Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Notices 1353

12See Securities Exchange Act Release No. 29801

(October 10, 1991), 56 FR 52098 (approving 15-

second interval following a market maker’s receipt

of a SOES execution report to update its quotation

before being required to execute another order in

that security through SOES).

13Morgan Stanley argues that market makers

whose quotes have been locked or crossed may not

always have adequate notice that their quotation

has been locked or crossed. It recommends that the

NASD provide a market maker whose quotation has

been locked or crossed with a warning window on

its screen. While the suggestion has merit, the

Commission does not believe that it is a necessary

prerequisite for approving a rule change providing

market makers with five additional seconds to

update their quotations.

14 17 CFR 200.30–3(a)(12) (1989).

1 15 U.S.C. 78s(b)(1).

2On 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.

1 If the phone number of the clearing organization

appears on the back of the statement it must be in

‘‘bold’’ or ‘‘highlighted’’ letters.

or crossed until the locking or crossing

market maker has notified the NASD,

and the NASD, in turn, has notified the

market maker that its quotation has been

locked or crossed, would be highly

inefficient and would be inconsistent

with the NASD’s statutory mandate that

its rules remove impediments to and

perfect the mechanism of a free and

open market. The Commission also

notes that each of the alternatives

suggested by Morgan Stanley would

inhibit the ability of investors to obtain

executions at a market maker’s

displayed quotations if it were

implemented. Thus, the Morgan Stanley

alternatives do not give due recognition

to the interests of investors or to the

interest of the NASD in discouraging

locked and crossed markets.

The 5-second interval between SOES

executions during locked and crossed

markets will apply to all SOES users

and participants. Although the proposal

will limit to a small extent the ability to

investors to obtain executions in locked

and crossed markets by providing a 5-

second interval between executions, the

Commission believes that the rule

change appropriately balances the

interests of investors and the need for

market makers to have a very brief

period to update their quotations

expeditiously in locked or crossed

markets. The rule change also is

intended to enhance the production of

fair and orderly quotations in NNM

securities. This, in turn, should

encourage market makers to enter more

competitive quotations.

The Quote Rule requires that brokers

and dealers execute orders to buy and

sell securities at their published quotes

unless communicating a revised bid or

offer or unless updating their quotations

in response to an execution. The 5-

second interval is intended to provide

market makers with an opportunity to

update their quotations in response to

an execution. Market makers who do

not so will be required to execute

further transactions at their published

bid or offer. 12 The Commission notes

that if the NASD adopted either

alternative suggested by Morgan

Stanley, Nasdaq market makers would

not be required to execute orders to buy

and sell securities at their published

quotes even when they are not

communicating a revised bid or offer or

updating their quotations in response to

an execution. 13

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change SR–NASD–95–54

be, and hereby is, approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority. 14

[FR Doc. 97–445 Filed 1–8–97; 8:45 am]

BILLING CODE 8010–01–M

[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 selfregulatory organization. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

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

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
1354 Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Notices

2Where 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.

3Columns, coloring or other distinct form of

demarcation should be used to clearly distinguish

assets.

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

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 nonbrokerage 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
Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Notices 1355

4Where 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. 5 15 U.S.C. 78f(b)(5).

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.

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.

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