[Federal Register Volume 59, Number 99 (Tuesday, May 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12573]


[[Page Unknown]]

[Federal Register: May 24, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34073; File No. SR-NYSE-88-35]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Extensions of 
Time for Payment or Delivery of Securities

May 17, 1994.

I. Introduction and Background

    On November 16, 1988, 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'' or ``Exchange Act'')\1\ and 
Rule 19b-4 thereunder,\2\ a proposal to amend the NYSE Rules to add new 
NYSE Rule 434 that would require all member organizations for which the 
Exchange has been appointed the designated examining authority 
(``DEA'') by the Commission pursuant to Rule 17d-1 under the Act\3\ to 
submit requests for extensions of time for payment, under Regulation T 
promulgated by the Federal Reserve Board (``FRB''),\4\ or delivery of 
securities, pursuant to SEC Rule 15c3-3(n) under the Act,\5\ to the 
Exchange.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\17 CFR 240.17d-1 (1993).
    \4\12 CFR 220.4(c) and 220.8(d) (1993).
    \5\17 CFR 240.15c3-3 (1993).
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    Notice of the proposal appeared in the Federal Register on December 
9, 1988\6\ and again on December 30, 1992.\7\ The Commission determined 
to republish the notice for comment because of the significant period 
of time that had lapsed since the proposal initially was published in 
the Federal Register and because of the number of comment letters that 
were received concerning the proposal. In addition, in 1992, the 
Federal Reserve Board issued advanced notice of proposed rulemaking to 
modify Regulation T,\8\ and specifically noted the NYSE proposal in its 
request for comments. The FRB has not yet acted on its proposal, 
however, and has not published a timetable for doing so.
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    \6\See Securities Exchange Act Release No. 26341 (December 5, 
1988), 53 FR 49808 (December 9, 1988).
    \7\See Securities Exchange Act Release No. 31634 (December 22, 
1992), 57 FR 62409 (December 30, 1992).
    \8\See 57 FR 37109 (August 18, 1992).
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    The Commission received fifteen comment letters on the proposal in 
1988\9\ as well as a letter from the NYSE responding to the comment 
letters.\10\ The Commission received five comment letters on the 
proposal in 1993\11\ as well as a letter from the NYSE responding to 
the 1993 comment letters.\12\ This order approves the proposal.
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    \9\See letters from: Richard E. Orie, Vice President-Director of 
Compliance, Q & R Clearing Corporation, to Mary Revell, Branch 
Chief, Exchange Regulation, Division of Market Regulation, 
Commission, dated December 21, 1988 (``Q & R Clearing Letter''); J. 
Craig Long, Vice President, General Counsel and Secretary, Midwest 
Stock Exchange (now the Chicago Stock Exchange or ``CHX'') to 
Jonathan Katz, Secretary, Commission, dated December 23, 1988 
(``1988 CHX Letter''); David Colker, Vice President, Market 
Regulation and General Counsel, Cincinnati Stock Exchange, to 
Jonathan Katz, Secretary, Commission, dated December 28, 1988 
(``1988 CSE Letter''); Donald E. Weston, Chairman, Gradison & 
Company, Incorporated, to Jonathan Katz, Secretary, Commission, 
dated January 11, 1989 (``Gradison Letter''); Bernard L. Finger, 
Senior Vice President, Compliance Director, Securities Settlement 
Corporation to Secretary, Commission, dated January 18, 1989 
(``Securities Settlement Corp. Letter''); John F. Carsley, First of 
Michigan, Corporation to Jonathan Katz, Secretary, Commission, dated 
January 23, 1989 (``First of Michigan Letter''); Gerald L. Oaks, 
Chief Financial Officer, Bartlett & Co. to Jonathan Katz, Secretary, 
Commission, dated January 30, 1989 (``Bartlett & Co. Letter''); 
David Colker, Vice President, Market Regulation and General Counsel, 
Cincinnati Stock Exchange to Jonathan Katz, Secretary, Commission, 
dated January 31, 1989 (``January 1989 CSE Letter''); David P. 
Semak, Vice President-Regulation, Pacific Stock Exchange to Jonathan 
Katz, Secretary, Commission, dated January 31, 1989 (``1989 PSE 
Letter''); Richard T. Chase, Philadelphia Stock Exchange to Jonathan 
Katz, Secretary, Commission, dated February 1, 1989 (``1989 PHLX 
Letter''); J. Craig Long, Vice President, General Counsel and 
Secretary, Midwest Stock Exchange to Jonathan Katz, Secretary, 
Commission, dated February 1, 1989 (``1989 CHX Letter''); Laura 
Homer, Securities Credit Officer, Board of Governors of the Federal 
Reserve System to Howard Kramer, Assistant Director, Exchange and 
Options Regulation, Division of Market Regulation, Commission, dated 
March 8, 1989 (``FRB Letter''); John E. Pinto, Executive Vice 
President Compliance, National Association of Securities Dealers to 
Jonathan Katz, Secretary, Commission, dated March 22, 1989 (``1989 
NASD Letter''); John Caffrey, Chairman of the Board, Financial 
Clearing & Services, Corporation to Secretary of the Commission, 
dated March 27, 1989 (``Financial Clearing & Services Corp. 
Letter''); David Colker, Vice President Market Regulation and 
General Counsel, Cincinnati Stock Exchange to Howard Kramer, 
Assistant Director, Exchange and Options Regulation, Division of 
Market Regulation, Commission, dated July 5, 1989 (``July 1989 CSE 
Letter''). See infra for a discussion of the specific comments.
    \10\See letter from James E. Buck, Senior Vice President and 
Secretary, New York Stock Exchange to Mary Revell, Branch Chief, 
Exchange Regulation, Division of Market Regulation, Commission, 
dated May 31, 1989 (responding to comment letters by the Cincinnati 
Stock Exchange, Midwest Stock Exchange, Pacific Stock Exchange, 
Bartlett & Company, Gradison & Company, Incorporated, and Securities 
Settlement Corporation).
    \11\See letters from: Bear Stearns Securities Corp. to the 
Commission, dated January 15, 1993 (``Bear Stearns Letter''); David 
Colker, Executive Vice President, Cincinnati Stock Exchange to 
Jonathan Katz, Secretary, Commission, dated January 20, 1993 (``1993 
CSE Letter''); David P. Semak, Vice President Regulation, Pacific 
Stock Exchange to Jonathan Katz, Secretary, Commission, dated 
February 10, 1993 (``1993 PSE Letter''); David J. Diffenauer, Vice 
President, Margin Department Manager, A.G. Edwards & Sons, Inc. to 
Jonathan Katz, Secretary, Commission, dated February 26, 1993 
(``A.G. Edwards Letter''); Richard T. Chase, Senior Vice President, 
Associate General Counsel, Lehman Brothers to Jonathan Katz, 
Secretary, Commission, dated March 3, 1993 (``Lehman Brothers 
Letter''). See infra for a discussion of the specific comments.
    \12\See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE to Diana Luka-Hopson, Branch Chief, Exchange Branch, 
Division of Market Regulation, Commission, dated January 19, 1994.
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II. Description of the Proposal

