
[Federal Register Volume 79, Number 219 (Thursday, November 13, 2014)]
[Notices]
[Pages 67508-67519]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26815]



[[Page 67508]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73554; File No. SR-NYSE-2014-56]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Amending Its Rules Concerning Supervision To Harmonize the Rules With 
Certain Financial Industry Regulatory Authority, Inc. Rules and Making 
Other Conforming Changes

November 6, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 24, 2014, 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 and II below, which Items have been substantially prepared by 
the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons. The 
Exchange has designated the proposed rule change as constituting a 
``non-controversial'' rule change under Rule 19b-4(f)(6) of the Act,\3\ 
which renders the proposal effective upon receipt of this filing by the 
Commission.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE rules concerning supervision to 
harmonize the rules with certain Financial Industry Regulatory 
Authority, Inc. (``FINRA'') rules and make other conforming changes. 
The text of the proposed rule change is available on the Exchange's Web 
site at 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 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 those 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 parts of such 
statements.

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

1. Purpose
    The Exchange proposes to amend its rules concerning supervision to 
harmonize the rules with certain FINRA rules and make other conforming 
changes. Set forth below are descriptions of the harmonization process, 
the current NYSE rules, and the proposed NYSE rules. Specifically, the 
Exchange proposes to: (1) Adopt new rule text that is substantially 
similar to FINRA Rules 3110, 3120, 3150, and 3170; (2) delete Rule 342 
and related Rule Interpretations (except for certain text in Rule 
342.13 and related Rule Interpretation regarding qualifications and 
exam requirements for individuals with supervisory responsibilities), 
Rule 351(e) and related Rule Interpretations, Rule 354, Rule 401, and 
Rule 401A; and (3) make other conforming changes.\4\
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    \4\ References to rules are to NYSE rules unless otherwise 
indicated.
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Background
    On July 30, 2007, FINRA's predecessor, the National Association of 
Securities Dealers, Inc. (``NASD''), and NYSE Regulation, Inc. 
(``NYSER'') consolidated their member firm regulation operations into a 
combined organization, FINRA. Pursuant to Rule 17d-2 under the Act,\5\ 
the Exchange, NYSER, and FINRA entered into an agreement 
(``Agreement'') to reduce regulatory duplication for their members by 
allocating to FINRA certain regulatory responsibilities for NYSE rules 
and rule interpretations (``FINRA Incorporated NYSE Rules''). NYSE MKT 
LLC (``NYSE MKT'') became a party to the Agreement effective December 
15, 2008.\6\
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    \5\ 17 CFR 240.17d-2.
    \6\ See Exchange Act Release Nos. 56148 (Jul. 26, 2007), 72 FR 
42146 (Aug. 1, 2007) (order approving the Agreement); 56147 (Jul. 
26, 2007), 72 FR 42166 (Aug. 1, 2007) (SR-NASD-2007-054) (order 
approving the incorporation of certain NYSE Rules as ``Common 
Rules''); 60409 (Jul. 30, 2009), 74 FR 39353 (Aug. 6, 2009) (order 
approving the amended and restated Agreement, adding NYSE MKT LLC as 
a party). Paragraph 2(b) of the Agreement sets forth procedures 
regarding proposed changes by FINRA, NYSE or NYSE MKT to the 
substance of any of the Common Rules.
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    As part of its effort to reduce regulatory duplication and relieve 
firms that are members of FINRA, the Exchange, and NYSE MKT of 
conflicting or unnecessary regulatory burdens, FINRA is now engaged in 
the process of reviewing and amending the NASD and FINRA Incorporated 
NYSE Rules in order to create a consolidated FINRA rulebook.\7\
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    \7\ FINRA's rulebook currently has three sets of rules: (1) NASD 
Rules, (2) FINRA Incorporated NYSE Rules, and (3) consolidated FINRA 
Rules. The FINRA Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''), while 
the consolidated FINRA Rules apply to all FINRA members. For more 
information about the FINRA rulebook consolidation process, see 
FINRA Information Notice, dated March 12, 2008.
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    FINRA recently harmonized NASD and FINRA Incorporated NYSE Rules 
and interpretations concerning supervision. More particularly, FINRA: 
(1) Adopted FINRA Rules 3110 and 3120 to largely replace NASD Rules 
3010 and 3012, respectively; (2) incorporated into FINRA Rule 3110 and 
its supplementary material the requirements of NASD IM-1000-4, NASD IM-
3010-1, FINRA Incorporated NYSE Rule 401A, and FINRA Incorporated NYSE 
Rule 342.21; (3) replaced NASD Rule 3010(b)(2) with new FINRA Rule 
3170; (4) replaced NASD Rule 3110(i) with new FINRA Rule 3150; and (5) 
deleted the following FINRA Incorporated NYSE Rules and NYSE Rule 
Interpretations: (i) NYSE Rule 342 and related NYSE Rule 
Interpretations; (ii) NYSE Rule 343 and related NYSE Rule 
Interpretations; (iii) NYSE Rule 351(e) and related NYSE Rule 
Interpretation; (iv) NYSE Rule 354; (v) NYSE Rule 401; and (vi) NYSE 
Rule 401A.\8\
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    \8\ See Exchange Act Release No. 71179 (Dec. 23, 2013), 78 FR 
79542 (Dec. 30, 2013) (SR-FINRA-2013-025).
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    FINRA has announced that the effective date for the rule change 
will be December 1, 2014. The Exchange proposes to make its proposed 
rule change effective on the same date as FINRA, and will announce the 
effective date via an Information Memo.\9\
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    \9\ There is one exception. Effective as of April 7, 2014, in 
order to coincide with related changes to Form BR, the Exchange 
deleted NYSE Rule 343 and the related interpretations and FINRA 
deleted the related FINRA Incorporated NYSE Rule and NYSE Rule 
Interpretations. See FINRA Regulatory Notices 14-10 and 14-11 and 
Exchange Act Release No. 71989 (Apr. 22, 2014), 79 FR 23391 (Apr. 
28, 2014) (SR-NYSE-2014-21). See also Exchange Act Release No. 73325 
(Oct. 9, 2014), 79 FR 61360 (Oct. 10, 2014) (SR-NYSE-2014-55) 
(conforming amendments related to the deletion of NYSE Rule 343).
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Current Supervision Rules and Interpretations
    Rule 342(a) requires each office, department or business activity 
of a member or member organization (including foreign incorporated 
branch offices) to be under the supervision and control of the member 
or member

[[Page 67509]]

