SEC Division of Trading and Markets no-action letter: NYSE Regulation, Inc.

I
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
DIVISION OF
MARKET REGULATION August 1,2006
Mr. Michael Rufino
Senior Vice President, Member Firm Regulation
20 Broad St.
New York, NY 10005
Dear Mr. Rufino:
In your letter dated July 26,2006, on behalf of NYSE Regulation, Inc. ("NYSE), you seek interpretive guidance with regard to the definition of statutory disqualification, as contained in Section 3(a)(39) of the Securities Exchange Act of 1934 ("Exchange Act") (which incorporates by reference Sections 15(b)(4)@), (E), and (H), among others). You also seek interpretive guidance in connection with Exchange Act Rule 19h-l(a). In addition, you seek assurance that the staff of the Division of Market Regulation ("Staff') would not recommend enforcement action to the Commission under Exchange Act Section 6(c)(2) or Rule 19h-l(a) if the NYSE does not file a notice with the Commission for any person subject to a statutory disqualification under Section 3(a)(39) ("subject person") whom the NYSE is proposing to admit to or continue in membership or association with a member organization,' under the circumstances described more fully below. A. Interpretive Advice

1. Time-limited Bars or License Revocations
   You have requested guidance on whether a person subject to a bar or license revocation, for example, as described in Section 3(a)(39)(A) or Section 3(a)(39)(F) (through incorporation by reference to Section 15(b)(4)(H)(i)), that is time-limited and that does not require application for reentry or have a continuing effect after application for reentry has been granted, would be subject to a statutory disqualification under Section 3(a)(39) for the duration of the bar or license revocation, or for a longer period of time. It is the Staffs view A person subject to a statutory disqualification as defined in Section 3(a)(39) is not necessarily precluded from participating in the securities industry. However, when such a person seeks admission to or continuance in membership or association with a member of a self-regulatory organization ("SRO"), the Commission and the SROs have the opportunity to give special review to such person and to restrict or prevent entry into, or continuance in, the business where appropriate in the public interest and for the protection of investors. &g Senate Comm. on Banking, Housing, and Urban Affairs, The Securities Acts Amendments of 1989, S. Rep. No. 101-155, at 39 (1989); Exchange Act Rel. No. 13726 (Jul. 8, 1977) (adopting Rule 19h-1).

that a person is no longer subject to a statutory disqualification when the time limitation of a bar or license revocation has expired, provided that (i) application for reentry is not required or has been granted, (ii) the bar or revocation has no continuing effect, and (iii) the bar was not issued in connection with a final order based on violations of laws or regulations prohibiting fiaudulent, manipulative, or deceptive conduct, as described in Exchange Act
Section l5(b)(4)(~)(ii).~
2. State Bars or Suspensions Based on Disciplinary Action Taken by an SRO
You have requested guidance on whether a person subject to a bar or suspension by a State securities commission that is based solely upon a disciplinary action taken by an SRO (a "follow-on" action) would be subject to a statutory disqualification under Section 3(a)(39)(F) (through incorporation by reference to Section 15(b)(4)(H)(i)). The Staff would not consider a person to be subject to a statutory disqualification under Section 3(a)(39) if the person were subject to a bar or suspension by a State securities commission that is based solely upon a disciplinary action taken by an SRO. In other words, if the SRO action alone does not result in a statutory disqualification, a State bar or suspension based solely upon the SRO action also would not result in a statutory disqualification. Follow-on actions based on disciplinary actions of other entities, or in other circumstances, would require analysis on a case-by-case basis.
3. Willful Violations of the MSRB rules
You have requested guidance regarding the application of the notice filing requirement under Rule 19h-l(a) to subject persons who are subject to a statutory disqualification solely due to a finding of a willful violation of the rules of the Municipal Securities Rulemaking Board ("MSRB rules"), provided that the related sanctions are no longer in effect. Exchange Act Rule 19h-l(a)(3)(iii)(B) provides an exception fiom the notice filing requirement for subject persons who are subject to a statutory disqualification solely due to a finding of a willful violation of the federal securities laws or a rule or regulation thereunder, if the sanctions are no longer in effect. Section 15B(c)(l) provides, "No broker, dealer, or municipal securities dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security in contravention of any rule of the [MSRB]." Consequently, a violation of the MSRB rules also would constitute a violation of As an example, a person subject to a statutory disqualification based on a three-month bar (or three-year bar) that ends automatically and has no continuing effect would no longer be subject to a statutory disqualification at the end of the three months (or three years) under
Section 3(a)(39)(F) (through incorporation by reference to Exchange Act Section
15(b)(4)(H)(i)), unless the bar was issued in connection with a final order based on violations of laws or regulations prohibiting fiaudulent, manipulative, or deceptive conduct, as described in Exchange Act Section 15(b)(4)(H)(ii)..