    Registered national securities exchanges and registered national 
securities associations can grant broker-dealers extensions of time for 
payment on purchases and for delivery on sales of securities pursuant 
to Regulation T and Rule 15c3-3(n) under the Act. Such extensions may 
be granted when the self-regulatory organization (``SRO'') is satisfied 
that a creditor (broker/dealer/ is acting in good faith in making such 
a request and when the creditor believes exceptional circumstances 
warrant such action. The Exchange is proposing the addition of new Rule 
434, which would require all member firms for which the NYSE has been 
appointed the DEA under the Act to submit all requests for Regulation T 
and Rule 15c3-3 extensions to the NYSE.
    The NYSE has developed a computerized extension processing system 
for reviewing extension requests. The Exchange system contains specific 
criteria regarding acceptable reasons, number of days permitted per 
extension, and limits on the number of extensions permitted. These 
criteria facilitate the prompt collection of monies and securities due 
and reduce exposure to losses for both customers and member 
organizations. The Exchange system generates daily and monthly reports 
which provide member organizations and Exchange staff with a means to 
monitor the incidence and reasons for the extension, potential abuses, 
compliance with appropriate regulations, and indications of possible 
operational problems.
    The NYSE believes it is appropriate to require submission of 
extension requests to the DEA for several reasons. First, as the DEA 
for most of its member, the NYSE is responsible for examining its 
members for compliance with industry financial responsibility rules and 
the Exchange believes that complete extension information is needed for 
it to adequately perform its DEA functions under section 17(d) of the 
Act.
    Second, the only standards for extension requests under Regulation 
T and Rule 15c3-3 are that the creditor grant the request in good faith 
and that exceptional circumstances warrant an extension. Under this 
broad standard, each SRO that processes extension requests\13\ has 
developed its own parameters and procedures for evaluating, granting, 
and controlling extension requests.\14\ The Exchange asserts that, as a 
result, broker-dealers could forum-shop by applying for extensions from 
several or all SROs to circumvent the special requirements or the 
maximum number of extensions allowed by the NYSE. In the NYSE's view, 
adoption of the rule would ensure uniform application of standards to 
all customers of NYSE firms for which the NYSE is the DEA.
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    \13\At the time the NYSE filed the proposed rule change, the 
Boston, Cincinnati, Chicago, Pacific and Philadelphia Stock 
Exchanges and the National Association of Securities Dealers 
processed Regulation T extension requests. See Securities Exchange 
Act Release No. 26341 (December 5, 1988), 53 FR 49808 (December 9, 
1988).
    \14\For example, acceptable reasons for the extension, number of 
extensions permitted, special limitations and restrictions on 
customers are not necessarily uniformly applied, and in some cases, 
possibly, not applied at all.
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    Third, the Exchange believes that complete extension information 
would provide it with a valuable surveillance tool in detecting 
manipulation and other illegal trading activities. Rule 434 would 
ensure that credit extensions would be granted on the basis of complete 
information about a broker-dealer's payment and delivery status. The 
NYSE states that complete extension information would enable the NYSE 
to better monitor for compliance with financial and customer related 
rules, such as sales practice rules. Moreover, the NYSE believes that 
complete extension information would be useful to a DEA as an early 
indicator of operational difficulties at member firms.

III. Comments on the Proposal

    The Commission received eighteen comment letters opposing or 
suggesting substantial modifications to the NYSE proposal and two 
comment letters expressing support for the proposal.

