with a 
member organization by opening an account with the member organization 
or by conducting investment banking or other securities-related 
activity with the member organization.''
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    \6\ NYSE Rule 2 defines the term ``person'' to mean ``a natural 
person, corporation, partnership, association, joint stock company, 
trust, fund or any organized group of persons whether incorporated 
or not.
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``Customer Representative''
    The term ``customer representative'' means ``a person who is an 
employee, officer, director, or agent of a customer, unless such person 
is a family member \7\ of the customer.'' The ``family member'' 
exemption is proposed to exclude instances where an individual has 
power of attorney over the account of a close family member's account, 
such accounts opened under the Uniform Gifts to Minors Act or instances 
where a person exercises discretion over their spouse's account. The 
Exchange does not believe such arrangements are likely to result in the 
types of conflicts the proposed rule is intended to address and their 
inclusion would thus constitute an undue regulatory burden on 
membership.
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    \7\ The term ``family member'' is defined as ``a person's 
parents, mother-in-law or father-in-law, spouse, brother or sister, 
brother-in-law or sister-in-law, son-in-law or daughter-in-law, and 
children.''
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``Business Entertainment'' \8\
    The term ``business entertainment'' means ``any social event, 
hospitality event, sporting event, entertainment event, meal, leisure 
activity, or event of like nature or purpose, including business 
entertainment offered in connection with a charitable event, 
educational event or business conference, as well as any transportation 
or lodging related to such activity or event, in which an associated 
person of a member organization accompanies a customer representative'' 
(absent ``exigent circumstances,'' discussed below). Anything of value 
given or otherwise provided to a customer representative that does not 
fall within the definition of ``business entertainment'' is a gift 
subject to NYSE Rule 350 (``Compensation or Gratuities to Employees of 
Others'').
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    \8\ See also sections titled ``Exigent Circumstances'' and 
``Valuation of Business Entertainment'' below.
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``Associated Person''
    The terms ``person associated with a member organization'' or 
``associated person'' are defined to include: (1) A natural person who 
is registered or has applied for registration under the Rules of the 
NYSE; (2) a sole proprietor, partner, officer, director, or branch 
manager of a member organization, or other natural person occupying a 
similar status or performing similar functions, or a natural person 
engaged in the investment banking or securities business who is 
directly or indirectly controlling or controlled by a member 
organization, whether or not any such person is registered or exempt 
from registration with the NYSE or NASD.
    The Exchange has been asked about the extent to which the proposed 
rule change reaches business entertainment conducted outside the United 
States, particularly entertainment provided by persons who are employed 
in commonly controlled affiliates of a financial services company 
operating in the United States and/or foreign jurisdictions. As an 
initial matter, proposed Rule 350A reaches all business entertainment 
of a member organization and persons associated with a member 
organization, even if such entertainment occurs outside of the United 
States or is provided to foreign individuals. However, the Exchange 
does not believe that all persons who are employed in commonly 
controlled affiliates of a financial services company operating in the 
United States and/or foreign jurisdictions are necessarily associated 
persons of the member organization, even if they report to a person 
who, in

[[Page 28537]]

another capacity, is an associated person of a member organization.
    An associated person of a member organization may have management 
and supervisory responsibilities for non-member affiliates of a 
financial services company, located within or outside of the United 
States, without the result that the persons being managed and 
supervised in the non-member affiliates would necessarily be deemed 
associated persons of the member organization. It is the view of the 
Exchange that in such instances the following factors establish that an 
employee of a non-member affiliate is not an associated person of the 
member organization: (1) The manager/supervisor of that employee is 
recognized in the member organization as having a scope of 
responsibilities outside of the member organization; (2) the exercise 
of the management and supervision over that employee by such manager/
supervisor is not controlled by the member organization, is reviewable 
for purposes of performance and compensation outside of the member 
organization, and is not conducted for the benefit of the member 
organization; and (3) the employee of the non-member affiliate is not 
otherwise employed or engaged in the investment banking or securities 
business of the member organization or controlled by the member 
organization in respect of such activities.
Undefined Terms
    Any term not specifically defined in Rule 350A shall have the 
meaning ascribed to it as otherwise defined or understood within the 
rules of the Exchange and the interpretations thereof.