organization establishing it and of the personnel delegated such 
authority and responsibility. The person in charge of a group of 
employees must reasonably discharge his duties and obligations in 
connection with supervision and control of the activities of those 
employees related to the business of their employer and compliance with 
securities laws and regulations.
    Rule 342(b) provides that the general partners or directors of each 
member organization must provide for appropriate supervisory control 
and must designate a general partner or principal executive to assume 
overall authority and responsibility for internal supervision and 
control of the organization and compliance with securities' laws and 
regulations. This person must:
     Delegate to qualified principals or employees 
responsibility and authority for supervision and control of each 
office, department or business activity, and provide for appropriate 
procedures of supervision and control; and
     Establish a separate system of follow-up and review to 
determine that the delegated authority and responsibility is being 
properly exercised.
    Rule 342(c) provides that a member organization must provide notice 
to the Exchange of each branch office established by such member 
organization.
    Rule 342(d) provides that qualified persons acceptable to the 
Exchange must be in charge of:
     Any office of a member or member organization;
     Any regional or other group of offices; and
     Any sales department or activity.
    Rule 342(e) provides that the amounts and types of credit extended 
by a member organization must be supervised by members or principal 
executives qualified by experience for such control in the types of 
business in which the member organization extends credit.
    Supplementary Materials 342.10-.30 provide additional guidance 
relating to the definition of branch offices, annual fees, foreign 
branch offices, the acceptability of supervisors, the experience of 
senior management, small offices, the supervision of registered 
representatives, the review of communications with the public, 
bookkeeping, the supervision of producing managers, information 
requests, trade review and investigation, the definition of related 
financial instrument, internal controls, annual branch office 
inspection, risk-based surveillance and branch office identification, 
criteria for inspection programs, and annual reports and 
certifications. The related Rule 342 Interpretations provide further 
guidance relating to the foregoing.
    Rule 351(e) provides that each member not associated with a member 
organization and a principal executive of each member organization must 
take one or both of the following two actions in relation to the trades 
that are subject to the review procedures required by Rule 342.21(a):
     Sign a written statement in the form specified in the rule 
and deliver it to the Exchange by the 15th day of the month following 
the calendar quarter in which the trade occurred.
     As to any such trade that is the subject of an internal 
investigation pursuant to Rule 342.21(b), but has not been both 
resolved and included in the written statement, report in writing to 
the Exchange:
     The commencement of the internal investigation, the 
identity of the trade, and the reason why the trade could not be the 
subject of the written statement (report by the 15th day of the month, 
following the calendar quarter in which the trade occurred);
     the quarterly progress of each open investigation (report 
by the 15th day of the month following the quarter); and
     the completion of the investigation, detailing the 
methodology and results of the investigation, any internal disciplinary 
action taken, and any referral of the matter to the Exchange, another 
self-regulatory organization (``SRO''), the Commission or another 
Federal agency, and including, where no internal disciplinary action 
has been taken and no such referral has been made, a written statement 
in relation to the trade in the form specified below (report within one 
week after completion of the investigation).
    Rule 351(e) also provides that when a statement pertains to one or 
more trades that have been the subject of an internal investigation 
pursuant to Rule 342.21(b) but as to which no internal disciplinary 
action has been taken and no referral of the matter to the Exchange, 
another SRO, or a Federal agency has been made, the written statement 
must also refer to the particular trade(s) (rather than to the trades 
of a particular calendar quarter) and must omit the clause excepting 
trades reported as the subject of an investigation. The related Rule 
351 Interpretations provide additional guidance relating to the 
foregoing.
    Rule 354(a) provides that, by April 1 of each year, each member 
organization must submit a copy of its Rule 342.30 annual report on 
supervision and compliance to its control person(s) or, if the member 
organization has no control person, to the audit committee of its Board 
of Directors or its equivalent committee or group. In the case of a 
control person that is an organization (a ``controlling 
organization''), the member organization must submit the report to the 
general counsel of the controlling organization and to the audit 
committee of the controlling organization's Board of Directors or its 
equivalent committee or group.
    Rule 354(b) provides that, for the purpose of Rule 354(a), 
``control person'' means a person who controls the member organization 
within the meaning of Rule 2 otherwise than solely by virtue of being a 
director, general partner, or principal executive (or person occupying 
a similar status or performing similar functions) of the member 
organization.
    Rule 401(b) provides that each member and member organization must 
maintain written policies and procedures, administered pursuant to the 
internal control requirements prescribed under Rule 342.23, 
specifically with respect to the following activities:
     Transmittals of funds (e.g., wires, checks, etc.) or 
securities:
     From customer accounts to third party accounts (i.e., a 
transmittal that would result in a change of beneficial ownership);
     from customer accounts to outside entities (e.g., banks, 
investment companies, etc.);
     from customer accounts to locations other than a 
customer's primary residence (e.g., post office box, ``in care of'' 
accounts, alternate address, etc.); and
     between customers and registered representatives 
(including the hand-delivery of checks).
     Customer changes of address.
     Customer changes of investment objectives.
    The policies and procedures required under Rule 401(b)(1), (2), and 
(3) must include a means/method of customer confirmation, notification, 
or follow-up that can be documented.
    Rule 401A(a) provides that, for every customer complaint they 
receive that is subject to the reporting requirements of Rule 4530(d), 
members and member organizations must:
     Acknowledge receipt of the complaint within 15 business 
days of receiving it; and
     Respond to the issues raised in the complaint within a 
reasonable period of time.
    Rule 401A(b) provides that each acknowledgement and response

[[Page 67510]]

required by this rule must be conveyed to the complaining customer by 
an appropriate method. More specifically:
     Acknowledgements and responses to written complaints must 
be either:
     In writing, mailed to the complaining customer's last 
known address; or
     Electronically transmitted to the email address from which 
the complaint was sent (method only permissible for electronically 
transmitted complaints).
     Acknowledgements and responses to verbal complaints must 
be either:
     In writing, mailed to the complaining customer's last 
known address; or
     Made verbally to the complaining customer, and recorded in 
a log of verbal acknowledgements and responses to customer complaints.
    Rule 401A(c) provides that written records of the acknowledgements, 
responses, and logs required by this rule must be retained in 
accordance with Rule 440.
Proposed Rule Change
    The Exchange proposes to delete the foregoing rules and 
interpretations relating to supervision (except as noted below), which 
are, in main part, either duplicative of, or do not align with, the 
proposed supervision requirements discussed below, and adopt the text 
of FINRA Rules 3110, 3120, 3150, and 3170, subject to certain technical 
and conforming changes.\10\ As noted in Rule 0, NYSE rules that refer 
to NYSER, NYSER staff or departments, Exchange staff, and Exchange 
departments should be understood as also referring to FINRA staff and 
FINRA departments acting on behalf of the Exchange pursuant to the 
Agreement, as applicable.
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    \10\ The technical and conforming changes are that the Exchange 
would: (1) substitute the term ``member organization'' for 
``member,'' (2) substitute the term ``Exchange'' for ``FINRA,'' (3) 
change certain cross-references to FINRA rules to cross-references 
to Exchange rules, and (4) add supplementary material to define the 
term ``associated person'' in proposed Rules 3110, 3120, and 3150.
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    The Exchange proposes to retain the requirements contained in Rule 
342.13(a) and (b) and related interpretations regarding qualifications 
and exam requirements for individuals with supervisory 
responsibilities. The proposed new version of Rule 342(a), 
corresponding to current Rule 342.13(a), would provide that any member 
or employee identified as in charge of (1) any office of a member or 
member organization, (2) any regional or other group of offices, or (3) 
any sales department or activity must have a creditable record and pass 
the General Securities Sales Supervisor Qualification Examination 
(Series 9/10) or another examination acceptable to the Exchange. The 
proposed new version of Rule 342(a) would retain the current 
requirement in the Interpretation to Rule 342 that every branch office 
or sales manager must have at least three years' experience as a 
registered representative or substantial experience in a related sales 
or managerial position and must pass the Series 9/10.
    Further, the proposed new version of Rule 342(a) would retain the 
current examples of a related sales or managerial position in the 
Interpretation to Rule 342 and the requirement that in order to qualify 
as a supervisory person, a principal executive \11\ should have at 
least three years' experience as a registered representative unless 
granted an exception. The proposed new version of Rule 342(a) would 
also retain from the related Interpretation that the General Securities 
Principal Examination (Series 24) is an acceptable alternative for 
persons whose duties do not include the supervision of options or 
municipal securities sales activity and that the examination 
requirement may be waived at the discretion of the Exchange. Finally, 
the proposed new version of Rule 342(a) would retain the requirement 
from the Interpretation that in the case of a firm applying for 
registered broker-dealer status, the supervisory candidates must have 
at least one year of direct experience or two years of related 
experience in the subject area to be supervised in addition to the 
requirements outlined above.
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    \11\ The Interpretation to Rule 342 refers to ``allied 
members,'' a category the Exchange eliminated and replaced with 
``principal executive,'' which has substantially the same meaning. 
See Exchange Act Release No. 58549 (Sept. 15, 2008), 73 FR 54444 
(Sept. 19, 2008) (SR-NYSE-2008-80).
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    The proposed new version of Rule 342(b), corresponding to current 
Rule 342.13(b), would provide that the individuals designated as having 
day-to-day compliance responsibilities for their respective firms, or 
who supervise ten or more persons engaged in compliance activities, 
have the knowledge necessary to carry out their job responsibilities 
(i.e., overall knowledge of the securities laws and Exchange rules) and 
pass the Compliance Official Examination (the ``Series 14'') or, in the 
case of compliance supervisors of member organizations that conduct a 
Designated Market Maker (``DMM'') business, the DMM Compliance Official 
Examination (the ``Series 14A''). The proposed new version of Rule 
342(b) would also retain the current requirement in the Interpretation 
to Rule 342 that member organizations engaged in a public business in 
addition to a DMM business must have a qualified compliance supervisor 
who has passed both the Series 14 and Series 14A Examinations. Finally, 
the proposed new version of Rule 342(b) would incorporate the following 
exemptions from the Series 14 Examination requirement (currently 
contained in the Interpretation to Rule 342):
     Compliance supervisors at member organizations whose 
activities are solely related to execution of orders on the Exchange 
trading floor and who do not conduct any business with the public;
     Compliance supervisors at member organizations whose 
commissions and other fees from public business (retail and 
institutional) are under $500,000 in the preceding calendar year and 
who introduce to another broker-dealer; and
     Supervisors of ten or more persons whose compliance 
responsibilities are limited to the registration of member organization 
employees with the various regulators and SROs.
Proposed Rule 3110 (Supervision)
    Proposed Rule 3110 is based primarily on requirements in the FINRA 
rulebook and current Rule 342 relating to, among other things, 
supervisory systems, written procedures, internal inspections, and 
review of correspondence.
Proposed Rule 3110(a)
    Proposed Rule 3110(a) would cover supervisory systems and would 
require each member organization to establish and maintain a system to 
supervise the activities of each associated person that is reasonably 
designed to achieve compliance with applicable securities laws and 
regulations, and with applicable Exchange rules. Under the proposed 
rule, final responsibility for proper supervision would rest with the 
member organization. In addition, a member organization's supervisory 
system would be required to provide, at a minimum, for the following:
     The establishment and maintenance of written procedures as 
required by proposed Rule 3110.
     The designation, where applicable, of an appropriately 
registered principal with authority to carry out the supervisory 
responsibilities of the member organization for each type of business 
in which it engages for which registration as a broker-dealer is 
required.
     The registration and designation as a branch office or an 
office of supervisory jurisdiction (``OSJ'') of each location, 
including the main office, that