Section 15B(c)(l), and therefore, of the Exchange Act. In our view, the exception contained
in Rule 19h-l(a)(3)(iii)(B) would include findings of willful violations of the MSRB rules, if the sanctions are no longer in effect.
4. Aiding and Abetting
You have requested guidance regarding the application of the notice filing requirement under Rule 19h-l(a) to subject persons who are subject to a statutory disqualification solely due to findings of willfully aiding, abetting, counseling, commanding, inducing, or procuring (collectively, "aiding and abetting") a violation by any other person of the federal securities laws or a rule or regulation thereunder. As suggested in your letter, the Rule 19h-l(a)(3)(iii)(B) exception discussed above is not explicitly applicable to such findings. However, the Staff would view Rule 19h-l(a)(3)(iii)(B) to encompass willfully aiding and abetting a violation. Therefore, no notice would be required to be filed with the Commission pursuant to the exception under Rule 19h-1 (a)(3)(iii)(B) for willfully aiding and abetting a violation of the provisions of the federal securities laws or the rules or regulations thereunder (including the MSRB rules), if no notice would be required for a direct violation of those provisions, provided that the related sanctions are no longer in effect. These interpretive positions are based solely on your representations and the facts presented and are strictly limited to the application of Exchange Act Section 3(a)(39) and Rule 19h-1. [These positions do not represent a legal interpretation or conclusion with respect to the applicability of any other statutory or regulatory provisions of the federal securities laws, including Sections 15(b)(4) or 15(b)(6) of the Exchange Act.] Any different facts or circumstances may require a different response. B. No-Action Relief

1. Findings of Willful Violations or Failure to Supervise in the Context of New
   Admissions, Readmissions, or Continuances
   Based on the facts and representations set forth in your letter and discussions with the Staff, the Staff will not recommend enforcement action to the Commission under Section 6(c)(2) of the Exchange Act or Rule 19h-l(a) thereunder if the NYSE does not file a notice with the Commission when proposing to admit to or continue in membership or association with a member organization any subject person if:
   (a) the subject person is subject to a statutory disqualification solely due to a finding of a willful violation (including willfully aiding and abetting a

violation) of the CEA or the rules or regulations thereunder, provided that the sanctions are no longer in effe~t;~ or (b) the subject person is subject to a statutory disqualification solely due to a finding that the subject person failed reasonably to supervise, with a view to preventing violations of the federal securities laws or the rules or regulations thereunder (including the MSRB rules), or of the CEA or the rules or regulations thereunder, another person who committed a violation, provided that the sanctions related to the finding are no longer in effect with respect to the subject person.
2. Statutorv Disqualifications Arising from Sarbanes-Oxley Amendments
Based on the facts and representations set forth in your letter and discussions with the Staff, the Staff will not recommend enforcement action to the Commission under Section 6(c)(2) of the Exchange Act or Rule 19h-l(a) if the NYSE does not file a notice with the Commission for any subject person who, as of the date of this letter, already is a member, member organization, or associated person of a member or member organization of the NYSE or another self-regulatory organization: if that subject person, as of the date of this letter, is subject to:
(a) a bar, as described in Exchange Act Section 15(b)(4)(H)(i), and:
(i) the bar is no longer in effect (and is not related to fraudulent, manipulative, or deceptive conduct), or (ii) the bar is still in effect, unless there is a change in employer or the employer makes an application for the registration of the person in a supervisory capacity; or In your letter you also request relief from the notice filing requirement for subject persons subject to a statutory disqualification due to a finding of a willful violation (including willhlly aiding and abetting a violation) of the MSRB Rules. These requests are addressed in Sections A.3 and A.4, above. For purposes of this letter, an associated person would include a person that was associated with a member or member organization within 45 days prior to the date of this letter, provided that the person is associated with another member or member organization within 45 days after the date of this letter.