Exigent Circumstances

    As noted above, the definition of ``business entertainment'' 
generally prescribes that if a customer representative is not 
accompanied by an appropriate associated person of the member 
organization, any expenses associated with the business entertainment 
will be considered a gift under NYSE Rule 350. An exception to this 
requirement is proposed to address instances when exigent circumstances 
make it impractical for an associated person to attend a business 
entertainment event.\9\ All instances where such exigent circumstances 
are invoked must be clearly and thoroughly documented and be subject to 
the prior written approval of a designated supervisory person or, in 
very limited circumstances where such prior approval cannot reasonably 
be obtained, to a prompt post-event review to be conducted and 
documented by such supervisory person.
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    \9\ See Rule 350A(b)(4)(A).
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    The Exchange believes that the ``exigent circumstances'' exception 
provides necessary flexibility in light of real-world, last minute 
emergency situations that could arise that would make it difficult, if 
not impossible, for an appropriate member organization associated 
person to attend a business entertainment event with a customer 
representative. Examples of exigent circumstances would be a sick 
child, an accident, or some other sudden overriding circumstance. The 
Exchange does not believe this provision would lead to circumvention of 
the spirit or substance of the proposed rule since all such occurrences 
are subject to detailed documentation such that any patterns of abuse 
would become quickly apparent to supervisory personnel.

Written Policies and Supervisory Procedures Required

    Pursuant to the general directive of proposed Rule 350A(a), Rule 
350A(c) would require that each member organization have written 
policies and supervisory procedures applicable to business 
entertainment that incorporate prescribed elements. The following 
prescribed elements, outlined under subsection (c)(1), are applicable 
to all member organizations except those with business expenses below 
$7,500, which are subject only to subsection (c)(1)(D) and (c)(1)(E): 
\10\
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    \10\ See proposed Rule 350A(f) and section below entitled 
``Specific Exemptions for Member Organizations with Business 
Entertainment Expenses Below $7,500.''
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    (A) The policies and procedures must define forms of business 
entertainment that are ``appropriate'' and ``inappropriate,'' using 
quantitative and/or qualitative standards that address the nature and 
frequency of the entertainment provided, as well as the type and class 
of any accommodations or transportation provided in connection with 
such business entertainment. This provision recognizes that, in order 
to establish meaningful standards that are enforceable, firms must have 
objective bases upon which to determine the appropriateness of business 
entertainment. It also recognizes that, given the wide range of broker-
dealer business models, it is impractical to require a single, 
industry-wide set of standards. Further, by placing the responsibility 
on firm personnel to develop firm-specific standards has the benefit of 
fostering internal discussion and serious consideration of issues 
related to the provision of business entertainment in both an ethical 
and practical context.
    (B) The policies and procedures must make clear that anything of 
value given or otherwise provided to a customer representative that 
does not fall within the definition of ``business entertainment'' is a 
gift under NYSE Rule 350.
    (C) The policies and procedures must impose either specific dollar 
limits on business entertainment or require prior written supervisory 
approval when such entertainment expenses will exceed certain specified 
dollar thresholds. This provision would require firms to make 
objective, ``hard number'' value determinations regarding generally 
acceptable levels of business entertainment. Not only would this 
approach have the benefit of establishing unambiguous standards, it 
would also encourage the self-comparison of such standards among firms 
of similar size and circumstance. This, in conjunction with feedback 
from regulatory organizations, would likely result in the establishment 
of ``unofficial,'' but generally accepted industry standards over time.
    (D) The policies and procedures must be designed to detect and 
prevent business entertainment that is intended as, or could reasonably 
be perceived to be intended as, an improper quid pro quo or that could 
otherwise give rise to a potential conflict of interest, or undermine 
the performance of a customer representative's duty to a customer or to 
any person to whom the customer owes a fiduciary duty. In addition to 
highlighting the core purpose of the Rule, this provision is intended 
to make clear that member organizations are expected to take a 
proactive approach with respect to potential violations of their 
business entertainment policy.
    (E) The policies and procedures must establish standards to ensure 
that persons designated to supervise and administer the written 
policies and procedures are sufficiently qualified. Since the Rule does 
not prescribe exam qualifications or other standardized qualification 
requirements for supervisors or administrators of business 
entertainment policies and procedures, member organizations must 
formalize a process to ensure that informed determinations are made 
with regard to the ability of persons assigned such 
responsibilities.\11\
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    \11\ See NYSE Rule 345A(b). Note also that although Rule 350A, 
as proposed in Amendment No. 1, does not include a specific 
requirement that members test business entertainment policies and 
procedures, such policies and procedures are subject to NYSE Rule 
342.23 which requires the development and maintenance of adequate 
controls over each business activity and the establishment of 
procedures for independent verification and testing of those 
business activities. Telephone call between Rebekah Liu, Special 
Counsel, Division of Market Regulation (``Division''), Commission, 
and Steve Kasprzak, Principal Counsel, NYSE, May 15, 2007.