A. Competitive Concerns

    Most of the commenters opposed to the NYSE proposal noted their 
competitive concerns, citing either section 11A(a)(1) of the Act,\15\ 
which encourages automation and efficiency in the markets while 
assuring fair competition,\16\ or section 6(b)(8) of the Act,\17\ which 
requires that the rules of an SRO not impose a burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. In particular, commenters argue that competition among SROs 
has led to technological improvements in extension granting procedures, 
such as faster turnaround and customized reports generated, and that 
competition has resulted in lower fees to broker-dealers. These 
commenters assert that the proposal would be anti-competitive in that 
the vast majority of all requests for extension of time for payment or 
delivery of securities would go to the NYSE because the NYSE is the DEA 
for virtually all of its member firms.\18\
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    \15\15 U.S.C. 78k-1(a)(1) (1988).
    \16\See e.g., January 1989 CSE Letter and Securities Settlement 
Corp. Letter, supra note 9.
    \17\15 U.S.C. 78f(b)(8) (1988).
    \18\See e.g., Securities Settlement Corp. Letter, supra note 9. 
The Securities Settlement Corp. Letter states that competition in 
the area of extension processing is consistent with section 
11A(a)(1)(C) which states that it is in the public interest and 
appropriate for the protection of investors to assure fair 
competition among exchange markets and between exchange markets.
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    The CSE asserts that the proposal would grant the NYSE a monopoly 
on extension processing, thereby imposing a chilling effect on 
innovation and stifling any initiative by an SRO to contribute to more 
efficient and effective market operations. The CSE further asserts that 
the proposal would remove any incentive for an SRO to offer technical 
enhancements to improve the ability of brokers-dealers to comply with 
their legal obligations and manage the risk associated with extensions 
of credit.\19\
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    \19\The PHLX and the Securities Corp. also assert that the NYSE 
proposal would lessen incentives for further improvements in 
services. See 1989 PHLX Letter and Securities Settlement Corp. 
Letter, supra note 9.
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    As an example, the CSE asserts that it has responded to the 
industry's need for better risk management tools and technical 
innovations. The CSE states that it initiated customized supervisory 
reports, batch transmission capability and next-morning electronic 
access to disposition reports. The CSE believes that these enhancements 
help to create a more efficient and orderly marketplace.\20\ Likewise, 
Lehman Brothers asserts that the NYSE replaced a cumbersome and 
manually intensive processing system only after competing automated 
systems had been developed by the CSE and the CHX.\21\ Both the CHX and 
CSE point out that they have expended considerable expense and effort 
to develop a computerized extension processing system.
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    \20\See January and July 1989 CSE Letters, supra note 9.
    \21\See Lehman Brothers Letter, supra note 11. The letter states 
that while Lehman Brothers submits its extension requests to the 
NYSE, it has clearly benefited from the competition between the 
exchanges and the NASD in the form of improved services.
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    Various commenters assert that by contributing to the NYSE's 
overall monopolistic position within the national marketplace, the 
proposal will seriously impair other SROs' ability to complete with the 
NYSE. For example, both the CSE and PSE state that the anti-competitive 
effects of this proposal go beyond extension processing services to 
impact on the larger concept of the entire regulatory package of 
services that each exchange can provide, which is one of the factors 
that firms look at when considering membership and the routing of order 
flow.\22\
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    \22\See 1993 CSE Letter and 1993 PSE Letter, supra note 11.
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    Some commenters assert that the NYSE's concerns could be addressed, 
and the anti-competitive effects diminished, through less restrictive 
means. Some of these commenters suggest that the regulatory objectives 
could be met through the development of uniform industry standards for 
processing extension requests and by formalizing information sharing 
arrangements.\23\
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    \23\See e.g., January 1989 and July 1989 CSE Letters; 1989 CHX 
Letter; 1989 PSE Letter, supra note 9, and Lehman Brothers Letter, 
supra note 11. The CSE, PSE, CHX and Lehman Brothers Letters all 
state that information sharing would be the appropriate alternative 
to the proposal. The CSE, for example, states that it shares all of 
its extension processing information with the DEAs.
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    In addition to information sharing, commenters suggest that uniform 
industry standards for processing extension requests could ameliorate 
the NYSE's concerns. The CSE suggests that the Intermarket Surveillance 
Group (``ISG''), in cooperation with the Commission, should develop 
uniform industry standards for the processing of extensions since, 
currently, there is no recognized way to evaluate individual extension 
requests.\24\ The NASD suggests that broker-dealers should be able to 
submit extension requests to any SRO as long as there are comparable 
review criteria and the SRO has policies and procedures that make 
regulatory use of the data.\25\
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    \24\See January 1989 CSE Letter, supra note 9.
    \25\See 1989 NASD Letter, supra note 9.
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    Lehman Brothers and A.G. Edwards comment that, to the extent that 
consistency is the NYSE's objective, the proposal is an incomplete 
solution because it has no impact on the processing of margin extension 
requests for non-NYSE firms.\26\ Lehman Brothers asserts that 
consistency could be achieved more effectively by the FRB or Commission 
dictating uniform processing criteria for all SROs although if does not 
believe that they are necessary at the present time.
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    \26\See Lehman Brothers Letter and A.G. Edwards Letter, supra 
note 11.
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    Some commenters conclude that it appears that competition has led 
to lower extension fees for broker-dealers. These commenters assert 
that the NYSE currently charges more than the other SROs granting 
extension requests. These commenters also assert that if the proposal 
is approved, the NYSE will not be subject to competition from other 
SROs and thus it will be free to charge any amount it wishes for 
extensions. For example, the Gradison Letter states that competition is 
the key to keeping regulatory costs under control.\27\ Likewise, First 
of Michigan states that it submits its extension requests to the CSE 
and its costs have been reduced. The PHLX states that approval of the 
NYSE proposal would leave as the only discipline on the NYSE's 
extension fees Commission review of such fees pursuant to section 
6(b)(4) of the Act to assure that there was ``equitable allocation of 
reasonable dues, fees and other charges among its members * * *''\28\ 
The PHLX asserts that such review is inevitably inexact and is far less 
preferable to relying on the competitive discipline of the market to 
assure fair and appropriate fees.\29\
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    \27\See Gradison Letter, supra note 9.
    \28\15 U.S.C. 78f(b)(4) (1988).
    \29\See 1989 PHLX Letter, supra note 9.
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B. The Viability of the Existing Process

