[Federal Register Volume 62, Number 196 (Thursday, October 9, 1997)]
[Notices]
[Pages 52801-52804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26723]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39190; File No. SR-NYSE-96-27]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by New York Stock Exchange, Inc. Relating to an Interpretation 
of Rule 409 (``Statements of Accounts to Customers'')

October 2, 1997.

I. Introduction

    On December 5, 1996, \1\ the New York Stock Exchange, Inc. 
(``NYSE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 
thereunder, \3\ a proposed rule change interpreting Exchange Rule 409. 
A notice of the proposed rule change appeared in the Federal Register 
on January 9, 1997.\4\
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    \1\ In response to comment letters and membership concerns, the 
NYSE has submitted three amendments to this proposed rule change. 
See letter from James E. Buck, Senior Vice President and Secretary, 
NYSE, Inc., to Ms. Katherine A. England, Assistant Director, 
Division of Market Regulation, SEC, dated April 24, 1997 (responding 
to comment letters)(``Amendment No. 1''); Letter from James E. Buck, 
Senior Vice President and Secretary, NYSE, Inc., to Ms. Katherine A. 
England, Assistant Director, Division of Market Regulation, SEC, 
dated June 9, 1997 (amending the rule language to clarify the 
proposed interpretation and stipulating to a one year phase-in 
period for implementation of the Rule's requirements)(``Amendment 
No. 2''); Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, Inc., to Ms. Katherine A. England, Assistant 
Director, Division of Market Regulation, SEC, dated September 18, 
1997 (eliminating redundant provisions in the 
interpretation)(``Amendment No. 3''). These amendments are technical 
in nature and do not need to be published for comment.
    \2\ 15 U.S.C. Sec. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ Securities Exchange Act Release No. 38106 (December 31, 
1996), 62 FR 1353 (January 9, 1997).
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    The Commission received five comment letters addressing the 
proposed rule change.\5\ One commenter endorsed the proposed 
amendments,\6\ while the remaining commenters opposed the proposal.\7\ 
This order approves the proposed rule change.
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    \5\ Letter from Sarah A. Miller, Senior Government Relations 
Counsel, Trust and Securities, American Bankers Association, to 
Jonathan G. Katz, Secretary, SEC, dated January 30, 1997 (``ABA 
Letter''); Letter from Deborah H. Kaye, Vice President and Assistant 
General Counsel, Retail Banking and Securities, The Chase Manhattan 
Bank, to Jonathan G. Katz, Secretary, SEC, dated January 28, 1997 
(``Chase Letter''); Letter from Thomas W. Evans, Vice President, 
Citibank, to Secretary, SEC, dated January 29, 1997 (``Citibank 
Letter''); Letter from Steven J. Freiberg, Chairman and Chief 
Executive Officer, Citicorp Investment Services, to Secretary, SEC, 
dated January 29, 1997 (``CIS Letter''); Letter from Monica M. 
Barbour, Vice President and Legal Counsel, First Chicago NBD, to 
Margaret H. McFarland, Deputy Secretary, SEC, dated January 31, 1997 
(``First Chicago Letter'').
    \6\ See First Chicago Letter.
    \7\ See ABA Letter, Chase Letter, Citibank Letter, and CIS 
Letter.
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    The proposed rule change sets forth an interpretation of Exchange 
Rule 409 with respect to the establishment of standards regarding the 
distribution of ``summary statements'' and the use of ``third party 
agents'' to prepare or distribute customer account statements. The 
proposed interpretation also codifies existing Exchange policy as to 
certain information that must be disclosed on account statements. Other 
items addressed in the proposed interpretation include account 
statements that reflect assets not in the possession or control of a 
member organization and the use of logos and trademarks on account 
statements by an entity other than the carrying or introducing 
organization.