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[[Page 28538]]

    (F) The policies and procedures must provide appropriate education 
and training to all personnel who supervise, administer, or are subject 
to the written policies and procedures prescribed by the proposed Rule. 
This provision is intended to ensure that all relevant personnel are 
familiar with, and have a clear understanding of, the firm's business 
entertainment policies and procedures. Such education and training 
could be provided as part of the ``Firm Element'' requirement of NYSE 
Rule 345A (``Continuing Education for Registered Persons'').\12\
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    \12\ See NYSE Rule 345A(b).
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Certain ``Business Entertainment'' Standards May Be Distinguished

    In addition to the above requirements, the proposed Rule \13\ would 
make clear that the written policies and supervisory procedures may 
distinguish, and set specifically tailored standards for, business 
entertainment deemed to be primarily educational in nature or closely 
associated with a charitable event or philanthropic cause. This 
provision recognizes that certain types of events that could be 
characterized as business entertainment, or that include entertainment 
as an element, might serve a larger purpose than those strictly or 
primarily intended to solicit business. Any such standards to be 
utilized must be explicitly addressed in the member's organization 
policies and procedures, and must still comply with all requirements of 
the proposed Rule.
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    \13\ See Rule 350A(c)(2).
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Recordkeeping Requirements

    In order to ensure that expenses can be tracked and analyzed for 
potential improprieties, proposed Rule 350A(d) makes clear that each 
member organization's written policies and procedures must require 
maintenance of detailed records of business entertainment expense 
provided to any customer representative. Further, such policies and 
procedures must require that, upon a customer's written request, each 
member organization will promptly make available to a customer any 
records regarding business entertainment provided to customer 
representatives of that customer.
    However, in order not to impose an undue regulatory burden, the 
proposed Rule includes an exemption to the recordkeeping requirement 
for de minimis or incidental expenses that would not reasonably be 
expected to influence the behavior of a customer representative. 
Specifically, records would not be required to be maintained for:
    (1) Business entertainment when its total value, including all 
associated expenses, does not exceed $50 per day (such as a $45 dinner, 
or an inexpensive dinner and movie which, in the aggregate, cost less 
than $50); or
    (2) Additional expenses incurred in connection with otherwise 
recorded business entertainment that do not, in the aggregate, exceed 
$50 per day (such as a hot dog and soda purchased at a professional 
sporting event where the cost of the ticket--presuming it is greater 
than $50--has been duly recorded as a business entertainment 
expense).\14\
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    \14\ Member organizations should be aware, however, that they 
may need to track such expenses under other NYSE or Commission 
rules.
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    Each member organization's written policies and procedures must 
include provisions reasonably designed to prevent member organization 
associated persons from circumventing the recordkeeping requirements in 
contravention of the spirit and purpose of this rule (e.g., a pattern 
of providing a customer representative with business entertainment 
valued at $48, or the disaggregation of events--such as a $40 dinner 
followed by a $40 sporting event--required by the Rule to be aggregated 
and recorded).
    As discussed more fully below, the recordkeeping requirements of 
proposed Rule 350A(d) shall not apply to member organizations with 
annual business entertainment expenses below $7,500.