    Various SRO commenters assert that the NYSE proposal is unnecessary 
because there has not been any showing that the current extension 
approval process does not work.\30\ For example, both the CSE and 
Gradison Letters assert that there is no evidence that the CSE has not 
adequately monitored extensions.\31\ The CSE further argues that 
adoption of the NYSE proposal is unnecessary because the Commission has 
found that the CSE has a good extension program.\32\ Similarly, 
Bartlett and Company states that the CSE has effectively monitored the 
extension approval process and it would be inefficient, uneconomical, 
and extremely inconvenient for it to submit its extension requests to 
the NYSE.\33\ Securities Settlement Corporation states that it has been 
filing extension requests with the CSE and it has concluded that the 
CSE has provided cost effective service and financial reports that the 
NYSE has not been able to provide.\34\
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    \30\See Gradison Letter and July 1989 CSE Letter, supra note 9, 
and January 1993 CSE Letter, supra note 11.
    \31\See id.
    \32\See January 1993 CSE Letter, supra note 11.
    \33\See Bartlett and Co. Letter, supra note 9.
    \34\See Securities Settlement Corp. Letter, supra note 9.
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    Some commenters question the NYSE's portrayal of the current 
regulatory environment, and claim that their extension processing 
system is comparable to that of the NYSE. The CSE and PHLX, for 
example, state that there is much more uniformity than the NYSE 
proposal implies.\35\ The CSE states that it believes that it uses the 
same parameters and procedures as the NYSE for evaluating, granting and 
controlling extensions as well as the same acceptable reasons, 
acceptable number of extensions permitted, special limitations and 
restrictions on customers as the NYSE. The PHLX states that it grants 
extensions for reasons similar to those accepted by the NYSE, and that 
both the NYSE and the PHLX grant extensions for similar lengths of 
time.\36\ The CHX also states that it applies the same parameters and 
procedures for evaluating, granting and controlling extension requests 
as are used by the NYSE.\37\st
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    \35\See January 1989 CSE Letter and 1989 PHLX Letter, supra, 
note 9.
    \36\See February 1989 PHLX Letter, supra not 9.
    \37\See 1989 CHX Letter, supra note 9.
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C. Inconsistency With the Act

    Some commenters assert that the NYSE proposal is inconsistent with 
the Act.\38\ These commenters state that Regulation T and SEC Rule 
15c3-3 permit a broker-dealer to apply to any SRO for an extension. 
Thus, broker-dealers should be free to choose an SRO on the basis of 
convenience, service and cost efficiency.\39\ For example, the CHX 
states that approval of the NYSE proposal would be contrary to the 
intent of Regulation T and Rule 15c3-3, which is to provide flexible 
SRO oversight of the processing of Regulation T extensions. Lehman 
Brothers argues that the current extension procedures can only be 
altered by petitioning the FRB or the Commission to make a rule change 
since both Regulation T and Rule 15c3-3 permit broker-dealers to send 
extension requests to any SRO.\40\
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    \38\See e.g., 1989 CHX Letter; 1988 and January 1989 CSE 
Letters; 1989 PHLX Letter, supra note 9; and 1993 CSE Letter and 
Lehman Brothers Letter, supra note 11.
    \39\See Bartlett and Co. Letter; 1989 PHLX Letter; 1989 PSE 
Letter; 1989 NASD Letter; Securities Settlement Corp. Letter; First 
of Michigan Letter; Gradison Letter; July 1989 CSE Letter, supra 
note 9; and Lehman Brothers Letter; A.G. Edwards Letter, supra note 
11.
    \40\See Lehman Brothers Letter, supra note 11.
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D. Claims of Forum Shopping

    The PHLX states that it is unaware of any instance in which a 
broker-dealer changed from one SRO to another in order to circumvent an 
SRO's extension guidelines. The PHLX states that the reasons that its 
members have given for choosing to send extension requests to one SRO 
over another are, inter alia, convenience, turn-around time and 
information provided by the SRO, such as providing the number of 
requests emanating from a particular branch.
    Similarly, the CSE states that there is no evidence to support the 
NYSE's assertions that several NYSE members began using the CSE for 
extension processing after the NYSE took restrictive action against 
them.\41\ The CSE states that, had it been aware of such restrictive 
action by the NYSE, it would have cooperated in restricting the firm.
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    \41\See July 1989 CSE Letter, supra note 9.
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E. Harm to the NASD That Would Result From Implementation of the NYSE 
Proposal

    The NASD's comment letter asserts that it would be harmed in a 
number of unique ways if the NYSE proposal is approved.\42\ The NASD 
states that it has significant regulatory and examination 
responsibility for all of its members, and that extension information 
is not relevant exclusively to financial and operational monitoring as 
the NYSE seems to assert. The NASD believes that extension requests 
contain valuable data which is useful to an SRO for general market 
surveillance to detect possible market or trading abuses.
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    \42\See 1989 NASD Letter, supra note 9.
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    In addition, the NASD notes that a significant portion of customer 
activities involving NASDAQ and OTC securities is handled by NASD/NYSE 
members, and if it were mandated that such members file all extension 
requests with the NYSE, then the NASD would be deprived of significant 
important regulatory data involving the marketplace that it is required 
to regulate. The NASD further asserts that the resulting fragmentation 
of NASDAQ and OTC market data would be counterproductive to 
establishing efficient regulation. It states that approval of the NYSE 
proposal, therefore, would deprive the NASD of significant and 
important regulatory data currently used to fulfill its SRO functions.

