What is an ABC Agreement

An ABC agreement is an agreement that is made between a member of the New York Stock Exchange (NYSE) and the firm the member works for.

BREAKING DOWN ABC Agreement

An ABC agreement must be approved by the NYSE before it can be executed. The agreement is used when an employee is leaving a firm and will no longer be using the company’s designated seat on the NYSE. It allows the employee to transfer their seat on the exchange to another member of their firm. The agreement also gives them the right to retain ownership of their seat, and instead use their membership to purchase a new seat for another active member of the firm. Thirdly, they can elect to sell their seat all together with the caveat that all proceeds must be transferred back to the firm.

ABC agreements are important contracts since the firm is the one that pays for the employee’s seat on the NYSE, and therefore the seat is directly tied to the brokerage. The employee using this seat could potentially do damage to the firm’s ability to trade on the exchange long after the employee has ended their employment with their existing member company.  

Other exchanges have similar agreements in place with membership firms to prevent future employee misconduct from negatively impacting a firm’s ability to conduct business on an exchange.

An Example of an ABC Agreement

As an example of an ABC Agreement in action, imagine the brokerage firm Jones Investing Group, LLC. They have a staff of 20 brokers, each one with a license to trade on the New York Stock Exchange (NYSE). One of their brokers, Ken West, has decided to leave Jones Investing for a more prestigious firm in the city. Ken has let his manager at Jones Investing know that he plans on leaving in two weeks and they have begun searching for his replacement. Once they find one, they will set up an ABC Agreement between Ken and his replacement, Lydia. The agreement will need to be approved by the NYSE, but once it has been, Lydia will officially be licensed to operate under Ken’s previous license. As this license was originally obtained by Jones Investing, Ken will have to get a separate license under his new employer.

Now imagine a situation where Ken left the investment firm under less than desirable terms. Instead of transferring his license over, as he had agreed to do when he was hired, he takes it to his new job at Smith House Investing Group. There, he makes a trade that is in violation of the NYSE guidelines, and the Securities and Exchange Commission (SEC) opens an investigation. Ken is still operating under the Jones Investing licensing umbrella, and his actions have brought them into the investigation and jeopardized the entire firm’s good standing with the NYSE.