[[Page 67511]]

meets the definitions contained in proposed Rule 3110(e).\12\
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    \12\ Although to date the Exchange and FINRA have used the same 
definition for ``branch office,'' the Exchange has not previously 
designated OSJs. As such, the requirements relating to OSJs 
described hereinafter would be new for member organizations.
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     The designation of one or more appropriately registered 
principals in each OSJ and one or more appropriately registered 
representatives or principals in each non-OSJ branch office with 
authority to carry out the supervisory responsibilities assigned to 
that office by the member organization.
     The assignment of each registered person to an 
appropriately registered representative or principal who would be 
responsible for supervising that person's activities.
     The use of reasonable efforts to determine that all 
supervisory personnel are qualified, either by virtue of experience or 
training, to carry out their assigned responsibilities.
     The participation of each registered representative and 
registered principal, either individually or collectively, no less than 
annually, in an interview or meeting conducted by persons designated by 
the member organization at which compliance matters relevant to the 
activities of the representative and principal are discussed, which may 
occur in conjunction with the discussion of other matters and may be 
conducted at a central or regional location or at the representative's 
or principal's place of business.
Proposed Rule 3110(b)
    In proposed Rule 3110(b), the Exchange proposes to consolidate 
provisions from current Rule 401A relating to the review of customer 
complaints with various provisions and rules from the FINRA rulebook 
that currently require written procedures, including provisions 
relating to the supervision and review of registered representatives' 
transactions and correspondence. In addition, proposed supplementary 
material, which is discussed in detail below, would codify and expand 
guidance in these areas.
    Proposed Rule 3110(b)(1) would address written procedures and would 
require each member organization to establish, maintain, and enforce 
written procedures to supervise the types of business in which it 
engages and the activities of its associated persons that are 
reasonably designed to achieve compliance with applicable securities 
laws and regulations and applicable Exchange rules.
    Under proposed Rule 3110(b)(2), the supervisory procedures required 
by proposed Rule 3110(b) would include procedures for the review by a 
registered principal, evidenced in writing, of all transactions 
relating to the investment banking or securities business of the member 
organization.
    Consistent with FINRA Rule 3110(b)(3), proposed Rule 3110(b)(3) 
would be marked ``Reserved.''
    Under proposed Rule 3110(b)(4), the supervisory procedures required 
by proposed Rule 3110(b) would also include procedures for the review 
of incoming and outgoing written (including electronic) correspondence 
and internal communications relating to the member organization's 
investment banking or securities business and be appropriate for the 
member organization's business, size, structure, and customers. The 
supervisory procedures would require the member organization's review 
of:
     Incoming and outgoing written (including electronic) 
correspondence to properly identify and handle in accordance with firm 
procedures, customer complaints, instructions, funds and securities, 
and communications that are of a subject matter that require review 
under Exchange rules and federal securities laws; and
     Internal communications to properly identify those 
communications that are of a subject matter that require review under 
Exchange rules and federal securities laws.

Such reviews would be conducted by a registered principal and would be 
evidenced in writing, either electronically or on paper. Those 
communications subject to review would include (without limitation):
     Communications between non-research and research 
departments concerning a research report's contents (Rule 472(b)(3)).
     Certain communications with the public that require a 
principal's pre-approval (Rule 2210).
     The identification and reporting to the Exchange of 
customer complaints (Rule 4530).\13\
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    \13\ With respect to customer complaints, proposed Rule 
3110(b)(5) also would affirmatively require members to capture, 
acknowledge, and respond to all written (including electronic) 
customer complaints.
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    Current Rule 401A requires firms to acknowledge and respond to all 
customer complaints subject to the reporting requirements of current 
Rule 4530(d). Previously, this meant that firms had to acknowledge and 
respond to both written and oral customer complaints. However, as part 
of the effort to harmonize the NASD and NYSE rules in the interim 
period before completion of the Consolidated FINRA Rulebook, current 
Rule 4530(d) was amended to limit the definition of ``customer 
complaint'' to include only written complaints, thereby making the 
definition substantially similar to that in FINRA Rule 4530(d).\14\
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    \14\ The Exchange adopted the text of FINRA Rule 4530 to replace 
comparable provisions in Rule 351. See Exchange Act Release No. 
64785 (Jun. 30, 2011), 76 FR 39946 (Jul. 7, 2011) (SR-NYSE-2011-27).
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    Proposed Rule 3110(b)(5), which requires a member organization's 
supervisory procedures to include procedures to capture, acknowledge, 
and respond to all written (including electronic) customer complaints, 
essentially incorporates the customer complaint requirement in current 
Rule 401A, including the limitation on including only written 
(including electronic) customer complaints. The Exchange believes that 
oral complaints are difficult to capture and assess, and that they 
raise competing views as to the substance of the complaint being 
alleged. Consequently, the Exchange believes that oral complaints do 
not lend themselves as effectively to a review program as written 
complaints, which are more readily documented and retained. However, 
the Exchange reminds member organizations that the failure to address 
any customer complaint, written or oral, may be a violation of Rule 
2010.
    Under proposed Rule 3110(b)(6), the supervisory procedures required 
by proposed Rule 3110(b) must set forth the supervisory system 
established by the member organization pursuant to proposed Rule 
3110(a), and would include:
     The titles, registration status, and locations of the 
required supervisory personnel and the responsibilities of each 
supervisory person as these relate to the types of business engaged in, 
applicable securities laws and regulations, and Exchange rules.
     A record, preserved by the member organization for a 
period of not less than three years, the first two years in an easily 
accessible place, of the names of all persons who are designated as 
supervisory personnel and the dates for which such designation is or 
was effective.
     Procedures prohibiting associated persons who perform a 
supervisory function from:
     Supervising their own activities; and
     Reporting to, or having their compensation or continued 
employment determined by, a person or persons they are supervising.