F. Miscellaneous Comments

 Extension Requests Should be Granted by Broker-Dealers
    The Bear Stearns and A.G. Edwards Letters assert that brokers-
dealers should not be required to submit requests for extensions of 
time for payment or delivery of securities to any SRO. These commenters 
esentially assert that broker-dealer is in the best position to know 
when exceptional circumstances warrant an extension and, in any event, 
assume the financial risk from such extensions. The Bear Stearns Letter 
asserts that suitable procedures can be established for broker-dealers 
to control the time periods within which payment or delivery of 
securities are made, without the need for the formal submission of 
requests for permission to extend the time periods. The A.G. Edwards 
Letter disagrees with the FRB's concern that broker-dealers may grant 
favorable extension review to certain customers. It believes that 
broker-dealers should be required periodically to notify an SRO to act 
as a monitor for abuses of the Rule and provide its members with 
periodic reports.\43\
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    \43\See A.G. Edwards, Letter, supra note 11. A.G. Edwards 
submitted similar comments to the FRB in response to its 1992 
request for comments.
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 Fees from Extensions Help Defray the Cost of DEA Functions
    The CSE states that it is relieving the NYSE of the cost of 
processing extensions since the NYSE is allocated only the on-site 
portion of the broker-dealer examination relating to extensions, and 
the cost associated with the NYSE's DEA function is already covered by 
the NYSE's fee structure in that, pursuant to NYSE Rule 142, the NYSE 
charges its members $.42 per $1,000 gross revenue for regulatory 
services. Therefore, according to the CSE, the NYSE has no need for 
additional revenue to subsidize its DEA functions.\44\
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    \44\See January 1989 CSE Letter, supra note 9. The fee cited by 
the CSE was in effect as of January 1989.
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 Discussion of Section 17(d) of the Act
    Both the PHLX and the CSE argue that the NYSE misapprehends the 
principal purpose of section 17(d) of the Act, which is to avoid 
unnecessary regulatory duplication and, secondarily, to assure that 
violations are not missed because they fall between the 
responsibilities of different SROs. They state that submission of 
extension requests by a broker-dealer to an SRO other than its DEA 
results in no duplicative regulation or burdens on broker-dealers. The 
PHLX states that, to the extent that processing of extension request by 
multiple SROs could cause any one SRO's financial or regulatory 
oversight to be incomplete, this can be addressed through the 
coordination between SROs.\45\
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    \45\The PHLX believes that extension requests are far less 
useful indicators of potential broker-dealer financial or regulatory 
concerns than other indicia such as an increased number of 
uncompared or adjusted trades, net capital deficiencies or intra-day 
monitoring of large trades or positions in active markets.
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    The CSE asserts that the existence of a Rule 17d-2 agreement 
between the CSE and the NYSE does not mean that the CSE has abrogated 
its SRO authority to the NYSE. It asserts that under its Rule 17d-2 
agreement with the NYSE, the CSE retains responsibility to enforce 
compliance with the CSE's extension rule, and the NYSE is only 
allocated the responsibility to conduct regular on-site examinations to 
ensure compliance with this rule.
    The CSE further asserts that the concept of sharing extension 
request data between SROs and the DEA is not, as the NYSE claims, 
inconsistent with the intent of SEC Rules 17d-1 and 17d-2. The CSE 
states that, as an SRO, it could conduct its own special examinations 
of, or participate in a joint regulatory effort with respect to firms 
who file extensions with the Exchange. The CSE asserts that it has the 
necessary examination responsibilities and ongoing regulatory 
relationship with its extension firms to justify the continued 
processing of extension requests. The CSE concludes that as a non-DEA 
SRO, it is in a position to make a good faith and informed judgment 
whether ``exceptional circumstances'' warrant the granting of 
extensions.

G. Comments In Support of the Proposal

    Two commenters express support for the proposal. Financial Clearing 
and Services Corporation (``FCSC'')\46\ states that it agrees that the 
NYSE proposal serves a valid regulatory purpose. FCSC notes, however, 
that the Commission should remain cognizant of the fact that new rules 
must not lessen competition nor should they adversely affect technical 
innovation.\47\
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    \46\FCSC carries accounts on a fully disclosed basis on behalf 
of other introducing broker-dealers.
    \47\See Financial Clearing Letter, supra, note 9.
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    The FRB staff expresses support for the purposes behind the NYSE's 
proposal. The FRB staff notes that the DEA is ultimately responsible 
for monitoring those firms that it examines in other areas of the 
securities business where credit may be a significant factor, such as 
sales practices. The FRB staff further states that it questions the 
propriety of an SRO with virtually no general examination 
responsibility passing on extensions of time since such SROs may lack 
the requisite experience in correlating credit extensions with other 
areas of regulatory concern.\48\ The FRB staff believes that only SROs 
with examination responsibilities of some kind should grant extensions 
of time. In this regard, the FRB specifies that,
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    \48\See FRB Letter, supra note 9.
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    ``In our view, it would be difficult, if not impossible, for an SRO 
to meet the requirements of the present rule (12 CFR 220.4(c)(3)(ii)) 
unless the SRO has some ongoing regulatory relationship with the 
applicant to support a belief as to the good faith of the applicant or 
the sufficiency of the determination that ``exceptional circumstances'' 
warrant the extension.''\49\
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    \49\See id at 3.
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    The FRB Letter asserts that the FRB anticipated that the exceptions 
to the Regulation T requirements governing payment for securities would 
be minimal, and that, ``[n]o one ever perceived the granting of 
extensions of time as a profit-making endeavor.''\50\ The FRB Letter 
also states that, for the extension request process to be effective, 
cooperation, and not competition, among SROs is essential. In this 
regard, the FRB Letter states that it appears that the change in the 
rule to allow any SRO to grant extension requests ``may have 
inadvertently permitted regulatory concerns to be subordinated to the 
profit motive.''\51\ The FRB staff also expresses the view that if the 
extension-granting service is viewed as a profit center, it can only 
encourage more extensions of time.\52\
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    \50\See FRB Letter, supra note 9 at 1.
    \51\FRB Letter, supra note 9 at 2. In 1980, the FRB revised Reg 
T in its entirety. The Board broadened the scope of Reg T by 
authorizing a self-regulatory organization or association to grant 
extensions to any creditor regardless of membership affiliation. SEC 
Rule 15c3-3(n) is similarly worded.
    \52\See FRB Letter, supra note 9 at 2.
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IV. The NYSE's Responses

