Brokerage and other financial organizations usually purchase seats or memberships at the New York Stock Exchange (NYSE) for employees and an ABC agreement is a contract between the employee and the purchasing firm and it details the rights of the firm and the employee. When it comes to the seats in the New York Stock Exchange (NYSE), there are a lot of rules and restrictions set up for the sole purpose of restricting unethical activities by the firms that have purchased seats. Any deviations from the rules and restrictions result in heavy penalties to the company including the loss of the seat, so an ABC agreement is very important because it gives the firm or company the right to monitor the activities of the employee that serves as the firm's representative in the NYSE.
There are three provisions that an ABC Agreement has to contain:
- The employee can transfer the seat to another employee in the same firm: This provision makes it easy to transfer the seat to another employee in the same firm in case the previous employee is replaced for any reason.
- The employee can retain the seat and purchase another seat for an authorized employee of the firm: This means that the firm can increase its presence in the New York Stock exchange (NYSE), however, there are some restrictions to the number of seats a company can have.
- Sell the seat and give the proceeds to the company: If a company decides to sell its seat on the NYSE to another party, the proceeds from that seat goes to the company and not the employee that held the seat.
Owning a seat on the NYSE enables them to trade on the floor. (Read the answer to our frequently asked question Why is membership in the NYSE know as "owning a seat"? to learn more.)
This question was answered by Chizoba Morah.