[[Page 67512]]

     If a member organization determines, with respect to any 
of its supervisory personnel, that compliance with the preceding two 
bullets is not possible because of the member organization's size or a 
supervisory personnel's position within the firm, the member 
organization would be required to document:
     The factors the member organization used to reach such 
determination; and
     How the supervisory arrangement with respect to such 
supervisory personnel otherwise complies with proposed Rule 3110(a).
     Procedures reasonably designed to prevent the supervisory 
system required pursuant to proposed Rule 3110(a) from being 
compromised due to the conflicts of interest that may be present with 
respect to the associated person being supervised, including the 
position of such person, the revenue such person generates for the 
firm, or any compensation that the associated person conducting the 
supervision may derive from the associated person being supervised.
    Proposed Rule 3110(b)(7) would require a member organization to 
keep and maintain a copy of its written supervisory procedures, or such 
relevant portions, in each OSJ and at each location where supervisory 
activities are conducted on behalf of the member organization. Each 
member organization would be required to promptly amend its written 
supervisory procedures to reflect changes in applicable securities laws 
or regulations, including Exchange rules, and as changes occur in its 
supervisory system. Each member organization would be responsible for 
promptly communicating its written supervisory procedures and 
amendments to all associated persons to whom such written supervisory 
procedures and amendments are relevant based on their activities and 
responsibilities.
Proposed Rule 3110(c)
    Proposed Rule 3110(c) would cover internal inspections. Proposed 
Rule 3110(c)(1) would require each member organization to conduct a 
review, at least annually (on a calendar-year basis), of the businesses 
in which it engages. The review must be reasonably designed to assist 
the member organization in detecting and preventing violations of, and 
achieving compliance with, applicable securities laws and regulations, 
and with applicable Exchange rules. Each member organization would be 
required to review the activities of each office, which would include 
the periodic examination of customer accounts to detect and prevent 
irregularities or abuses. Each member organization would also be 
required to retain a written record of the date upon which each review 
and inspection is conducted.
    In addition, proposed Rule 3110(c)(1) would require each member 
organization to inspect at least annually (on a calendar-year basis) 
every OSJ and any branch office that supervises one or more non-branch 
locations. Each member organization would also be required to inspect 
at least every three years every branch office that does not supervise 
one or more non-branch locations. In establishing how often to inspect 
each non-supervisory branch office, the member organization would be 
required to consider whether the nature and complexity of the 
securities activities for which the location is responsible, the volume 
of business done at the location, and the number of associated persons 
assigned to the location require the non-supervisory branch office to 
be inspected more frequently than every three years. If a member 
organization establishes a more frequent inspection cycle, the member 
organization would be required to ensure that at least every three 
years, the inspection requirements enumerated in proposed Rule 
3110(c)(2) have been met. The member organization's written supervisory 
and inspection procedures would have to set forth the non-supervisory 
branch office examination cycle, an explanation of the factors the 
member organization used in determining the frequency of the 
examinations in the cycle, and the manner in which a member 
organization would comply with proposed Rule 3110(c)(2) if using more 
frequent inspections than every three years.
    Under proposed Rule 3110(c)(1), each member organization would also 
be required to inspect every non-branch location on a regular, periodic 
schedule. In establishing such a schedule, the member organization 
would be required to consider the nature and complexity of the 
securities activities for which the location is responsible and the 
nature and extent of contact with customers. The member organization's 
written supervisory and inspection procedures would have to set forth 
the schedule and an explanation regarding how the member organization 
determined the frequency of the examination.
    Proposed Rule 3110(c)(2) would require that the inspection and 
review by a member organization pursuant to proposed Rule 3110(c)(1) be 
reduced to a written report and kept on file by the member organization 
for a minimum of three years, unless the inspection is being conducted 
pursuant to proposed Rule 3110(c)(1)(C) and the regular periodic 
schedule is longer than a three-year cycle, in which case the report 
would have to be kept on file at least until the next inspection report 
has been written. If applicable to the location being inspected, 
proposed Rule 3110(c)(2)(A) would require that location's written 
inspection report to include, without limitation, the testing and 
verification of the member organization's policies and procedures, 
including supervisory policies and procedures in the following areas:
     Safeguarding of customer funds and securities;
     Maintaining books and records;
     Supervision of supervisory personnel;
     Transmittals of funds (e.g., wires or checks, etc.) or 
securities from customers to third party accounts; from customer 
accounts to outside entities (e.g., banks, investment companies, etc.); 
from customer accounts to locations other than a customer's primary 
residence (e.g., post office box, ``in care of'' accounts, alternate 
address, etc.); and between customers and registered representatives, 
including the hand-delivery of checks; and
     Changes of customer account information, including address 
and investment objectives changes and validation of such changes.
    Under proposed Rules 3110(c)(2)(B) and 3110(c)(2)(C), a member 
organization's policies and procedures regarding transmittals of funds 
must include a means or method of customer confirmation, notification, 
or follow-up that can be documented. Member organizations could use 
reasonable risk-based criteria to determine the authenticity of the 
transmittal instructions. The policies and procedures regarding changes 
in customer account information would have to include, for each change 
processed, a means or method of customer confirmation, notification, or 
follow-up that can be documented and that complies with Rules 17a-
3(a)(17)(i)(B)(2) and 17a-3(a)(17)(i)(B)(3) under the Act.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 240.17a-3(a)(17)(i)(B)(2) and 17 CFR 240.17a-
3(a)(17)(i)(B)(3).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 3110(c)(2)(D), if a member organization 
does not engage in all of the activities enumerated in the bullets 
immediately above at the location being inspected, the member 
organization would be required to identify those activities in the 
member organization's written supervisory procedures or the location's

[[Page 67513]]

written inspection report and document in the member organization's 
written supervisory procedures or the location's written inspection 
report that supervisory policies and procedures for such activities 
must be in place at that location before the member organization can 
engage in them.
    Under proposed Rule 3110(c)(3), for each inspection conducted 
pursuant to the proposed rule, a member organization would be required 
to:
     Have procedures reasonably designed to prevent the 
effectiveness of inspections from being compromised due to conflicts of 
interest that may be present with respect to the location being 
inspected, including but not limited to, economic, commercial, or 
financial interests in the associated persons and businesses being 
inspected; and
     Ensure that the person conducting an inspection is not an 
associated person assigned to the location or is not directly or 
indirectly supervised by, or otherwise reporting to, an associated 
person assigned to the location.
    Under the proposed rule, if a member organization determines that 
compliance with these two bullets is not possible either because of a 
member organization's size or its business model, the member 
organization would be required to document in the inspection report 
both the factors the member organization used to make its determination 
and how the inspection otherwise complies with proposed Rule 
3110(c)(1).
    By way of comparison, under current Rules 342.24 and 342.25, each 
branch office must be inspected annually, unless the member 
organization obtained an exemption by submitting to the Exchange 
written policies and procedures for systematic risk-based surveillance 
of its branch offices, in which case each branch office must be 
inspected at least every three years. The proposed subject matter 
requirements for inspection reports are substantially the same as the 
current subject matter requirements.
Proposed Rule 3110(d)
    Section 15(g) of the Act, adopted as part of the Insider Trading 
and Securities Fraud Enforcement Act of 1988,\16\ requires every 
registered broker or dealer to establish, maintain, and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
material, non-public information by the broker or dealer or any 
associated person of the broker or dealer.\17\ Current Rule 342.21 sets 
forth specific supervisory procedures for compliance with Section 15(g) 
by requiring firms to review trades in Exchange-listed securities and 
related financial instruments that are effected for the member 
organization's account or for the accounts of the member organization's 
employees and family members. Current Rule 342.21 also requires member 
organizations to promptly conduct an internal investigation into any 
trade the firm identifies that may have violated insider trading laws 
or rules.
---------------------------------------------------------------------------

    \16\ See Insider Trading and Securities Fraud Enforcement Act of 
1988, Public Law No. 100-704, 102 Stat. 4677.
    \17\ 15 U.S.C. 78o(g).
---------------------------------------------------------------------------