    In May 1989, the NYSE submitted a letter to the Commission 
responding to negative comments by the CSE, CHX, PHLX, PSE, Bartlett & 
Company, Gradison & Company, and the Securities Settlement Corporation 
with respect to the Exchange's proposed Rule 434. In January, 1994, the 
NYSE submitted another letter responding to comments sent to the 
Commission by the CSE, PSE, Bear Stearns Securities Corp, A.G. Edwards 
& Sons, Inc. and Lehman Brothers after the Commission republished 
notice of this proposal. The NYSE's responses to the commenters are 
summarized below.

A. Burden on Competition

    The NYSE acknowledges that some loss of revenue to other SROs may 
result from its proposed rule, but disagrees that the proposal will 
have a significant anti-competitive effect on the marketplace that is 
not necessary or appropriate in furtherance of the purposes of the Act. 
The NYSE also asserts that proposed NYSE Rule 434 is justified from a 
regulatory perspective and that arguments regarding competition as they 
relate to revenues are inappropriate.
    In support of its contention that the proposed NYSE Rule 434 is 
justified, the NYSE asserts first that, as DEA for most of its members, 
the Exchange is charged with overseeing compliance by its members with 
the applicable financial responsibility rules. The Exchange believes 
that the information gathered in processing extension requests is 
essential in carrying out its statutory oversight responsibilities.\53\
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    \53\The Exchange also states that the FRB concurs that the DEA 
has ultimate responsibility in monitoring those firms which it 
examines, and that even the CSE acknowledges that this information 
is important to the DEA.
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    Second, pursuant to agreements with other SROs, the NYSE has 
assumed responsibility to oversee compliance by its members with sales 
practices and related rules of the NYSE and other SROs. Information 
derived from extension requests is necessary to perform effective on-
site review as this is a significant means for detecting potential 
sales practices problems.
    Third, the NYSE believes that the proposal does not conflict with 
federal laws permitting any SRO to approve extensions of time. The NYSE 
states that while 1980 amendments to Regulation T and similar changes 
to Rule 15c3-3 under the Act permitted any SRO to grant extensions, the 
FRB issued a letter outlining procedures to be followed when a non-DEA 
SRO considers such requests, including notification of the DEA. The 
NYSE also notes that the FRB Comment Letter states that modern 
technology has significantly altered the convenience benefits of the 
1980 amendments, and that the authority of non-DEAs to grant extensions 
should be on an exception basis.\54\
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    \54\Along these lines, the NYSE's 1989 Comment Letter states 
that 99.6% of all extension requests received by the Exchange are 
transmitted electronically.
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    Fourth, the NYSE asserts that concentrated regulatory 
responsibilities under Exchange Act Rules 17d-1\55\ and 17d-2\56\ 
require that the NYSE obtain continuous first-hand information from its 
DEA firms and process such information. The NYSE further asserts that, 
because the Exchange already has 17d-1 and 17d-2 responsibility for 
regulation of its members, it does not make good regulatory sense to 
break out one aspect of regulation for the economic benefit of 
individual SROs. The Exchange cites to the FRB Letter, which states: 
``We certainly would question the propriety of an SRO with virtually no 
general examination responsibilities passing on extensions of time as 
experience might be lacking in correlating credit extensions with other 
areas of regulatory concern.''\57\
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    \55\Rule 17d-1--Examination for Compliance with Applicable 
Financial Responsibility Rules--deals with designation of a SIPC 
member to an SRO for purposes of examining such member for 
compliance with applicable financial responsibility rules.
    \56\Rule 17d-2--Program for Allocation of Regulatory 
Responsibility--deals with the creation of plans between SROs to 
allocate responsibility to receive regulatory reports from persons 
who are members or participants of more than one SRO, to examine 
such persons for compliance, or to enforce compliance by such 
persons with specified provisions of the Act and the rules and 
regulations thereunder.
    \57\See FRB Letter, supra note 9 at 2.
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    Finally, the NYSE asserts that arguments that the proposal violates 
section 11A(a)(1) of the Act are ``ill conceived.'' The NYSE states 
that section 11A(a)(1), pertaining to the national market system, is 
basically concerned with efficient, effective and competitive trading 
systems and not regulatory obligations.\58\ Moreover, the NYS does not 
agree that proposed Rule 434 would have a negative impact on the 
extension processing system in terms of efficiency or technical 
innovation. The NYSE asserts that it has been a pioneer in developing 
and computerizing the extension processing system, and that other SROs 
copied its efforts. The NYSE states that it is committed to increasing 
efficiency in the process, which is reflected through, e.g., its 
committment of staff dedicated to monitoring extension requests.\59\
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    \58\The NYSE cites: HR Report No. 94-229, 94th Congress, 1st 
Session (1975) ``The Report of the Committee of Conference to 
accompany S. 249'' and Senate Report No. 94-75, 94th Congress, 1st 
Session (1975) ``Report of the Committee on Banking, Housing and 
Urban Affairs, United States Senate to accompany S. 249,'' at 101.
    \59\The NYSE stated, at the time of the 1989 response letter, 
that it had a 5-person professional staff as well as a group of 
about 128 examiners and 32 coordinators who add integral 
surveillance support to the Credit Regulation Function, and that it 
believed its staff to be unique to the industry.
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B. A Program of Sharing Information

