[Federal Register Volume 62, Number 6 (Thursday, January 9, 1997)]
[Notices]
[Pages 1353-1355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-489]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 38106; File No. SR-NYSE-96-27]


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

December 31, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 5, 1996,\2\ the 
New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ On December 5, 1996, the NYSE filed Amendment No. 1 with the 
Commission. The proposed rule change was submitted on September 25, 
1996. However, amendments to the rule language were improperly 
identified in contravention of Section 19(b); therefore, the filing 
is deemed to be filed on the later date. See letter from James E. 
Buck, Senior Vice President and Secretary, NYSE, to Katherine A. 
England, Assistant Director, Division of Market Regulation, SEC, 
dated December 5, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange has filed with the Commission a proposed rule change 
which consists of an interpretation with respect to the meaning and 
administration of existing Exchange Rule 409 (``Statements of Accounts 
of Customers''). Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
brackets.
RULE 409: STATEMENTS OF ACCOUNTS TO CUSTOMERS

(a)

/01  Applicability

    Compliance with Rule 409(a) and the accuracy of statements of 
accounts thereunder is the responsibility of the member organization 
carrying the customer account for which the statement is required, 
unless such responsibility has been allocated to a non-member carrying 
organization pursuant to an Exchange approved agreement under Rule 382.

/02  Information To Be Disclosed

    Statements of accounts to customers must clearly and prominently 
disclose on the front of the statement:
    1. the identity of the introducing and carrying organization and 
their respective phone numbers for service;\1\
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    \1\ If the phone number of the clearing organization appears on 
the back of the statement it must be in ``bold'' or ``highlighted'' 
letters.
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    2. where the customers' assets included on the statement are 
carried;
    3. that the carrying organization is a member of SIPC and whether 
any of the customers' assets included on the statement are not covered 
by SIPC;
    4. the opening and closing balances for the account.

/03  Use of Third Party Agents

    Prior to utilizing a ``third party agent'' to prepare and/or 
transmit statements of accounts to customers, a member organization 
shall represent/undertake in writing to the Exchange that:
    1. the third party is acting as agent for the member organization;
    2. the member organization retains responsibility for compliance 
with Rule 409(a);
    3. the member organization has developed procedures/controls for 
reviewing and testing the accuracy of statements of accounts prepared 
and/or transmitted by the third party agent;
    4. the member organization will retain copies of statements of 
accounts prepared and/or transmitted by the third party agent in 
accordance with applicable books and records requirements.
    Allocation of responsibilities for preparation and/or transmission 
of statements to any person other than a carrying organization pursuant 
to an agreement approved by the Exchange in accordance with Rule 382 
(Carrying

[[Page 1354]]

Agreements) shall be deemed to be utilization of a ``third party 
agent''.
    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 not itself prepare and or transmit such 
statements.

/04  Assets Not In Possession/Control of Member Organization

    Where a statement of account includes assets that are not within 
the possession or control of the member organization such assets must 
be clearly and distinguishably separated on the statement, and it must 
be clearly indicated on the statement that such externally held assets: 
are not within the possession or control of the member organization, 
are included on the statement solely as a service to the customer, 
information (including valuation) is derived from the customer or other 
external source for which the member organization is not responsible, 
and are not covered by SIPC.

/05  Use of Logos, Trademarks, etc.

    Where the logo, trademark or other similar identification of a 
person (other than the carrying or introducing organization) appears on 
a customer account statement, the identify of such person(s) and the 
relationship to the introducing, carrying or other organization 
included on the statement must be provided and may not be utilized in a 
manner which is misleading or causes customer confusion.