    Proposed Rule 3110(d) incorporates provisions of current Rule 
342.21, with some modifications, and extends the requirement beyond 
Exchange-listed securities and related financial instruments to cover 
all securities. Proposed Rule 3110(d) would cover transaction reviews 
and investigations. Proposed Rule 3110(d)(1) would require each member 
organization to include in its supervisory procedures a process for the 
review of securities transactions reasonably designed to identify 
trades that may violate the provisions of the Act, the rules 
thereunder, or Exchange rules prohibiting insider trading and 
manipulative and deceptive devices that are effected for the:
     Accounts of the member organization;
     Accounts introduced or carried by the member organization 
in which a person associated with the member organization has a 
beneficial interest or the authority to make investment decisions;
     Accounts of a person associated with the member 
organization that are disclosed to the member organization pursuant to 
Rule 407 or NASD Rule 3050, as applicable; and
     Covered accounts.
    Under proposed Rule 3110(d)(2), each member organization would be 
required to promptly conduct an internal investigation into any such 
trade to determine whether a violation of those laws or rules has 
occurred. In addition, under proposed Rule 3110(d)(3), a member 
organization engaging in investment banking services would be required 
to file written reports with the Exchange, signed by a senior officer 
of the member organization, at such times and, without limitation, 
including such content, as follows:
     Within ten business days of the end of each calendar 
quarter, a written report describing each internal investigation 
initiated in the previous calendar quarter pursuant to proposed Rule 
3110(d)(2), including the identity of the member organization, the date 
each internal investigation commenced, the status of each open internal 
investigation, the resolution of any internal investigation reached 
during the previous calendar quarter, and, with respect to each 
internal investigation, the identity of the security, trades, accounts, 
associated persons of the member organization, or associated person of 
the member organization's family members holding a covered account, 
under review, and that includes a copy of the member organization's 
policies and procedures required by proposed Rule 3110(d)(1).
     Within five business days of completion of an internal 
investigation pursuant to proposed Rule 3110(d)(2) in which it was 
determined that a violation of the provisions of the Act, the rules 
thereunder, or Exchange rules prohibiting insider trading and 
manipulative and deceptive devices had occurred, a written report 
detailing the completion of the investigation, including the results of 
the investigation, any internal disciplinary action taken, and any 
referral of the matter to the Exchange, another SRO, the SEC, or any 
other federal, state, or international regulatory authority.
    For purposes of proposed Rule 3110(d)(4), the following definitions 
would apply:
     The term ``covered account'' would include any account 
introduced or carried by the member organization that is held by:
     The spouse of a person associated with the member 
organization;
     A child of the person associated with the member 
organization or such person's spouse, provided that the child resides 
in the same household as, or is financially dependent upon, the person 
associated with the member organization;
     Any other related individual over whose account the person 
associated with the member organization has control; or
     Any other individual over whose account the associated 
person of the member organization has control and to whose financial 
support such person materially contributes.
     The term ``investment banking services'' would include, 
without limitation, acting as an underwriter, participating in a 
selling group in an offering for the issuer, or otherwise acting in 
furtherance of a public offering of the issuer; acting as a financial 
adviser in a merger or acquisition; providing venture capital or equity 
lines of credit or serving as placement agent for the issuer or 
otherwise acting in

[[Page 67514]]

furtherance of a private offering of the issuer.
Proposed Rule 3110(e)
    Proposed Rule 3110(e) would define ``OSJ'' and ``branch office.'' 
As noted above, ``OSJ'' would be a new designation for the Exchange and 
the definition of the term would substantially mirror FINRA's 
definition. The term ``OSJ'' would mean any office of a member 
organization at which any one or more of the following functions take 
place:
     Order execution or market making;
     Structuring of public offerings or private placements;
     Maintaining custody of customers' funds or securities;
     Final acceptance (approval) of new accounts on behalf of 
the member organization;
     Review and endorsement of customer orders;
     Final approval of retail communications for use by persons 
associated with the member organization, pursuant to Rule 2210(b)(1), 
except for an office that solely conducts final approval of research 
reports; or
     Responsibility for supervising the activities of persons 
associated with the member organization at one or more other branch 
offices of the member organization.

The definition of ``branch office'' would be substantially the same as 
current Rule 342.10. It would mean any location where one or more 
associated persons of a member organization regularly conducts the 
business of effecting any transactions in, or inducing or attempting to 
induce the purchase or sale of, any security, or is held out as such, 
excluding:
     Any location that is established solely for customer 
service or back office type functions where no sales activities are 
conducted and that is not held out to the public as a branch office;
     Any location that is the associated person's primary 
residence, provided that:
     Only one associated person, or multiple associated persons 
who reside at that location and are members of the same immediate 
family, conduct business at the location;
     The location is not held out to the public as an office 
and the associated person does not meet with customers at the location;
     Neither customer funds nor securities are handled at that 
location;
     The associated person is assigned to a designated branch 
office, and such designated branch office is reflected on all business 
cards, stationery, retail communications and other communications to 
the public by such associated person;
     The associated person's correspondence and communications 
with the public are subject to the firm's supervision in accordance 
with proposed Rule 3110;
     Electronic communications (e.g., email) are made through 
the member organization's electronic system;
     All orders are entered through the designated branch 
office or an electronic system established by the member organization 
that is reviewable at the branch office;
     Written supervisory procedures pertaining to supervision 
of sales activities conducted at the residence are maintained by the 
member organization; and
     A list of the residence locations is maintained by the 
member organization.
     Any location, other than a primary residence, that is used 
for securities business for less than 30 business days \18\ in any one 
calendar year, provided the member organization complies with the first 
eight of the nine immediately preceding bullet points;
---------------------------------------------------------------------------

    \18\ The term ``business day'' would not include any partial 
business day provided that the associated person spends at least 
four hours on such business day at his or her designated branch 
office during the hours that such office is normally open for 
business.
---------------------------------------------------------------------------

     Any office of convenience, where associated persons 
occasionally and exclusively by appointment meet with customers, which 
is not held out to the public as an office; \19\
---------------------------------------------------------------------------

    \19\ Where such office of convenience is located on bank 
premises, signage necessary to comply with applicable federal and 
state laws, rules and regulations and applicable rules and 
regulations of other SROs, and securities and banking regulators 
could be displayed and would not be deemed ``holding out'' for 
purposes of this section.
---------------------------------------------------------------------------

     Any location that is used primarily to engage in non-
securities activities and from which the associated person(s) effects 
no more than 25 securities transactions in any one calendar year; 
provided that any retail communication identifying such location also 
sets forth the address and telephone number of the location from which 
the associated person(s) conducting business at the non-branch 
locations are directly supervised;
     The floor of a registered national securities exchange 
where a member organization conducts a direct access business with 
public customers; or
     A temporary location established in response to the 
implementation of a business continuity plan.
    Notwithstanding the exclusions for branch offices described above, 
any location that is responsible for supervising the activities of 
persons associated with the member organization at one or more non-
branch locations of the member organization would be considered a 
branch office.
Proposed Supplementary Materials to Proposed Rule 3110
    Proposed Supplementary Material .01 to Rule 3110 would require a 
member organization's main office location to be registered and 
designated as a branch office or OSJ if it meets the definitions of a 
``branch office'' or ``office of supervisory jurisdiction'' as set 
forth in proposed Rule 3110(e). In general, the nature of activities 
conducted at a main office will satisfy the requirements of such terms.
    Proposed Supplementary Material .02 to Rule 3110 would provide 
that, in addition to the locations that meet the definition of OSJ in 
proposed Rule 3110(e), each member organization must also register and 
designate other offices as OSJs as is necessary to supervise its 
associated persons in accordance with the standards set forth in 
proposed Rule 3110. In making a determination as to whether to 
designate a location as an OSJ, the member organization should consider 
the following factors:
     Whether registered persons at the location engage in 
retail sales or other activities involving regular contact with public 
customers;
     Whether a substantial number of registered persons conduct 
securities activities at, or are otherwise supervised from, such 
location;
     Whether the location is geographically distant from 
another OSJ of the firm;
     Whether the member organization's registered persons are 
geographically dispersed; and
     Whether the securities activities at such location are 
diverse or complex.
    Proposed Supplementary Material .03 to Rule 3110 would provide 
additional guidance relating to proposed Rule 3110(a)(4), which would 
require a member organization to designate one or more appropriately 
registered principals in each OSJ with the authority to carry out the 
supervisory responsibilities assigned to that office (``on-site 
principal''). The proposed Supplementary Material would provide that 
the designated on-site principal for each OSJ must have a physical 
presence, on a regular and routine basis, at each OSJ for which the 
principal has supervisory responsibilities. Consequently, there is a 
general presumption that a principal will not be designated and 
assigned to be the on-site principal pursuant to proposed Rule 
3110(a)(4) to supervise more than one

[[Page 67515]]