II. Description of the Proposal

    Exchange Rule 409 addresses the responsibility of member 
organizations carrying customer accounts to send statements of these 
accounts to their customers. Currently, the rule requires member 
organizations to send their customers account statements showing 
security and money positions and entries at least quarterly to all 
accounts having an entry, money or security position during the 
preceding quarter. As amended, the rule will allow Exchange member 
organizations, jointly with other financial institutions (e.g., banks 
and investment companies), to formulate and distribute to common 
customers a ``summary statement'' of the customers' accounts with the 
respective institutions. These consolidated statements will reflect 
information from entities that are part of a financial services 
``group'' or ``family,'' which could include an Exchange member 
organization that carries accounts for another broker-dealer.
    Specifically, the Exchange will require that the summary statement: 
indicate that the statement is informational and includes assets held 
at different entities; identify each entity, their relationship to each 
other and their respective functions; distinguish clearly between 
assets held by each entity; \8\ identify the customer's account numbers 
at each entity and provide a customer service telephone number at each; 
\9\ disclose which entity holds each of the different assets on the 
summary; and identify each entity that is a member of the Securities 
Investor Protection Corporation (``SIPC'').\10\ Additionally, any 
aggregation of account values must be recognizable as having been 
derived from the separately stated totals; the beginning and end of 
each separate underlying statement must be clearly distinguishable; and 
there must be a written agreement between the parties jointly 
distributing the statements that each has developed procedures and 
controls for testing the accuracy of its own information on the summary 
statement. Furthermore, the member organization must indicate on the 
summary statement that it is not responsible for any information 
derived from the customer or other external source relating to 
externally-held assets.
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    \8\ Columns, coloring or other distinct forms of demarcation may 
be used to clearly distinguish assets. The Interpretation requires 
only that a physical distinction of assets be made on the summary 
page. It was not intended to mandate the manner in which such 
identification is made. see infra note 13, at pg. 4.
    \9\ Where the customer account number and telephone number for 
customer service at each entity are included on each entity's 
respective customer account statement, such account and telephone 
numbers need not be included on the summary statement. See also note 
26, infra.
    \10\ See supra note 1, Amendment No. 2.
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    The proposed interpretation also clarifies that certain information 
must be disclosed on the front of account statement, i.e., the identity 
of the introducing and carrying organizations, where customer assets 
included on the statement are held, whether such customer assets are 
covered by SIPC, and the opening and closing account balances. 
Moreover, the interpretation requires that where the account statement 
includes assets not within the possession or control of the member

[[Page 52802]]

organization, such assets must be clearly separated on the statement. 
In addition, the statement must clearly indicate that such externally 
held assets: are not within the possession or control of the member 
organization and are included on the statement solely as a service to 
the customer; and are not covered by SIPC.
    Concerning the use of logos and trademarks, the proposed 
interpretation provides that where the logo, trademark or other 
identification of an entity (other than that of the carrying or 
introducing organization) appears on an account statement, the identity 
of such entity and the relationship to the introducing, carrying or 
other organization must be provided on the statement. With respect to 
the summary statement, the location of the name of the entity may not 
be misleading or cause customer confusion. The proposed interpretation 
codifies that carrying firms are responsible for sending statements to 
customers and for ensuring the accuracy of such statements. However, 
because in many cases ``third party agents'' (e.g., service bureaus or 
other independent entities) prepare or transmit customer account 
statements, the proposed interpretation to Rule 409 would also 
establish Exchange policy regarding use of ``third party agents'' to 
prepare or transmit statements of accounts and to set forth certain 
representations which must be made in writing by the member 
organization to the Exchange when employing their party agents.
    Specifically, the member organization must represent that the third 
party is acting as agent for the member organization, that the member 
organization retains responsibility for compliance with Rule 409(a), 
that the member organization has developed procedures and implemented 
controls for reviewing and testing the accuracy of statements, and that 
it will retain copies of all such statements. In addition, the 
interpretation states that an introducing organization that is a 
provider of services included in a member organization's statements of 
accounts may not function as a ``third party agent'' and may neither 
prepare nor transmit such statements itself.