/06  Combined Statements

    Where a member organization carrying a customer's account and 
another person(s) who separately offers financial related products/
services to the same customer (e.g. mutual fund sales/custodial 
services, banking products/services, insurance products/services, 
securities products/services, etc.) seek to jointly formulate and/or 
distribute their respective customer account statements together with a 
statement summarizing or combining assets held in different accounts, 
(``summary statement''), the Exchange will require:
    1. That the summary statement:
    a. indicate that the ``summary statement'' is provided for 
informational purposes and includes assets held at different entities;
    b. identify each entity from which information is provided or 
assets being held are included, their relationship with each other 
(e.g., parent, subsidiary or affiliated organization), and their 
respective functions (introducing/carrying brokerage firms, fund 
distributor, banking/insurance product providers, etc.);
    c. clearly distinguish between assets held by each entity by way of 
use of columns, coloring or other district form of demarcation;
    d. identify the customer's account number at each entity; \2\
    e. provide a telephone number for customer service at each entity; 
\2\
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    \2\ Where the customer account number and telephone number for 
customer service at each entity are included on each entit[ies]y's 
respective customer account statement, such account and telephone 
numbers need not be included on the summary statement.
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    f. disclose which entity carries each of the different assets or 
categories of assets included on the summary;
    g. identify and distinguish between those accounts/assets covered 
and not covered by SIPC.
    2. To the extent that the summary statement aggregates the values 
of the various accounts summarized or portions thereof, such 
aggregation shall be recognizable as having been arithmetically derived 
from the separately stated totals or their components.
    3. That the beginning and end of each separate statement (e.g., 
summary, brokerage, mutual fund, banking, insurance, etc.) be clearly 
distinguishable by color, pagination or other distinct form of 
demarcation.
    4. That there be a written agreement between the carrying 
organization and each other person jointly formulating and/or 
distributing its respective customer account statements attesting that 
each such person has developed procedures/controls for reviewing and 
testing the accuracy of its respective statements or any information 
included by it on a summary statement.
    5. The summary statement shall comply with Rule 409 and all 
interpretations thereof.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to set forth an 
interpretation concerning the meaning and administration 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 and/or distribute customer account statements. The 
proposed interpretation also codifies existing Exchange policy as to 
certain information that must be disclosed on account statement. Other 
items in the proposed interpretation address statements that include 
assets not in possession or control of a member organization and the 
use of logos and trademarks on statements.
    Exchange Rule 409 addresses the responsibility of member 
organizations carrying customer accounts to send statements of these 
accounts to their customers. The Exchange has received requests from 
member organizations to allow them jointly, with other financial 
institutions (e.g., banks and investment companies), to formulate and 
distribute to common customers a ``summary statement'' together with 
their respective customer account statements. These requests generally 
involve entities that are part of a financial services ``group'' or 
``family'' or where the Exchange member organization carries accounts 
for a broker-dealer that is part of such a group. The ``summary 
statement'' provides an overview of the customer's accounts at the 
separate entities and is supported by the detail on the separate 
respective statements.
    The Exchange has worked with industry representatives to develop 
parameters so that this may be accomplished in a manner that will 
provide customers with accurate account statements that clearly 
identify the respective entities involved and distinguish brokerage 
from non-brokerage assets.
    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 \3\; identify the customer's account numbers 
at each entity and provide a

[[Page 1355]]

customer service telephone number at each entity \4\; disclose which 
entity holds each of the different assets on the summary; and 
distinguish between accounts that are or are not covered by SIPC. 
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/controls for testing the accuracy of its own information on 
the customer statement.
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    \3\ Columns, coloring or other distinct form of demarcation 
should be used to clearly distinguish assets.
    \4\ 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.
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    The proposed interpretation will codify that carrying firms are 
responsible for sending statements to customers and for ensuring the 
accuracy of such statements. However, it is recognized that in many 
cases ``third party agents'' (e.g., service bureaus or other 
independent entities) prepare or transmit customer account statements. 
Therefore, the proposed interpretation to Rule 409 would also establish 
Exchange policy regarding use of ``third party agents'' to prepare and 
transmit statements of accounts and to set forth certain 
representations which must be made in writing by the member 
organization to the Exchange. 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 not itself prepare and or transmit such 
statements.
    The proposed interpretation also clarifies that certain information 
must be disclosed on the front of account statements, 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.
    The interpretation also requires that where the account statement 
includes assets not within the possession or control of the member 
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; are included on the statement solely as a service to the 
customer; and are not covered by SIPC. Moreover, the summary statement 
must indicate that the member organization is not responsible for any 
information derived from the customer or other external source relating 
to such assets.
    As to the use of logos and trademarks, the proposed interpretation 
provides that were the logo, trademark or other identification of a 
person (other than that of the carrying or introducing organization) 
appears on an account statement, then the identity of such person and 
the relationship to the introducing, carrying or other organization 
included on the statement must be provided and may not be misleading or 
cause customer confusion.
    The Exchange believes that this proposed interpretation will give 
member organizations the flexibility to distribute summary statements 
to customers or use third party agents to prepare and transmit customer 
account statements, while providing appropriate safeguards through 
detailed disclosure to customers and required undertakings to the 
Exchange.
2. Statutory Basis
    The NYSE believes the proposed rule change is consistent with the 
requirements of Section 6(b)(5) \5\ of the Act which requires that the 
rules of the Exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. This proposal complies with the Act in that it 
establishes standards enabling members and member organizations to 
distribute summary statements and to use third party agents to prepare 
and distribute these statements, while providing customer protection 
through appropriate disclosures and implementation of specified 
procedures and controls.
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    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comment on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commissions' Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal office of the New 
York Stock Exchange. All submissions should refer to the File No. SR-
NYSE-96-27 and should be submitted by January 30, 1997.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-489 Filed 1-8-97; 8:45 am]
BILLING CODE 8010-01-M