This rule is no longer applicable. Incorporated NYSE Rule 342 has been superseded by FINRA Rule 3110. Please consult the appropriate FINRA Rule.
(a) Each office, department or business activity of a member or member organization (including foreign incorporated branch offices) shall be under the supervision and control of the member or member organization establishing it and of the personnel delegated such authority and responsibility.
The person in charge of a group of employees shall 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.
(b) The general partners or directors of each member organization shall provide for appropriate supervisory control and shall 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 shall:
(1) 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.
(2) establish a separate system of follow-up and review to determine that the delegated authority and responsibility is being properly exercised.
(c) A member organization shall provide notice to the Exchange of each branch office established by such member organization.
(d) Qualified persons acceptable to the Exchange shall be in charge of:
(1) any office of a member or member organization,
(2) any regional or other group of offices,
(3) any sales department or activity.
(e) The amounts and types of credit extended by a member organization shall 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 Material: --------------
.10 Definition of Branch Office
A "branch office" is any location where one or more associated persons of a member or member organization regularly conduct 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:
(A) any location that is established solely for customer service and/or back office type functions where no sales activities are conducted and that is not held out to the public as a branch office;
(B) any location that is the associated person's primary residence; provided that: (i) 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; (ii) the location is not held out to the public as an office and the associated person does not meet with customers at the location; (iii) neither customer funds nor securities are handled at that location; (iv) the associated person is assigned to a designated branch office, and such branch office is reflected on all business cards, stationery, advertisements and other communications to the public by such associated person; (v) the associated person's correspondence and communications with the public are subject to all supervisory provisions of the Exchange's rules including, but not limited to, [Rules 342] and [472]; (vi) electronic communications (e.g., e-mail) are made through the member's or member organization's electronic system; (vii) all orders are entered through the designated branch office or an electronic system established by the member or member organization that is reviewable at the branch office; (viii) written supervisory procedures pertaining to supervision of sales activities conducted at the residence are maintained by the member or member organization; and (ix) a list of the locations is maintained by the member or member organization;
(C) any location, other than a primary residence, that is used for securities business for less than 30 business days in any one calendar year, provided the member or member organization complies with the provisions of (ii) through (viii) of paragraph (B) above;
(D) any office of convenience, where the associated person occasionally and exclusively by appointment meets with customers, which is not held out to the public as a branch office (where such location is on bank premises, however, only signage required by the Interagency Statement (Statement on Retail Sales of Nondeposit Investment Products required under Banking Regulations) may be displayed);
(E) any location that is used primarily to engage in non-securities activities and from which the associated person effects no more than 25 securities transactions in any one calendar year; provided that any advertisements or sales literature identifying such location also sets forth the address and telephone number of the location from which the associated person conducting business at the non-branch locations are directly supervised;
(F) the Floor of a registered national securities exchange where a member or member organization conducts a direct access business with public customers; or
(G) a temporary location established in response to the implementation of a business continuity plan.
Notwithstanding the exclusions in subparagraphs [342].10(A)–(G), any location that is responsible for supervising the activities of persons associated with a member or member organization at one or more non-branch locations of such member or member organization is considered to be a branch office.
For purposes of this Rule, the term "business day" shall 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.
For purposes of this Rule, the term "associated person of a member or member organization" is defined as a member or employee associated with a member or member organization.
For purposes of [Rule 342].10(B)(viii), written supervisory procedures shall include criteria for on-site for cause reviews of an associated person's primary residence. Such reviews must utilize risk-based sampling or other techniques designed to assure compliance with applicable securities laws and regulations and with Exchange Rules.
For purposes of [Rule 342].10(B)(viii) and (C), written supervisory procedures for such residences and other remote locations must be designed to assure compliance with applicable securities laws and regulations and with NYSE Rules.
Factors which should be considered when developing risk-based sampling techniques to determine the appropriateness of on-site for cause reviews of selected residences and other remote locations shall include, but not be limited to, the following: (i) the firm's size; (ii) the firm's organizational structure; (iii) the scope of business activities; (iv) the number and location of offices; (v) the number of associated persons assigned to a location; (vi) the nature and complexity of products and services offered; (vii) the volume of business done; (viii) whether the location has a Series 9/10-qualified person on-site; (ix) the disciplinary history of the registered persons or associated persons, including a review of such person's customer complaints and Forms U4 and U5; and (x) the nature and extent of a registered person's or associated person's outside business activities, whether or not related to the securities business.