OSJ. If a member organization determines it is necessary to designate 
and assign one appropriately registered principal to be the on-site 
principal pursuant to proposed Rule 3110(a)(4) to supervise two or more 
OSJs, the member organization must take into consideration, among 
others, the following factors:
     Whether the on-site principal is qualified by virtue of 
experience and training to supervise the activities and associated 
persons in each location;
     Whether the on-site principal has the capacity and time to 
supervise the activities and associated persons in each location;
     Whether the on-site principal is a producing registered 
representative;
     Whether the OSJ locations are in sufficiently close 
proximity to ensure that the on-site principal is physically present at 
each location on a regular and routine basis; and
     The nature of activities at each location, including size 
and number of associated persons, scope of business activities, nature 
and complexity of the products and services offered, volume of business 
done, the disciplinary history of persons assigned to such locations, 
and any other indicators of irregularities or misconduct.
    The proposed Supplementary Material would provide that a member 
organization must establish, maintain, and enforce written supervisory 
procedures regarding the supervision of all OSJs. In all cases where a 
member organization designates and assigns one on-site principal to 
supervise more than one OSJ, the member organization must document in 
the member organization's written supervisory and inspection procedures 
the factors used to determine why the member organization considers 
such supervisory structure to be reasonable and the determination by 
the member organization will be subject to scrutiny.
    Proposed Supplementary Material .04 to Rule 3110 would provide that 
a member organization is not required to conduct in-person meetings 
with each registered person or group of registered persons to comply 
with the annual compliance meeting (or interview) required by proposed 
Rule 3110(a)(7). A member organization that chooses to conduct 
compliance meetings using other methods (e.g., on-demand webcast or 
course, video conference, interactive classroom setting, telephone, or 
other electronic means) must ensure, at a minimum, that each registered 
person attends the entire meeting (e.g., an on-demand annual compliance 
webcast would require each registered person to use a unique user ID 
and password to gain access and use a technology platform to track the 
time spent on the webcast, provide click-as-you go confirmation, and 
have an attestation of completion at the end of a webcast) and is able 
to ask questions regarding the presentation and receive answers in a 
timely fashion (e.g., an on-demand annual compliance webcast that 
allows registered persons to ask questions via an email to a presenter 
or a centralized address or via a telephone hotline and receive timely 
responses directly or view such responses on the member organization's 
intranet site).
    Proposed Supplementary Material .05 to Rule 3110 would provide that 
a member organization may use a risk-based review system to comply with 
proposed Rule 3110(b)(2)'s requirement that a registered principal 
review all transactions relating to the investment banking or 
securities business of the member organization. A member organization 
would not be required to conduct detailed reviews of each transaction 
if it is using a reasonably designed risk-based review system that 
provides it with sufficient information to permit it to focus on the 
areas that pose the greatest numbers and risks of violation.
    Proposed Supplementary Material .06 to Rule 3110 would provide 
that, by employing risk-based principles, a member organization must 
decide the extent to which additional policies and procedures for the 
review of:
     Incoming and outgoing written (including electronic) 
correspondence that fall outside of the subject matters listed in 
proposed Rule 3110(b)(4) are necessary for its business and structure. 
If a member organization's procedures do not require that all 
correspondence be reviewed before use or distribution, the procedures 
must provide for:
     The education and training of associated persons regarding 
the firm's procedures governing correspondence;
     The documentation of such education and training; and
     Surveillance and follow-up to ensure that such procedures 
are implemented and followed.
     Internal communications that are not of a subject matter 
that require review under Exchange rules and federal securities laws 
are necessary for its business and structure.
    Proposed Supplementary Material .07 to Rule 3110 would provide that 
the evidence of review required in proposed Rule 3110(b)(4) must be 
chronicled either electronically or on paper and must clearly identify 
the reviewer, the internal communication or correspondence that was 
reviewed, the date of review, and the actions taken by the member 
organization as a result of any significant regulatory issues 
identified during the review. Merely opening a communication would not 
be sufficient review.
    Proposed Supplementary Material .08 to Rule 3110 would provide 
that, in the course of the supervision and review of correspondence and 
internal communications required by proposed Rule 3110(b)(4), a 
supervisor/principal may delegate certain functions to persons who need 
not be registered. However, the supervisor/principal would remain 
ultimately responsible for the performance of all necessary supervisory 
reviews, irrespective of whether he or she delegates functions related 
to the review. Accordingly, supervisors/principals must take reasonable 
and appropriate action to ensure delegated functions are properly 
executed and should evidence performance of their procedures 
sufficiently to demonstrate overall supervisory control.
    Proposed Supplementary Material .09 to Rule 3110 would provide that 
each member organization must retain the internal communications and 
correspondence of associated persons relating to the member 
organization's investment banking or securities business for the period 
of time and accessibility specified in Rule 17a-4(b) under the Act. The 
names of the persons who prepared outgoing correspondence and who 
reviewed the correspondence must be ascertainable from the retained 
records, and the retained records must be readily available to the 
Exchange, upon request.
    Proposed Supplementary Material .10 to Rule 3110 would provide that 
a member organization's determination that it is not possible to comply 
with proposed Rules 3110(b)(6)(C)(i) or (b)(6)(C)(ii) prohibiting 
supervisory personnel from supervising their own activities and from 
reporting to, or otherwise having compensation or continued employment 
determined by, a person or persons they are supervising generally will 
arise in instances where:
     The member organization is a sole proprietor in a single-
person firm;
     A registered person is the member organization's most 
senior executive officer (or similar position); or
     A registered person is one of several of the member 
organization's most senior executive officers (or similar positions).
    Proposed Supplementary Material .11 to Rule 3110 would provide that 
a member organization may use electronic media to satisfy its 
obligation to communicate its written supervisory procedures, and any 
amendment

[[Page 67516]]

thereto, pursuant to proposed Rule 3110(b)(7), provided that:
     The written supervisory procedures have been promptly 
communicated to, and are readily accessible by, all associated persons 
to whom such supervisory procedures apply based on their activities and 
responsibilities through, for example, the member organization's 
intranet system;
     All amendments to the written supervisory procedures are 
promptly posted to the member organization's electronic media;
     Associated persons are notified that amendments relevant 
to their activities and responsibilities have been made to the written 
supervisory procedures;
     The member organization has reasonable procedures to 
monitor and maintain the security of the material posted to ensure that 
it cannot be altered by unauthorized persons; and
     The member organization retains current and prior versions 
of its written supervisory procedures in compliance with the applicable 
record retention requirements of Rule 17a-4(e)(7) under the Act.
    Proposed Supplementary Material .12 to Rule 3110 would provide 
that, in fulfilling its obligations under proposed Rule 3110(c), each 
member organization must conduct a review, at least annually, of the 
businesses in which it engages. The review must be reasonably designed 
to assist in detecting and preventing violations of and achieving 
compliance with applicable securities laws and regulations and with 
Exchange rules. Each member organization must establish and maintain 
supervisory procedures that must take into consideration, among other 
things, the firm's size, organizational structure, scope of business 
activities, number and location of the firm's offices, the nature and 
complexity of the products and services offered by the firm, the volume 
of business done, the number of associated persons assigned to a 
location, the disciplinary history of registered representatives or 
associated persons, and any indicators of irregularities or misconduct 
(i.e., ``red flags''), etc. The procedures established and reviews 
conducted must provide that the quality of supervision at remote 
locations is sufficient to ensure compliance with applicable securities 
laws and regulations and with Exchange rules. A member organization 
must be especially diligent in establishing procedures and conducting 
reasonable reviews with respect to a non-branch location where a 
registered representative engages in securities activities. Based on 
the factors outlined above, member organizations may need to impose 
reasonably designed supervisory procedures for certain locations or may 
need to provide for more frequent reviews of certain locations.
    Proposed Supplementary Material .13 to Rule 3110 would provide 
additional guidance to proposed Rule 3110(c)(1)(C), which would require 
a member organization to inspect on a regular periodic schedule every 
non-branch location. In establishing a non-branch location inspection 
schedule, there is a general presumption that a non-branch location 
will be inspected at least every three years, even in the absence of 
any indicators of irregularities or misconduct (i.e., ``red flags''). 
If a member organization establishes a longer periodic inspection 
schedule, the member organization must document in its written 
supervisory and inspection procedures the factors used in determining 
that a longer periodic inspection cycle is appropriate.
    Proposed Supplementary Material .14 to Rule 3110 would provide that 
a member organization's determination that it is not possible to comply 
with proposed Rule 3110(c)(3)(B) with respect to who is not allowed to 
conduct a location's inspection will generally arise in instances 
where:
     The member organization has only one office; or
     The member organization has a business model where small 
or single-person offices report directly to an OSJ manager who is also 
considered the offices' branch office manager.
    Proposed Supplementary Material .15 to Rule 3110 would provide a 
definition for ``associated person'' for the purposes of proposed Rule 
3110.
Proposed Rule 3120 (Supervisory Control System)
    Proposed Rule 3120(a), which is based on FINRA Rule 3120(a), would 
provide that each member organization must designate and specifically 
identify to the Exchange one or more principals who must establish, 
maintain, and enforce a system of supervisory control policies and 
procedures that:
     Test and verify that the member organization's supervisory 
procedures are reasonably designed with respect to the activities of 
the member organization and its associated persons, to achieve 
compliance with applicable securities laws and regulations, and with 
applicable Exchange rules; and
     Create additional or amend supervisory procedures where 
the need is identified by such testing and verification.