    The NYSE does not believe information sharing between SROs would be 
practical. First, the NYSE states that it needs to have extension 
information on-line. The NYSE states that it needs to make immediate 
decisions in order to perform daily regulatory responsibilities. 
Information and reports received after the fact would not be as 
valuable.
    Second, the NYSE states that current SRO systems are not compatible 
and could not be linked because of different parameters and methods of 
processing data. The NYSE also states that information provided by 
other SROs would be of little use to the NYSE because each SRO makes 
decisions based on its own standards.
    Third, the NYSE states that the expense necessary to link current 
SRO systems would be substantial and other SROs would look to the NYSE 
to pay the majority of the cost associated with the changes since the 
NYSE processes 85% of its members' extensions. The NYSE also states 
that it does not believe that the expense is justifiable since it 
performs all of the tasks associated with margin positions, and other 
SROs have little or no need for this information. The NYSE asserts that 
its regulatory costs should not be increased in order to justify the 
non-regulatory purposes of other SROs, and that such costs will be 
passed on to customers.
    Finally, the NYSE states that the concept of sharing extension data 
by other SROs with the DEA is inconsistent with the intent of Rules 
17d-1 and 17d-2 under the Act. The DEA initiatives were adopted in 
order to eliminate unnecessary duplication by concentrating regulatory 
functions within one SRO and relieving all other SROs of their 
responsibility to examine for compliance with relevant rules under the 
Act.

C. Lack of Uniform Standards

    In its comment letter, the NYSE maintains that there are no uniform 
extension processing standards among the SROs, despite several SROs' 
assertions that their standards are comparable to those of the NYSE. 
The NYSE states that it does not believe that the CSE's standards for 
extension review are comparable to those of the NYSE, and it cites 
examples of situations taken from CSE extension reports that the NYSE 
would find unacceptable.
    The NYSE also believes that as long as filing extension requests 
with a firm's DEA is not mandatory, the Exchange is constrained from 
incorporating more effective regulatory tools into its system. The NYSE 
believes that those firms that require the greatest scrutiny and 
oversight will commence filing for extensions with another SRO if the 
NYSE takes restrictive action. The NYSE cites examples of broker-
dealers that switched from the NYSE to the CSE after restrictive action 
was filed against them. The NYSE believes that the impetus for these 
switches was not efficiency or economics, as stated by the CSE, but 
rather to avoid regulations intended to ensure extensions are granted 
for legitimate purposes and to prevent excessive credit in the 
securities markets.
    Finally, the NYSE dismisses suggestions by some commenters that the 
ISG should develop these standards in conjunction with the Commission. 
The NYSE states that the purpose of ISG is to deal with market 
operations related projects rather than with credit issues.

D. Miscellaneous Comments

    The NYSE states that the CSE was in error when it asserted that the 
cost associated with the Exchange's DEA function is already covered by 
the Exchange's fee structure. The NYSE states that it charges its 
members a regulatory service fee pursuant to Rule 129 for financial 
oversight responsibilities but such fee does not cover regulatory 
services with respect to sales practices which are a significant aspect 
of monitoring credit extensions.
    The NYSE disagrees with the CSE's assertion that extension 
processing by the CSE relieves the NYSE of regulatory expense, because 
the NYSE must conduct field examinations of all of its members, 
including those who process extensions through the CSE. The NYSE 
suggests that the CSE may be able to charge less per extension than the 
NYSE because the CSE has no field examination capabilities to monitor 
credit extension and thus, does not incur costs for maintaining an 
examination program.
    The NYSE disagrees with the concerns that approval of Rule 434 
would give the NYSE monopoly power with respect to pricing. The NYSE 
states that it would impose a price increase unless appropriate. 
Moreover, the NYSE notes that any fee increase would be subject to 
Commission review.
    The NYSE states that it agrees with the FRB's conclusion that only 
SROs with some examination responsibilities should grant extensions, as 
well as its conclusion that it would be difficult or impossible to 
comply with the Regulation T requirement that exceptional circumstances 
warrant an extension if the SRO does not have an ongoing regulatory 
relationship with the broker-dealer requesting the extension. The NYSE 
also notes that it processes 85% of the extensions generated by its 
members and thus economics is not its major consideration in proposing 
Rule 434. The NYSE states that equal and effective regulation of its 
members is the primary goal of the proposal.
    The Exchange does not believe it is appropriate to allow a broker-
dealer to grant extensions of time to its own customers given the 
potential for conflict between regulatory and customer service 
considerations.
    Finally, the NYSE states that, since its 1989 letter, it has 
continued to undertake enhancements to its automated extension 
processing system. In January, 1994, it implemented a system to 
transmit daily extension reports back to member organizations. 
According to the Exchange, over 99% of all extension requests received 
by the Exchange are processed and returned electronically to member 
organizations the same day so that extension data is available to them 
before the start of the next business day. The NYSE is not aware of any 
other SRO which provides this service.