.11 Reserved.
.12 Foreign branch offices
With prior approval of the Exchange, a member organization may establish a foreign branch office in corporate or partnership form, provided it is wholly owned by the member organization. Continuance of the arrangement is subject to any changes in the Rules of the Exchange as may be thereafter adopted.
Foreign branch offices approved pursuant to this paragraph .12 and their personnel shall be fully subject to the Rules of the Exchange to the same degree and extent as are members and member organizations and their personnel. All obligations and liabilities of such foreign branch office shall be assumed or guaranteed by its parent member organization and such member organization shall be fully responsible for all acts of such foreign branch office.
For purposes of this Rule 342.12, the term "foreign branch office" shall include any such independently organized foreign location from which the services of the member or member organization are being made available or whose financial resources are being utilized in the operation of the office or as to which either of the above is held out, respectively, as available or being utilized.
.13 Acceptability of supervisors
(a) Generally
Any member or employee who is a candidate for acceptability under (d)(1), (2), or (3) above must have a creditable record and must pass the General Securities Sales Supervisor Qualification Examination (Series 9/10) or another examination acceptable to the Exchange which demonstrates competency relevant to assigned responsibilities. 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. The examination requirement may be waived at the discretion of the Exchange. In the case of a firm that is applying for registered broker-dealer status, such supervisory candidates, in addition to the requirements outlined above, must also have at least one year of direct experience or two years of related experience in the subject area to be supervised.
(b) Compliance supervisors
Each member not associated with a member organization and in the case of a member organization, the person (or persons) designated to direct day-to-day compliance activity (such as the Compliance Officer, Partner or Director) and each other person at the member organization directly supervising ten or more persons engaged in compliance activity should have overall knowledge of the securities laws and Exchange rules and must pass the Compliance Official Qualification Examination. Where good cause is shown, the Exchange, at its discretion, may waive the examination requirement. The Exchange may give consideration to the scope of the member or member organization's activity, to previous related employment, and to examination requirements of other self-regulatory organizations. In such cases, the Exchange must be satisfied that the person is qualified for the position.
.14 Experience of senior management
Member organizations without experienced senior principals may be subject to agreements with the Exchange appropriately limiting their scope of activity.
.15 Small offices
may be in the charge of a qualified principal or manager who is either resident or nonresident in that area. In the event that such a qualified supervisor is non-resident, a resident registered representative may be designated for subsidiary authority and is not required to meet a manager's examination or experience requirements.
.16 Supervision of registered representatives
Would ordinarily include at least approval of new accounts and reasonable procedures for review of registered representatives' communications with the public relating to their business, and customer accounts and transactions. Such policies and procedures should be in writing and be designed to reasonably supervise each registered representative. Evidence that these supervisory policies and procedures have been implemented and carried out must be maintained and made available to the Exchange upon request.
See [Rule 405] ("Diligence as to Accounts") for responsibilities for supervision of customer accounts.
.17 Review of communications with the public
Members and member organizations must develop written policies and procedures that are appropriate for their business, their size, structure and customers in connection with the review of communications with the public relating to their business. Where such policies and procedures for the review of public communications do not require pre-use review, they must include provision for the education and training of employees as to organizational policies and procedures, documentation of such education and training, and provide for surveillance and follow-up to ensure that such policies and procedures are implemented and adhered to.
See also [Rule 472] ("Communications with the Public"), for preapproval requirements for certain communications and standards governing all communications.
.18 Member organizations shall provide for the supervision and control of each general ledger bookkeeping account and account of like function on the basis specified in [Rule 440].20.
.19 Supervision of Producing Manager
Members and member organizations must develop and implement written policies and procedures reasonably designed to independently review and supervise customer account activity conducted by each Branch Office Manager, Sales Manager, Regional/District Sales Manager, or by any person performing a similar supervisory function. Such supervisory reviews must be performed by a qualified person pursuant to
[Rule 342].13 who:
(a) is either senior to, or otherwise independent of, the Producing Manager under review. For purposes of this Rule, an "otherwise independent" person: may not report either directly or indirectly to the Producing Manager under review; must be situated in an office other than the office of the Producing Manager; must not otherwise have supervisory responsibility over the activity being reviewed; and must alternate such review responsibility with another qualified person every two years or less. Further, if a person designated to review a Producing Manager receives an override or other income derived from that Producing Manager's customer activity that represents more than 10% of the designated person's gross income derived from the member or member organization over the course of a rolling twelve-month period, the member or member organization must establish alternate senior or otherwise independent supervision of that Producing Manager to be conducted by a qualified person, pursuant to [Rule 342].13, other than the designated person receiving the income.