(b) a final order based on violations of laws or regulations prohibiting fkaudulent, manipulative, or deceptive conduct, as described in Exchange Act Section 1 5(b)(4)(~)(ii),~ and:
(i) the sanctions do not involve licensing or registration revocation or suspension (or analogous sanctions), and the sanctions are no longer in effect; (ii) the sanctions do not involve licensing or registration revocation or suspension (or analogous sanctions), and the sanctions are still in effect, unless there is a change in employer or the employer makes an application for the registration of the person in a supervisory capacity; or (iii) the sanctions do involve licensing or registration revocation or suspension (or analogous sanctions), and (A) the sanctions are no longer in effect, and (1) the order was entered 10 or more years ago, or (2) the order was entered within the prior 10 years, unless there is a change in employer or the employer makes an application for the registration of the person in a supervisory capacity; or (B) the sanctions are still in effect, unless there is a change in employer or the employer makes an application for the registration of the person in a supervisory capacity. The Staff notes in particular that Section 604 of the Sarbanes-Oxley Act overlays the existing framework of Section 3(a)(39) of the Exchange Act by including additional circumstances which would result in a statutory disqualification. Consistent with the existing exceptions from the notice filing requirement in Rule 19h-l(a)(3)(iii), these Staff positions should allow the NYSE to integrate filings mandated by the Sarbanes-Oxley Act into established programs that monitor subject persons as they reenter the securities business, move fkom one firm to another, or take on supervisory responsibilities. These Staff positions concern enforcement actions only and do not represent a legal conclusion with respect to the applicability of the statutory or regulatory provisions of the federal securities laws. These positions are based on the facts you have presented and the This would include a finding of aiding and abetting a violation of such laws.

NY SE Regulation, Inc. representations you have made, and any different facts or conditions may require a different response. Moreover, these positions are subject to modification or revocation if at any time the Commission or the Staff determines that such action is necessary or appropriate. Sincerely, Catherine McGuire Chief Counsel