Similar to the requirements of current Rule 342.30, the designated 
principal or principals would be required to submit to the member 
organization's senior management no less than annually, a report 
detailing each member organization's system of supervisory controls, 
the summary of the test results and significant identified exceptions, 
and any additional or amended supervisory procedures created in 
response to the test results.
    Proposed Rule 3120(b) would provide that each report provided to 
senior management pursuant to proposed Rule 3120(a) in the calendar 
year following a calendar year in which a member organization reported 
$200 million or more in gross revenue must include, to the extent 
applicable to the member organization's business:
     A tabulation of the reports pertaining to customer 
complaints and internal investigations made to the Exchange during the 
preceding year; and
     Discussion of the preceding year's compliance efforts, 
including procedures and educational programs, in each of the following 
areas:
     Trading and market activities;
     Investment banking activities;
     Antifraud and sales practices;
     Finance and operations;
     Supervision; and
     Anti-money laundering.

The categories listed above are incorporated from the annual report 
content requirements of current Rule 342.30, which apply to all member 
organizations regardless of revenue. The proposed rule change seeks to 
mitigate compliance costs and burdens with respect to proposed Rule 
3120's annual reporting requirements by requiring that only member 
organizations reporting $200 million or more in gross revenues in the 
preceding year include in their annual reports supplemental information 
from current Rule 342.30's annual report content requirements. The 
Exchange also believes that the proposed threshold strikes the 
appropriate balance as it encompasses larger member organizations, 
member organizations engaged in significant underwriting activities and 
substantial trading activities or market making business, and member 
organizations with extensive sales platforms.
    Proposed Rule 3120(c) would provide that, for purposes of proposed 
Rule 3120(b), ``gross revenue'' is defined as:
     Total revenue as reported on FOCUS Form Part II or IIA 
(line item 4030) less commodities revenue (line item 3990), if 
applicable; or
     Total revenue as reported on FOCUS Form Part II CSE (line 
item 4030) less, if applicable,

[[Page 67517]]

     Commissions on commodity transactions (line item 3991); 
and
     Commodities gains or losses (line items 3924 and 3904).
    Proposed Supplementary Material .01 to Rule 3120 would provide a 
definition for ``associated person'' for the purposes of proposed Rule 
3120.
Proposed Rule 3150 (Holding of Customer Mail)
    Proposed Rule 3150(a) would provide that a member organization may 
hold mail for a customer who will not be receiving mail at his or her 
usual address, provided that:
     The member organization receives written instructions from 
the customer that include the time period during which the member 
organization is requested to hold the customer's mail. If the requested 
time period included in the instructions is longer than three 
consecutive months (including any aggregation of time periods from 
prior requests), the customer's instructions must include an acceptable 
reason for the request (e.g., safety or security concerns). Convenience 
is not an acceptable reason for holding mail longer than three months;
     The member organization:
     Informs the customer in writing of any alternate methods, 
such as email or access through the member organization's Web site, 
that the customer may use to receive or monitor account activity and 
information; and
     Obtains the customer's confirmation of the receipt of such 
information; and
     The member organization verifies at reasonable intervals 
that the customer's instructions still apply.
    Proposed Rule 3150(b) would provide that, during the time that a 
member organization is holding mail for a customer, the member 
organization must be able to communicate with the customer in a timely 
manner to provide important account information (e.g., privacy notices 
and the Securities Investor Protection Corporation information 
disclosures required by Rule 2266), as necessary.
    Proposed Rule 3150(c) would provide that a member organization 
holding a customer's mail pursuant to proposed Rule 3150 must take 
actions reasonably designed to ensure that the customer's mail is not 
tampered with, held without the customer's consent, or used by an 
associated person of the member organization in any manner that would 
violate Exchange rules or the federal securities laws.
    The Exchange currently does not have a rule comparable to proposed 
Rule 3150. The Exchange believes that adding proposed Rule 3150 would 
help protect customers.
    Proposed Supplementary Material .01 to Rule 3150 would provide a 
definition for ``associated person'' for the purposes of proposed Rule 
3150.
Proposed Rule 3170 (Tape Recording of Registered Persons by Certain 
Firms)
    Proposed Rule 3170(a) would provide the following definitions for 
purposes of proposed Rule 3170:
     The term ``registered person'' would mean any person 
registered with the Exchange.
     The term ``disciplined firm'' would mean:
     A member organization that, in connection with sales 
practices involving the offer, purchase, or sale of any security, has 
been expelled from membership or participation in any securities 
industry SRO or is subject to an order of the SEC revoking its 
registration as a broker-dealer;
     A futures commission merchant or introducing broker that 
has been formally charged by either the Commodity Futures Trading 
Commission or a registered futures association with deceptive 
telemarketing practices or promotional material relating to security 
futures, those charges have been resolved, and the futures commission 
merchant or introducing broker has been closed down and permanently 
barred from the futures industry as a result of those charges; or
     A futures commission merchant or introducing broker that, 
in connection with sales practices involving the offer, purchase, or 
sale of security futures is subject to an order of the SEC revoking its 
registration as a broker or dealer.
     The term ``disciplinary history'' would mean a finding of 
a violation by a registered person in the past five years by the SEC, 
an SRO, or a foreign financial regulatory authority of one or more of 
the following provisions (or comparable foreign provision) or rules or 
regulations thereunder:
     Violations of the types enumerated in Section 15(b)(4)(E) 
of the Act;
     Section 15(c) of the Act;
     Section 17(a) of the Securities Act of 1933;
     Rules 10b-5 and 15g-1 through 15g-9 under the Act;
     NASD Rule 2110 (Standards of Commercial Honor and 
Principles of Trade) or FINRA Rule 2010 (Standards of Commercial Honor 
and Principles of Trade) or NYSE Rule 2010 (Standards of Commercial 
Honor and Principles of Trade) or NYSE Rule 476(a)(6) (Failure to 
Observe High Standards of Commercial Honor and Just and Equitable 
Principles of Trade) (only if the finding of a violation of NASD Rule 
2110, FINRA Rule 2010, NYSE Rule 2010 or NYSE Rule 476(a)(6) is for 
unauthorized trading, churning, conversion, material misrepresentations 
or omissions to a customer, front-running, trading ahead of research 
reports or excessive markups), FINRA Rule 5280 (Trading Ahead of 
Research Reports), NASD Rule 2120 (Use of Manipulative, Deceptive or 
Other Fraudulent Devices) or FINRA Rule 2020 (Use of Manipulative, 
Deceptive or Other Fraudulent Devices) or NYSE Rule 2020 (Use of 
Manipulative, Deceptive or Other Fraudulent Devices) or NYSE Rule 
476(a)(5) (effecting any transaction in, or inducing the purchase or 
sale of, any security by means of any manipulative, deceptive or other 
fraudulent device or contrivance), NASD Rule 2310 (Recommendations to 
Customers (Suitability)) or FINRA Rule 2111 (Suitability) or NYSE Rule 
405 (Diligence as to Accounts), NASD Rule 2330 (Customers' Securities 
or Funds) or FINRA Rule 2150 (Improper Use of Customers' Securities or 
Funds; Prohibition Against Guarantees and Sharing in Accounts) or NYSE 
Rule 2150 (Improper Use of Customers' Securities or Funds; Prohibition 
Against Guarantees and Sharing in Accounts), NASD Rule 2440 (Fair 
Prices and Commissions), NASD Rule 3010 (Supervision) or FINRA Rule 
3110 (Supervision) or NYSE Rule 3110 (Supervision) or NYSE Rule 342 
(Offices--Approval, Supervision and Control) (failure to supervise only 
for both NASD Rule 3010, FINRA Rule 3110, NYSE Rule 3110 or Rule 342), 
NASD Rule 3310 (Publication of Transactions and Quotations) or FINRA 
Rule 5210 (Publication of Transactions and Quotations) or NYSE Rule 
5210 (Publication of Transactions and Quotations), and NASD Rule 3330 
(Payment Designed to Influence Market Prices, Other than Paid 
Advertising) or FINRA Rule 5230 (Payments Involving Publications that 
Influence the Market Price of a Security); and MSRB Rules G-19, G-30, 
and G-37(b) & (c).
     The term ``tape recording'' would include without 
limitation, any electronic or digital recording that meets the 
requirements of proposed Rule 3170.
     The term ``taping firm'' would mean:
     A member organization with at least five but fewer than 
ten registered persons, where 40% or more of its registered persons 
have been associated with one or more disciplined firms in a registered 
capacity within the last three years;