III. Summary of Comments

    The Commission received five comment letters in response to the 
proposed rule change.\11\ The First Chicago Letter generally endorsed 
the proposed rule change as a ``significant step in meeting customer 
needs by creating a more efficient and less costly delivery system of 
customer statements.\12\ The remaining letters, however, raised several 
issues that the Commission believes should be addressed. The Exchange, 
at the Commission's request, has proffered a response.\13\
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    \11\ See supra note 5.
    \12\ First Chicago Letter at pg. 2.
    \13\ See supra note 1, Amendment No. 1.
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    The remaining commenters argued that the Exchange lacked the 
authority to regulate how non-Exchange members communicate with their 
customers and the type of information disseminated to their 
customers.\14\ One commenter, Chase, noted that if the NYSE member firm 
must develop procedures and controls for reviewing the accuracy of 
statements of accounts prepared by third party agents then this implies 
that the Exchange member must have access to bank records and 
statements.\15\ Chase questioned whether the NYSE has the authority to 
require NYSE member firms to review bank statements.\16\ Another 
commenter suggested that requiring banks (or other financial entities) 
to possibly establish and make accessible a customer service department 
was an indirect attempt by the Exchange to regulate banking activity 
and as such, was beyond the Exchange's purview.\17\
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    \14\ Chase Letter, pp. 2-3, Citibank Letter, p. 3, and CIS 
Letter p. 4.
    \15\ Chase Letter, p. 3.
    \16\ Id. See also Citibank Letter, (stating that the NYSE has no 
authority to access customer account numbers or information or to 
require customer service numbers at a bank or other financial 
entity), p. 3.
    \17\ CIS Letter, pp. 3-4.
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    The NYSE states that its proposed Interpretation is directed only 
to those persons or entities that themselves are subject to the 
jurisdiction of the Exchange.\18\ The Exchange believes that its 
interpretation will apply generically to the practice of formulating 
and disseminating summary statements together with combined statements 
of various entities, regardless of whether these entities are 
members.\19\ The Exchange states that it is not seeking to directly 
impose regulation on third parties; however, to the extent that member 
organizations enter into contractual arrangements with third parties, 
these relationships will necessarily be affected by Exchange 
regulation.\20\
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    \18\ Amendment No. 1, p. 2.
    \19\ Id.
    \20\ Id.
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    In its response, the NYSE has clarified its intent concerning 
specific jurisdictional issues raised by several commenters. First, the 
requirement that a member firm develop procedures and controls for 
reviewing the accuracy of statements of accounts prepared by third 
party agents only applies to the customer account statement of a member 
organization.\21\ For example, ``if a third party agent prepares 
account statements which include assets held at the member organization 
broker-dealer, there must be a system in place to ensure the accurate 
receipt by the third party agent of such information and the 
transmission of accurate information to customers.'' \22\ The 
Interpretation does not seek to address the responsibility for the 
preparation of statements or accuracy of information related to assets 
not held at the broker-dealer.\23\ Thus, concerning customer 
information provided by non-member entities, the responsibility of 
ensuring the accuracy and transmission of their information lies solely 
with them.
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    \21\ Amendment No. 1, p. 5.
    \22\ Id.
    \23\ Id.
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    Another concern most commonly raised addressed the requirement that 
each entity provide a customer service number on its respective 
customer account statement. In its response, the NYSE stated that the 
summary page must also identify the relevant customers' account numbers 
at each entity and provide a customer service number for each such 
entity, ``but only if such information is not included on each entity's 
underlying customer account statement.'' \24\ According to the 
Exchange, indicating the customer service telephone numbers will allow 
customers to contact the appropriate entity for assistance in regard to 
the information presented on the summary page or any of the attached 
statements.\25\
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    \24\ Amendment No. 1, p. 4.
    \25\ Id.
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    The Commission believes the requirement that a customer service 
number be provided from each entity will ensure that inquiries 
concerning an asset or account are directed to the entity controlling 
the same. If a subsidiary does not have a customer service number, it 
may use the customer service number of its parent company or other 
affiliate.\26\ With respect to the jurisdictional issues, the 
Commission recognizes that the development and distribution of these 
joint customer account statements would be a voluntary undertaking 
between the parties involved. If a broker-dealer affiliate chooses not 
to distribute joint account statements with the broker-dealer, then it 
would not be subject to the Interpretation.
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    \26\ If an alternate number is used, the customer must be able 
to receive assistance concerning his inquiries or be directed to the 
appropriate person or department for assistance.
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    Several comments took exception to the requirement that the summary

[[Page 52803]]

statement identify and distinguish between those accounts and assets 
covered and not covered by SIPC.\27\ According to these commenters, 
most financial entities have already addressed insurance disclosure and 
have established procedures to comply with the banking regulators' 
requirements.\28\ Thus, requiring banks to specifically disclose to 
customers that deposit accounts, insured by the Federal Deposit 
Insurance Corporation (``FDIC''), are not insured by SIPC would create 
unnecessary customer confusion \29\ and may create the illusion that 
the two types of coverage are comparable.\30\ One commenter noted that 
this requirement imposes a disproportionate impact \31\ on financial 
entities because they would be burdened with distinguishing between 
FDIC and SIPC coverage and educating the customer about the 
differences.\32\
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    \27\ Chase Letter, p. 4, Citibank Letter, pp. 1-2, CIS Letter, 
p. 2, and ABA Letter, p. 4.
    \28\ Id. The banking regulators' requirements are outlined in 
the Interagency Statement on Retail Sales of Non-deposit Investment 
Products, dated February 15, 1997 (``Interagency Statement''). See 
also Joint Interpretations of the Interagency Statement, dated 
September 12, 1995, (indicating that the banking agencies may seek 
to apply the Interagency Statement more broadly outside the bank 
than they do within the bank).
    \29\ Chase Letter, p. 4, Citibank, p. 1, and ABA Letter, p. 4.
    \30\ Citibank Letter, pp. 1-2.
    \31\ CIS Letter, (requiring additional disclosures will have an 
anti-competitive effect because NYSE Rule 409 will 
disproportionately affect banks, thus disadvantaging a class of NYSE 
competitors) at p. 2.
    \32\ ABA Letter, pp. 3-4.
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    In its response, the NYSE notes that it intended that member 
organizations be required to make the standard SIPC disclosures on 
their customer account statements and on summary statements where 
brokerage assets are included.\33\ The NYSE understands that if read 
literally, the proposal could be construed as requiring summary 
statement participants to make ``negative'' disclosures (i.e., specific 
identification of account assets or accounts not covered by SIPC); 
however, this was not its intent. Thus, with respect to SIPC 
disclosures on the summary statement, the Exchange has amended the 
proposed Interpretation to require that an entity disclose its 
membership status, not the status of the accounts or assets.\34\
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    \33\ Amendment No. 1, p. 4.
    \34\ Amendment No. 2, p. 2.
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    Finally, most commenters expressed concern about the additional 
costs and burdens financial institutions will incur in attempting to 
comply with the summary statement aspect of this proposal.\35\ These 
commenters contend that expanding the disclosure requirements to 
include, among other things, identifying each entity from which 
information is provided or where the assets are held and explaining the 
relationship between the various entities on the summary statement, 
would not only increase the cost of producing the statement,\36\ but 
would defeat the purpose of a statement summary by increasing its 
length.\37\ If the proposal is approved, the commenters suggest that 
those entities currently disseminating summary statements pursuant to 
NYSE rules either be grandfathered \38\ or provided with a grace period 
to implement the changes.\39\
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    \35\ Chase Letter, p. 1, Citibank Letter, p. 3, CIS Letter, p. 
2, and ABA Letter, p. 3.
    \36\ Chase Letter, p. 3, Citibank Letter, p. 3, CIS Letter, p. 3 
and ABA Letter, p. 3.
    \37\ Chase Letter, p. 5 and Citibank Letter, pp. 3-4.
    \38\ Citbank Letter, p. 4.
    \39\ Chase Letter, p. 6 and Citibank Letter, p. 4.
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    The NYSE has agreed that some flexibility in implementation is 
warranted. Thus, the Exchange has agreed to a one year phase-in period, 
commencing with Commission approval.\40\
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    \40\ Amendment No. 1, p. 3.
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IV. Discussion