MlchaelG Ruflno
SenlorVice Pcesldent
Mcmber FlrrnRegulutlon
NYSE Regulation NYSERcgdatlon. Inc. I 20 Broad Street New York, Ncw York 10005 t272-656-5685 ( f 212.656-5505 rnrutlndnyse.com Catherine McGuire, Bsq. Associate Dlrectot 8nd ChiefCounsel Division of Market Regulation U.S. Securities and ExchangeCommission 100 F S m NE Washington, DC 20549 Rc: Dation of "Stamtory Disqualificatibn3'-SarW-Oxley Act Dear Ms.McGuire:
NYSE Regulation, Inc. ("NYSF or G%xbge")is writingto seek asmvancethat the Mofthe Diwisicm of Mar& Regulation 0willnot recommend enforcement actiontothe Co~ssicm mder Section 6(c)(2) of theSecurities Exhange Actof 1934 ("Exchange Act") or Me 19bl(a) thereunder iftheNYSE does not file notices with the Commission for persons the NYSE is proposing to admit to or continue in membership or associationwith a member orgmizition,notwithstanding certainstatutory disqualifications. As discussed in more detail below,we believe that the relief we . seek will better enable the Exchange, and theCommission, to ibus resources onflings that laise importantinvestor protectionconcerns. Under the regulatory schemeestablishedby Section6(c)(2) and Rule 19h-1, the NYSEgenerally is requiredto file anotice withthe Commissionfaany person subject toastamtorydisqualification ("subjectperson") thattheExcharrgeis proposingtoadmit to or cmthue in anembership or association with ammber orgmbdon The definitionof "statuto'y disqualification"is contained in Section 3(a)(39) ofthe Exchange Act, which incorporates segmentsof Section 15(b)(4). Among athcr things, a person is subject toa stabtorydisq&cation if such person: (1) "isenjoined km any action, conduct, or pmctice specified in [Section 15(b)(4)(C) ofthc Exchange Act]''; (2)is subjectto a .finding of a willfirl violation ofthe Exchange Act, the Semities Act of 1933, &e Investment Advisers Act of 1940, the Investment Company Act of 1940, or arule or regulationthereunder;or (3) is subjectto a &cling ofa '%il[ure] reasonably tosupexvise, wi~a view topreventing violations ofthe provisions of such statutes,des, or reguktions, anuther person whocommits such aviolatian, if such other person is subject to his supmsion" Rule 19h-1 currdy does not quire SROq including the NYSE, to file notices in certain cizr;umStatces. ' 1 See E-e Act REL No.18278(Nw.20,1981), 46 FR58654 (Dec. 3,1981) (adoptingamendmentstoMe 19h-1).

JuI-26-06 04:15pm From￾Page 2
CatherheMcGuirc, Esq.
U.S. Sedes and Exchange Commission
July 26,2006
Inpertinent part, Rule 19h-l(a)(3)(iii)(A) waivesthe notice-flingrequirementfir statutory diswcatiow that consist of in.ctions speciiied in ]Exchange Act Section 15@)(4)(C), provided that the "injunctionwas entered 10 or more years prior to the proposed admission or a&uance." Me 19h-l(a)(3)(iii)(B) provides similar relieffor statutory disqdilicaiionsth;aconsist offindings of a willfulviolalion ofthe federal securities laws or arule or mgulationdmeunder by the Commissioa or an SRO "and the sanctionfor suchviolation is no longer i.u effect." Rule l9h-1 does not, however, provide relief eomthe notice-- requirementfor stalutoV discpaEcationsthatconsist ofa@dingofa failure reasonably to supervise, even ifthe sanctiws related to the fhding areno longer in effwt.2 Sarbanes-Wev Act of2002
Section 604 ofSarW-Ckley Act of2002 ("Safbanes-OxleyAct" or "Act"),which was eaacted on
July 30,2002, expandedthe d&ulition of statubrydisquaEcationin Section 3(a)(39) by incorporati~~g (the new) pzuagraph 15(b)(4)0 soastoincludepersons:
subject m any find order ofa Statesecurities oo&rsion (or any agency or offi~er performing like functions), State authority rhat supervises or examines bds, savings associations,orcreditunions,Statehwance commission (or any agency ar dEce performing like hctions), au appropriateFederal banking agency (as in section 3 ofthe Federal Deposit Insmce Act (12 U.S.C.1813(q))), orthe National Credit Union Adminkhticm, that- (i)bars suchperson hm associationwithan entity regulatedby such co&ion, authority, agency, or ofEcer, or f?om engaging in the business of securities,insurance, banking, savings associationactivities, or credit unionactivities; or (ii) constitutes afind order based on viokitio~~~ ofany law ortegulations that prohibit hudulqmanipulative, or deceptiveconduct.' Consequently, absent similarrelief, SROs, includingthe NYSE, are required under Exchange Act Rule 19h-l(a) to file a notice for any person who becomes asubject person as aresult ofthe expanded definition,and whom the SROis proposing to admitto or continue in membershipor assockdonwith a memberomtisn, notwithstanding a shtutorydisqualificationbased on a final order specifiedin the expanded defhidw whose sanctionis no longerineffect. 2~ecatly,however, the SMpfotridedno-actionndkf tothe Exchauge fir axlainpons subjectto a statutory dkpWcation solelybecaose ofa tinding by aforeigntinaacialn@aCory authori,,tyof aEdmto snpewis. SeeLew re: TheNew York Stock Exchange, Jnc. (Feb. 11,2005). Pub.L.No.107-204,116 Stat 745 (2002), Sec. 604. Section604amendedExchangeAct Sdon 3(a)(39)(F) to add a cross-mrn to Excbange Act Sdon 15(b)(4)(H), whichalso was added by the Sarbanes-Oxley Act.