Valuation of Business Entertainment

    The definition of the term ``business entertainment'' states that 
each member organization's written policies and procedures must specify 
the methodology to be used by the member organization to calculate the 
value of business entertainment.\15\ In general, business entertainment 
expenses should be valued at the higher of face value or cost to the 
member organization. Thus, if a theatre ticket with a face value of 
$100 is obtained at a cost to the member organization of $300, the 
ticket would be valued at the higher purchase price.
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    \15\ See Rule 350A(a)(4)(C).
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Provision of Business Entertainment Records to Customers/Notice 
Requirement

    Proposed Rule 350A(e) requires that each member organization's 
written policies and procedures provide that, upon a customer's written 
request, the member organization will promptly make available to the 
customer any business entertainment records regarding business 
entertainment provided any customer representative of that customer. 
Further, each member organization must have a system in place to give 
notice (e.g., via the member organization's Web site, a disclosure 
document, or other appropriate means) to customers that utilize 
customer representatives subject to this rule that, upon a customer's 
written request, the member organization will promptly provide such 
information. The Exchange notes that the ``notice'' provision will 
encourage the expansion of monitoring and controls on business 
entertainment beyond broker-dealers to the employers of business 
entertainment recipients.

Application of Proposed Rule 350A

General Application
    Subsection (f)(1) makes clear that the proposed Rule does not apply 
to any member organization that does not engage in business 
entertainment. Thus, for example, if a member organization provides no 
business entertainment as defined by the proposed Rule, it would not be 
required to establish otherwise applicable policies and procedures. 
This subsection further clarifies that the proposed rule applies only 
with respect to business entertainment provided to customer 
representatives. Thus, as noted above, it would not be applicable to 
situations where a member organization directly provides business 
entertainment to natural person customers or potential natural person 
customers.\16\
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    \16\ Telephone call between Steve Kuan, Special Counsel, 
Division, Commission, and Steve Kasprzak, Principal Counsel, NYSE, 
May 7, 2007.
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Specific Exemptions for Member Organizations With Business 
Entertainment Expenses Below $7,500
    The concerns that the proposed rule seek to address are not 
presented by those member organizations that, in the aggregate, do not 
devote significant resources to business entertainment. Consequently, 
the proposed rule provides for a partial exemption, under subsection 
(f)(2), for those member organizations with annual business 
entertainment expenses below $7,500.

[[Page 28539]]

The provision prescribes that the $7,500 ceiling be measured on a 
fiscal year basis. Each member organization that relies on the 
exemption must evidence that its business entertainment expenses are 
below the threshold.
    Specifically, member organizations below the $7,500 threshold would 
be exempt from the written ``Policies and Procedures'' provisions of 
proposed Rule 350A(c)(1) except for subsections (D) and (E). Subsection 
(D) requires written policies and procedures to detect and prevent 
business entertainment that is intended as, or could reasonably be 
perceived to be intended as, an improper quid pro quo or that could 
otherwise give rise to a potential conflict of interest, or undermine 
the performance of a customer representative's duty to a customer or to 
any person to whom the customer owes a fiduciary duty. Subsection (E) 
requires the establishment of standards to ensure that persons 
designated to supervise and administer the written policies and 
procedures are sufficiently qualified.
    Member organizations below the $7,500 threshold would also be 
exempt from the prescribed recordkeeping provisions of proposed Rule 
350A(d). As noted above, however, member organizations must be able to 
evidence that its business entertainment expenses were below the 
threshold over the course of their fiscal year.
    In addition, member organizations below the $7,500 threshold would 
be exempt from the requirement, under Rule 350A(e) to have a system in 
place to give notice (e.g., via a website, disclosure document, or 
other appropriate means) to customers that utilize customer 
representatives that, upon a customer's written request, the member 
organization will promptly provide detailed information regarding the 
manner and expense of any business entertainment provided to their 
customer representatives by such member organization.
    Note that member organizations that avail themselves of the 
specified exemptions under proposed subsection (f)(2) would still be 
fully subject to proposed Rule 350A(a) which imposes the general 
prohibition that ``no member organization or person associated with a 
member organization shall, directly or indirectly, provide any business 
entertainment to a customer representative pursuant to the 
establishment of, or during the course of, a business relationship with 
any customer that is intended or designed to cause, or would be 
reasonably judged to have the likely effect of causing, such customer 
representative to act in a manner that is inconsistent with: (1) The 
best interests of the customer or (2) the best interests of any person 
to whom the customer owes a fiduciary duty.''