(b) If a member or member organization is so limited in size and resources that there is no qualified person senior to, or otherwise independent of, the Producing Manager to conduct the reviews pursuant to (a) above (for instance, the member or member organization has only one office, or an insufficient number of qualified personnel who can conduct reviews on a two-year rotation), the reviews may be conducted by a person, qualified pursuant to [Rule 342].13, in compliance with (a) to the extent practicable.
(c) A member or member organization relying on (b) above must document the factors used to determine that complete compliance with all of the provisions of (a) is not possible, and that the required supervisory systems and procedures in place with respect to any Producing Manager comply with the provisions of (a) to the extent practicable.
.20 Information requests
In connection with its investigation of anomalous trading activity and for other purposes, the Exchange from time to time requests from members and member organizations detailed information regarding trades effected by the member or member organization in specified NYSE listed securities and related financial instruments during a specified period. Each member not associated with a member organization and each member organization shall comply with each such request by the date required by the Exchange.
.21 Trade review and investigation
In order to help assure its compliance with the provisions of the Securities Exchange Act of 1934, the rules under that act and the rules of the Exchange prohibiting insider trading and manipulative and deceptive devices, each member not associated with a member organization and each member organization, in addition to carrying out such other supervisory procedures as may be necessary to discharge its supervisory responsibilities as to compliance with Federal Securities laws and rules and Exchange rules generally shall:
(a) Subject trades in NYSE listed securities and in related financial instruments which are effected for the account of the member or member organization or for the accounts of members or employees of the member or member organization and their family members (including trades reported by other members or member organizations pursuant to [Rule 407]) to review procedures that the member or member organization determines to be reasonably designed to identify trades that may violate the provisions of the Securities Exchange Act of 1934, the rules under that act or the rules of the Exchange prohibiting insider trading and manipulative and deceptive devices, and
(b) Conduct promptly an internal investigation into any such trade that appears that it may have violated those laws and rules in order to determine whether it did violate those laws and rules.
The Exchange, at its discretion, may exclude from these review and investigation requirements particular classes of persons, trades, securities and related financial instruments.
.22 Definition of related financial instrument
For the purpose of Paragraphs .20 and .21, "related financial instrument" means:
(a) Any stock underlying an NYSE listed stock option or included in an index stock group underlying an NYSE listed index stock group option,
(b) Any stock option on an NYSE listed stock,
(c) Any index stock (bond) group option on a stock (bond) group that includes an NYSE listed stock (bond),
(d) Any futures contract on a stock (bond) group that includes an NYSE listed stock (bond), and
(e) Any option on any such futures contract.
.23 Internal Controls
Pursuant to paragraphs (a) and (b) of this Rule, members and member organizations must develop and maintain adequate controls over each of its business activities. Such controls must provide for the establishment of procedures for independent verification and testing of those business activities. An ongoing analysis, based upon appropriate criteria, may be employed to assess and prioritize those business activities requiring independent verification and testing. A review of each member's or member organization's efforts with respect to internal controls, including a summary of tests conducted and significant exceptions identified, must be included in the Annual Report required by .30 of this Rule.
The independent verification and testing procedures shall not apply to members and member organizations that do not conduct a public business, or that have a capital requirement of $5,000 or less, or that employ 10 or fewer registered representatives.
(See also [Rule 401](b))
.24 Annual Branch Office Inspection
(A) Each member organization business location designated as a branch office pursuant to
[Rule 342].10 must be inspected no less often than once each calendar year unless:
(1) it has been demonstrated to the satisfaction of the Exchange that because of proximity, special reporting or supervisory practice, other arrangements may satisfy the Rule's requirements for a particular branch office; or
(2) based upon the written policies and procedures of such member organization providing for a systematic risk-based surveillance system, the member organization submits a proposal to the Exchange and receives, in writing, an exemption from this requirement pursuant to [Rule 342].25.