Catherine McGuire, Esq.
U.S. Securities and Exchange Commission
July 26,2006 muest£brNo-Action Relief
The Exchange is seeking assurancethatthe SWwill not recommend enforcement action to the Commissionunder Section6(c)(2) ofthe ExchangeAct orRule 19h-l(a) thereunderif the NYSEdoes not fjlea noticewiththe Commissionwhenproposhg toadmitto or cwinue in membership or association withamemberorganization any subject person subject to a statutory disqualification as a remitofthe followhg %dings. A. Willfit1vioI~'onsofthe Commdi@Mange Ad, orthe des ofthe Municipal Secutities Rutmraking Born4 provided thatthe sanctionsareno longer in &&(willbe treated like violations specsed inRule 19h-1(a)(3)(iii)(B)), or B. WTUful aiding, abeztihg, counseling, mmnrandiig, inducing, urprocuriingthe viola&n by any other pmon ofany provision under thefederal secudks luws,or the Comm&y ExchangeAd, orthe rulesof theMunicipal Secu&hlemahg Boar4 provided that the sanctionsareno longer in cf5ect,and Failureto s~c~ise, witha view to preventing violations ofthe pmvisions ofsuch statutes, rules, and regulations, anather person who oornmits sucha violation, provided that the sanctions are no longer in effect (will be trez&d like vialations speczed in Rule 19h-1(a)(3)(iii)(B)). The Exchange isalsoseekingasmacethat the Staffwill not recammend enforcement action tothe Commissionuuder Section6(c)(2) of the Exchange Act or Rule 19h-l(a) thereunder ifthe NYSE does not fde a notice with the Commission whenproposing to continuein membership or associationwith a member orgakuion any subjectperson who, as ofthe of yourresponse tothis letter, is subject to a siaiutory disqualification pursuant to Section 15(b)(4)0 underthefollowing cwditions:
A. For cancinum~es,~ Jw?.(4rn@.:in connection with bars, as desmied in &change Ad Smion

1. If rhe bar isno longer in @d (and is not related tofrmtiklent,rnanipulaiiue, or
   deqlive condud), or
2. Hthe bar i&sal in Meet, unless there is a changein employer, or ifemployer makesan
   applicationfbrthe registrationofthe person in a supervisorycapacity.

• A continuanceis a acct personwho is, as of the dabofyour responseto thisletter, a mEmber argmkstibn,
  or associatedperson of amemberorgmiiationofNYSE LLC or another self-reguhory omom For purposes of thisIaer, an a6wchtedpersonwoi include aperscr~.that was associatedwithamember oqpimion within45 days priorto the date ofyout respomto this lettcr, provided that the person is associated with auok memberorgmbdonwithin45 days aRerthe date of your response to thisletter.