Interpretive Guidance/Practical Criteria

    As discussed above, required written policies and procedures 
addressing business entertainment must include criteria that the member 
organization will utilize to evaluate the propriety of business 
entertainment in various contexts. Although not included in the Rule 
text itself, the Exchange intends to include in an Information Memo 
released in conjunction with the approval of proposed Rule 350A the 
following factors to be considered when establishing such criteria:
With Respect to the Entertainment
    (a) Whether the nature, cost, or extent of the entertainment could 
reasonably give rise to an actual or perceived conflict of interest, or 
encourage a quid pro quo business transaction;
    (b) Whether the nature, cost, and extent of the entertainment is 
consistent with the nature of the business relationship and the 
relationship of the parties involved;
    (c) Whether the provision of any transportation, lodging, or other 
accommodations is appropriate;
    (d) Whether the entertainment would be considered usual and 
customary within the industry;
    (e) Whether the cost of the entertainment is consistent with the 
location (city and/or establishment) in which the entertainment takes 
place;
    (f) Whether the entertainment extends to the client's spouse or to 
guests of the client;
    (g) Whether the entertainment might otherwise reasonably be 
perceived to be improper.
With Respect to the Client
    (a) Whether the recipient of the entertainment has fiduciary duties 
(e.g., to a public company, a state, or a municipality) that may give 
rise to specific legal or ethical considerations;
    (b) The frequency of entertainment provided to the client;
    (c) The frequency of firm contact with the client in the ordinary 
course of business.
With Respect to the Business Purpose
    (a) Whether the entertainment is in recognition of a completed 
deal;
    (b) Whether the entertainment is educational/philanthropic in 
nature, or strictly recreational.
    In closing, the Exchange believes that the proposed Rule is an 
effective and practical approach to address the conflict-of-interest 
issues related to business entertainment, therefore approval of the 
proposal is requested. The Exchange further requests an effective date 
of 6 months from approval in order to give membership sufficient time 
to sufficiently upgrade systems and develop procedures to effectively 
comply with the Rule's requirements. The Exchange will announce the 
effective date in an Information Memo.
2. Statutory Basis
    The proposed rule change is consistent with Section 6 of the 
Act,\17\ in general, and furthers the objectives of Section 
6(b)(5),\18\ in particular, in that it is 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 Exchange 
believes the proposed amendments are consistent with this section in 
that they permit firms to develop and maintain business relationships 
while requiring controls that mitigate potential conflicts of interest 
that can arise in such relationships.
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    \17\ 15 U.S.C. 78f.
    \18\ 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 would 
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 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.

[[Page 28540]]

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.
    The Commission notes that the NYSE's proposed Rule 350A(e) provides 
that the NYSE member organization must have a system in place to give 
notice (e.g., via the member organization's Web site, a disclosure 
document, or other appropriate means) to customers that use customer 
representatives that upon a customer's written request, the NYSE member 
will provide detailed information regarding the manner and expense of 
any business entertainment provided by the NYSE member to the customer 
representative,\19\ while the NASD's proposal does not contain a 
similar notice provision.\20\ The Commission is soliciting comment on 
this difference between the NYSE and NASD proposed rules and 
specifically whether NASD should have a similar notification provision 
for customers utilizing customer representatives.
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    \19\ As noted above, according to the Exchange the notice 
provision will encourage the expansion of monitoring and controls on 
business entertainment beyond broker-dealers to the employers of 
business entertainment recipients.
    \20\ See infra footnote 3.
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    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-2006-06 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-2006-06. 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 the 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-2006-06 and should be submitted on or before June 11, 2007. For 
the Commission, by the Division of Market Regulation, pursuant to 
delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).

Jill M. Peterson,
Assistant Secretary.
[FR Doc. E7-9668 Filed 5-18-07; 8:45 am]

BILLING CODE 8010-01-P