    The Commission believes that the proposed rule change is consistent 
with the Act and the rules and regulations promulgated thereunder. 
Specifically, the Commission believes that approval of the proposed 
rule change is consistent with section 6(b)(5) \4\ of the Act. Pursuant 
to Section 6(b)(5), the proposed rule change benefits the public \42\ 
by codifying the information to be disclosed and delineating the 
criteria for the use of third party agents in formulating and 
disseminating statements of accounts to customers. Exchange Rule 409 
also benefits the public by establishing requirements for related 
financial entities to consolidate account information and distribute 
this information in a ``summary statement'' to their common customers. 
These summary statements will provide customers not only with an 
overview of their accounts at the separate entities, but with concise, 
detailed information that is easily accessible.\43\
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    \41\ Section 6(b)(5) requires the Commission to determine that a 
registered national securities exchange's rules are designed to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
    \42\ Pursuant to Section 3(f) of the Act, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \43\ The Commission notes that this approval order addresses the 
procedures that members and associated persons must follow to 
disseminate this customer information. The Commission, however, is 
not addressing the various entities' legal status or rights 
concerning this information.
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    Codifying the information to be disclosed on statements of accounts 
assures customers of consistency in the type of information received on 
their statements. It also establishes uniform standards which will be 
applicable to all Exchange members. The rule language establishes 
adequate procedures for members to follow if they chose to use third 
party agents to disseminate statements of accounts to their customers. 
The rule safeguards against possible conflicts of interest and requires 
that members who exercise this option, monitor the activity of the 
third party agents, to ensure accuracy of the information transmitted. 
Having members develop the requisite procedures and controls to monitor 
their agents' compliance with this rule should prevent the misuse of 
customer information.
    A summary statement consolidating a customer's accounts from 
various related financial entities will provide the customer with 
convenient access to the information in a single document. The 
Commission agrees that if these statements are currently being produced 
and disseminated, then uniform requirements need to be established for 
member and non-member participants to follow. The Commission applauds 
the Exchange's efforts in establishing requirements that attempt to 
provide the customer with as much information as possible. However, the 
Commission believes there is a fine line between a useful summary 
statement and one that could prove misleading and could cause customer 
confusion. Consequently, we urge the Exchange to be sensitive to any 
concerns that may arise after the proposal is implemented.
    The Commission also believes that allowing a one year phase-in 
period for implementation of the Interpretation will provide entities 
adequate time to comply with the requirements of the rule. Once the 
Interpretation is fully implemented, the resulting summary statement 
should achieve the Exchange's objectives while benefiting the customer 
through increased disclosure.

V. Conclusion

    For the above reasons, the Commission believes that the proposed 
rule change is consistent with the

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provisions of the Act, and in particular with Section 6(b)(5).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-NYSE-96-27) be, and hereby 
is approved, as amended.

    \44\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26723 Filed 10-8-97; 8:45 am]
BILLING CODE 8010-01-M