(B) Every branch office, without exception, must be inspected at least once every three calendar-years. All required inspections must be conducted by a person who is independent of the direct supervision and control of the branch office in question (i.e., not the Branch Office Manager, or any person who directly or indirectly reports to such Manager, or any person to whom such Manager directly reports). Written reports reflecting the results of such inspections are to be maintained at the member organization for the longer of three years or until the next branch inspection.
.25 Risk-Based Surveillance and Branch Office Identification
(A) Any member organization seeking an exemption, pursuant to
[Rule 342].24(A)(2), from the annual branch office inspection requirement must submit to the Exchange written policies and procedures for systematic risk-based surveillance of its branch offices. Such policies and procedures should reflect, among other factors, the member organization's business model, and product mix. Such policies and procedures must also, at a minimum, provide for:
(1) The inspection of branches where developments during the year require a reconsideration of such branch's exemption;
(2) A requirement that no less than half of the branch offices inspected each year on a cycle basis be done on an unannounced basis; and
(3) A system to enable employees to report compliance issues on a confidential basis outside of the branch office chain of command.
(B) For purposes of paragraph (A) the risk-based factors to be considered should include, but not necessarily be limited to, the following:
(1) Number of registered representatives;
(2) A significant increase in the number of registered representatives;
(3) Number of customers and volume of transactions;
(4) A significant increase in branch office revenues;
(5) Incidence of concentrated securities positions in customers' accounts;
(6) Aggregate customer assets held;
(7) Nature of the business conducted and the sales practice risk to investors associated with the products sold, and product mix (e.g., options, equities, mutual funds, annuities, etc.);
(8) Numbers of accounts serviced on a discretionary basis;
(9) Compliance and regulatory history of the branch, including:
(a) Registered representatives subject to special supervision by the member organization, self-regulatory authorities, state regulatory authorities or the Securities and Exchange Commission in years other than the previous or current year;
(b) Complaints, arbitrations, internal discipline, or prior inspection findings; and
(c) Persons subject to recent disciplinary actions by self-regulatory authorities, state regulatory authorities or the Securities and Exchange Commission.
(10) Operational factors, such as the number of errors and account designation changes per registered representative;
(11) Incidence of accommodation mailing addresses (e.g., post office boxes and "care of" accounts);
(12) Whether the branch office permits checks to be picked up by customers or hand delivery of checks to customers;
(13) Experience, function (producing or non-producing) and compensation structure of branch office manager;
(14) Branch offices recently opened or acquired; and
(15) Changes in branch location, status or management personnel.
(C) Notwithstanding any policies or procedures implemented pursuant to this rule, branch offices that meet any of the following criteria must be inspected no less often than once each calendar year:
(1) Offices with one or more registered representatives subject to special supervision as required by a self-regulatory authority or state regulatory authority during the current or immediately preceding year;
(2) Offices with 25 or more registered individuals;
(3) Offices in the top 20% of production or customer assets for the member organization;
(4) Any branch office not inspected within the previous two calendar years; and
(5) Any branch office designated as exercising supervision over another branch office.
.26 Criteria for Inspection Programs
(A) An annual branch office inspection program must include, but is not limited to, testing and independent verification of internal controls related to the following areas:
(1) Safeguarding of customer funds and securities;
(2) Maintaining books and records;
(3) Supervision of customer accounts serviced by Branch Office Managers;
(4) Transmittal of funds between customers and registered representatives and between customers and third parties;
(5) Validation of customer address changes; and
(6) Validation of changes in customer account information.
.30 Annual Report and Certification
By April 1 of each year, each member not associated with a member organization and each member organization shall submit to the Exchange a report on the member or member organization's supervision and compliance effort during the preceding year and on the adequacy of the member or member organization's ongoing compliance processes and procedures. The report shall include:
(a) A tabulation of the reports pertaining to customer complaints and internal investigations made to the Exchange during the preceding year pursuant to [Rules 351](d) and (e)(ii),
(b) Identification and analysis of significant compliance problems, plans for future systems or procedures to prevent and detect violations and problems, and an assessment of the preceding year's efforts of this nature, and
(c) Discussion of the preceding year's compliance efforts, new procedures, educational programs, etc. in each of the following areas (if any of these areas do not apply to the member or member organization, the report should so state):
(i) Antifraud and trading practices,
(ii) Investment banking activities,
(iii) Sales practices,
(iv) Books and records,
(v) Finance and operations,
(vi) Supervision,
(vii) Internal Controls, and
(viii) Anti-money laundering.
(d) Reserved.
(e) Reserved.