Catherine McGuire, Esq.
U.S. Securities and Exchange Commission
July 26,2006
E. For continuances, incuconaedon withfinal ordersbased on violations of laws or regulations probibitingfiaudul~rnan$uW~or decqtive conduct,as described in EdzmgeAd
Section 15(@)(@0:~

1. Iftbe sanctions do not involve licensing or regktrafionrevocation or suspension (or
   dogous sanctions), and the donsare no bngm in @kt.
2. Ifthe sanctions dknot hvolve licensing orreg@tratkmrevo&*on or suspmiorc (or
   analogous sandons), and the sanctionsate din @fled,unless there is achange in employer, orifemployermakes an applicationfor the registdon oftheperson in a supervisolycapacity.
3. Ifthe sanctionsdo involve liaenshg or regh?d~n revocation or suspension (or
   analogous sanctions), and a) Ifthe smctions are no longer in effect, and (i) the order wasentered 10or moreyears ago, or (ii) the orderwas cmeredwithin rheprior 10years; uulessthere isachange in employer,or if employer makes an application fbr the registration ofthe person in a supervisorycapacity; or b) Ifthe sanctions me s#U in fled, unlessthere is a change in employer, or if employer makes aapplication for the registration ofthe personin asupervisory capacity. Our utldmstadhgof Section 604 ofthe Sarbanes-Oxley Act is thatit overlaysfhe existing bework afSecrim3(a)(39} of the Exchange Act by including additional,Oir-ces which would result in a stamtory dis~cation.Consistentwith the existing exceptions fiom the natice fiiing requirement in Me 19h-l(a)(3)(iii), these Staff positions should allow theNYSE tointegratefilings mandated by the Smbanes-OxleyAct into establishedprograms rbatmonitor subject persons as theyreenter The securities business, move brn one firm toanothw, or take on supervisoryresponsibilities? Thiswodd include afhding afaiding and abmhga viohtionofsuch laws. AS withthose exceptions,webelieve that the proposed reliefwould allow both the Exchange and the Commissionto focus mou~lesonEhgs thatraise imp- investorproteaionconcuns. Infact, the requested relieffrom the notice mgqukmntissubstantiallynarrower tbanthe exceptions captainedinRule 19h￾l(a)(3)(iii). Specifically, the rcqumed relief applies only to persons aha& inthe securitiesindustry, wbcreas the excepfionsin Rule 19h-l(a)(3)Ci) apply to bothnew entrants andpemns abdy inthe dtiesindustry.

Jul-26-06 04:16pu From￾Page 5
Catherine McGube, Esq.
U.S. Secudies and Excme Commission
July 26,2006
Request &r hhqmtive Guidance
The Exchange is also seeking interpretive guidance regarding whether a pmon would be subject to a statutory disqualScation, as defined in Section 3(a)(39), in the c~ces desmied below. A. Time-Limited Bar or License Revdon - It is the Exchange's uddg that if a person is subject to a bar or license revocation that is time-lbhd, and that does not require reapplication for reentry or have a continuing &ect after application for reentry has been gmnted, the person would be subject to a stamtory disqdfication that lasts fior the same amount of time as that bar or license revodoa. As an example, a person subject to a statutory disqualification based on a thrcchmonth bar (or three-year bar) that ends automatically and has no continuing effect would no longer be subject to a statutory disqualification at the end of the three roo* (or three years) under Seaion 15@)(4)(H)(i), unless the bar was issued in connection wifh afinal order based on violations of laws or regulatians prohibitbgfiaudulent, manipul&e, or deceptiue conduct, as described in Section 15(b)(4)0(ii). B. Bars or Suspensions Based an Disciplinary Action Taken by an SRO - It is the Exchange's undexstading that a person would not be subject to a statutory disqualiikation if the person is subject to a bar or suspension by a State securities commission &ti is based solely upon a disciplimuy action taken by a self-regulatory organization. Upon receipt of the Commission's response to this request fbr relief, the Exwe iartends to publish an Information Memorandum reminding its member organizations of the Sarbanes-oxley amendments to the dethtion ofa stabtory disqualification. The &of the NYSE would be bappy to firth discuss We issues with you. Any questions should be directed to myself or Peggy Gdo ar (2 12) 656-8450. Sincerely, C-k&-f C; Brian A. Bussey, Assistant Chief Counsel Gena Lai, StaSAttorncy Joseph Shcirer, NYSE William Janmm, NYSE Susan Light, NYSE Peggy Germino, NYSE