[[Page 67518]]

     A member organization with at least ten but fewer than 
twenty registered persons, where four or more of its registered persons 
have been associated with one or more disciplined firms in a registered 
capacity within the last three years;
     A member organization with at least twenty registered 
persons where 20% or more of its registered persons have been 
associated with one or more disciplined firms in a registered capacity 
within the last three years.
     For purposes of calculating the number of registered 
persons who have been associated with one or more disciplined firms in 
a registered capacity within the last three years pursuant to proposed 
Rule 3170(a)(5), member organizations should not include registered 
persons who:
     Have been registered for an aggregate total of 90 days or 
less with one or more disciplined firms within the past three years; 
and
     Do not have a disciplinary history.
    Proposed Rule 3170(b) would provide that each member organization 
that either is notified by the Exchange or otherwise has actual 
knowledge that it is a taping firm must establish, maintain, and 
enforce special written procedures for supervising the telemarketing 
activities of all of its registered persons. A taping firm required to 
establish, maintain, and enforce special written procedures pursuant to 
proposed Rule 3170(b) would be required to establish and implement the 
procedures within 60 days of receiving notice from the Exchange or 
obtaining actual knowledge that it is a taping firm. The procedures 
required by proposed Rule 3170(b) would include procedures for tape 
recording all telephone conversations between the taping firm's 
registered persons and both existing and potential customers and for 
reviewing the tape recordings to ensure compliance with applicable 
securities laws and regulations and applicable Exchange rules. The 
procedures must be appropriate for the taping firm's business, size, 
structure, and customers, and must be maintained for a period of three 
years from the date that the taping firm establishes and implements the 
procedures. All tape recordings made pursuant to the requirements of 
proposed Rule 3170(b) must be retained for a period of not less than 
three years from the date the tape was created, the first two years in 
an easily accessible place. Each taping firm would be required to 
catalog the retained tapes by registered person and date. By the 30th 
day of the month following the end of each calendar quarter, each 
taping firm subject to the requirements of proposed Rule 3170(b) would 
be required to submit to the Exchange a report on the taping firm's 
supervision of the telemarketing activities of its registered persons.
    Proposed Rule 3170(c) would provide that a member organization that 
becomes a taping firm for the first time may reduce its staffing levels 
to fall below the threshold levels within 30 days after receiving 
notice from the Exchange pursuant to the provisions of proposed Rule 
3170(b)(1) or obtaining actual knowledge that it is a taping firm, 
provided the member organization promptly notifies the Exchange's 
Department of Member Regulation in writing of its becoming subject to 
the Rule. Once the member organization has reduced its staffing levels 
to fall below the threshold levels, it must not rehire a person 
terminated to accomplish the staff reduction for a period of 180 days. 
On or prior to reducing staffing levels pursuant to proposed Rule 
3170(c), a member organization would be required to provide the 
Exchange's Department of Member Regulation with written notice 
identifying the terminated person(s).
    Proposed Rule 3170(d) would provide that, pursuant to the Rule 9600 
Series, the Exchange could, in exceptional circumstances, taking into 
consideration all relevant factors, exempt any taping firm 
unconditionally or on specified terms and conditions from the 
requirements of proposed Rule 3170. A taping firm seeking an exemption 
would be required to file a written application pursuant to the Rule 
9600 Series within 30 days after receiving notice from the Exchange or 
obtaining actual knowledge that it is a taping firm. A member 
organization that becomes a taping firm for the first time could elect 
to reduce its staffing levels pursuant to the provisions of proposed 
Rule 3170(c) or, alternatively, to seek an exemption pursuant to 
proposed Rule 3170(d), as appropriate. A taping firm would not be able 
to seek relief from proposed Rule 3170 by both reducing its staffing 
levels pursuant to proposed Rule 3170(c) and requesting an exemption.
    The Exchange does not currently have a rule comparable to proposed 
Rule 3170. The Exchange believes that adopting proposed Rule 3170 will 
provide for more effective supervision of member organizations that 
have a significant number of registered persons with disciplinary 
history, thereby resulting is enhanced customer protection.
Conforming Changes
    The Exchange also proposes to make certain conforming changes to 
Rules 36, 70, 86, 345, 405, 407, 408,\20\ 410, 416A, 472, 476A, 2210, 
and 9217 to delete or update cross-references to the proposed rules as 
applicable. The Exchange also proposes certain technical changes within 
Rule 86 \21\ and 345.10 \22\ that are unrelated to this proposal.
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    \20\ The Exchange also proposes to replace ``allied member'' in 
Rule 408 with ``principal executive.'' See note 11, supra.
    \21\ The Exchange proposes to update a reference to Rules 17a-3 
and 17a-4 under the Act.
    \22\ The Exchange proposes to delete a reference to ``registered 
options representative.''
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\23\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\24\ in particular, because it 
is designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. Specifically, the Exchange 
believes that the proposed rule change supports the objectives of the 
Act by providing greater harmonization between Exchange rules and FINRA 
rules of similar purpose, resulting in less burdensome and more 
efficient regulatory compliance. In particular, Exchange member 
organizations that are also FINRA members are subject to Exchange 
supervisory rules and FINRA Rules 3110, 3120, 3150, and 3170, and 
harmonizing these rules by adopting proposed Rules 3110, 3120, 3150, 
and 3170 would promote just and equitable principles of trade by 
requiring a single standard for supervision. The Exchange believes that 
to the extent the Exchange has proposed changes that differ from the 
FINRA version of the Exchange rules, such changes are generally 
technical in nature and do not change the substance of the proposed 
rules. The Exchange also believes that the proposed rule change will 
update and add specificity to the requirements governing supervision, 
which will promote just and equitable principles of trade and help to 
protect investors. As such the Exchange believes that the proposed rule 
change meets the requirements of Section 6(b)(5) of the Act.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 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 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The

[[Page 67519]]

Exchange believes that the proposed rule change is not intended to 
address competitive issues but rather to achieve greater consistency 
between the Exchange's rules and FINRA's rules concerning supervision.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \25\ and Rule 19b-4(f)(6) thereunder.\26\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \25\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \26\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \27\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\28\ the Commission 
may designate a shorter period of time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing.
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    \27\ 17 CFR 240.19b-4(f)(6).
    \28\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, 
because it allows the Exchange to immediately conform its supervision 
rules to corresponding FINRA rules. This will ensure that Dual Members 
generally will be subject to a single set of rules governing 
supervision. As noted by the Exchange, the proposal would harmonize 
NYSE and FINRA rules, resulting in less burdensome and more efficient 
regulatory compliance. In addition, the proposal will update and add 
specificity to the Exchange's requirements governing supervision, which 
will promote just and equitable principles of trade and help to protect 
investors. For these reasons, the Commission designates the proposed 
rule change to be operative upon filing.\29\
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    \29\ For purposes of waiving the 30-day operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \30\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \30\ 15 U.S.C. 78s(b)(2)(B).
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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 email to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2014-56 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2014-56. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549-1090, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be 
available for inspection and copying at the NYSE's principal office. 
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-2014-56 
and should be submitted on or before December 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26815 Filed 11-12-14; 8:45 am]
BILLING CODE 8011-01-P