V. Discussion

    After careful consideration of the comments received as well as 
applicable statutory provisions, the Commission believes that proposed 
NYSE Rule 434, which would require all NYSE member firms for which the 
NYSE is the DEA to submit their requests for extensions of time for 
payment or delivery of securities to the NYSE, is consistent with the 
ACT, and in particular, sections 6(b) (5) and (8) of the Act.\60\
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    \60\15 U.S.C. 78f(b) (5) and (8) (1988).
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    Section 6(b)(5) of the Act requires, among other things, that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and, in general, to protect investors and the public interest. 
The Commission believes that proposed NYSE Rule 434 will serve to 
prevent fraudulent and manipulative acts and to protect investors and 
the public interest by enhancing the NYSE's ability to monitor the 
continued financial viability of its member firms where it is the DEA. 
In addition, the proposed rule will help the NYSE to ensure its 
members' compliance with the requirements of Regulation T and Rule 
15c3-3 of the Act. The Commission also believes that NYSE Rule 434 will 
help to effectuate uniform standards for NYSE members' requests for 
extensions of time for payment or delivery of securities. The uniform 
application of the NYSE's standards to a large majority of its member 
firms' extension requests will promote fairness by helping to ensure 
equal treatment for NYSE member firms.
    As the DEA for most of its member firms, the NYSE is responsible 
for examining such firms for compliance with the financial 
responsibility rules.\61\ The Commission believes that information 
about extensions for payment or delivery of securities is essential in 
helping the NYSE carry out its DEA responsibilities under the Act.\62\ 
In particular, Regulation T and Rule 15c3-3 require that extensions be 
granted only if the broker-dealer is acting in good faith and 
exceptional circumstances exist to warrant an extension. As the DEA, 
the NYSE must ensure that requests that are granted have met these 
conditions. Under the current structure, however, another SRO may grant 
numerous extensions without the NYSE being adequately informed as to 
the nature of the requests and the conditions under which they are 
being granted. This not only can impair the NYSE's ability to ensure 
member firm compliance with financial responsibility rules but it can 
affect the NYSE's ability to detect potential sales practice 
problems.\63\
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    \61\For firms where the NYSE is the DEA, the Exchange is 
responsible for examining the firms' compliance with rules 
pertaining to, among other things: Hypothecation or lending in 
customer reserve accounts (under section 8 of the Act); the 
maintenance of books and records (under section 17(a) of the Act); 
capital, margin or recordkeeping (under section 17(d) of the Act); 
broker-dealer balance sheets (under section 17(e) of the Act), or 
any other Commission or SRO rules relating to the protection of 
customer accounts or securities.
    \62\The Commission agrees with the NYSE's claim that information 
derived from extension requests is necessary, among other things, to 
perform effective on-site review to detect potential sales practice 
problems. See 1989 NYSE Letter, supra note 10.
    \63\The Commission notes that the NASD has expressed concern 
that this proposal would prevent the NASD from obtaining extension 
information necessary to perform its SRO functions. The NASD states 
that the proposal would prevent the NASD from obtaining information 
regarding a large number of its members since a significant portion 
of customer activities involving NASDAQ and OTC securities is 
handled by NASD/NYSE members for whom the NYSE is the DEA. The 
Commission finds this argument unpersuasive as the regulatory 
structure already distinguishes between DEA SROs and non-DEA SROs 
and this proposal merely follows this distinction.
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    Further, the rule change will serve to eliminate the possibility of 
forum shopping among SROs for extensions. For example, the NYSE's 1989 
comment letter notes instances where a NYSE member firm began to send 
its extension requests to another SRO after the NYSE took restrictive 
action against it. Although some comment letters dispute the extent of 
forum shopping, the Commission's experience in reviewing SRO compliance 
programs leads it to believe that the potential for forum shopping for 
extensions exists under the current scheme and that approval of the 
NYSE proposal will diminish this.\64\
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    \64\In this regard, other SROs may wish to adopt similar rule 
proposals that would require those members for which the SRO is the 
DEA to submit extension request to that SRO.
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    In summary, given the NYSE's Rule 17d-1\65\ and Rule 17d-2\66\ 
responsibilities under the Act, it will improve regulatory oversight by 
the NYSE if the Exchange receives extension request information for 
firms for which it is the DEA so that it may have a complete picture of 
each member's financial and regulatory situation. The proposed rule 
change will accomplish this by enabling the NYSE to have all the 
regulatory information necessary to get a complete view of each NYSE 
member firm's activity so that the NYSE may more effectively prevent 
members' financial difficulties or fraud.
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    \65\See supra note 55.
    \66\See supra note 56.
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    The Commission also believes that implementing proposed NYSE Rule 
434 is the simplest and quickest way to meet the goal of ensuring that 
credit related financial restrictions placed upon a member firm are 
based upon complete information. The Commission does not agree with 
assertions that the Act's objectives could be better met by 
implementing a uniform system of sharing extension information. 
Although improved sharing of extension information would provide data 
to the NYSE, it would not relay this information in time for the NYSE 
to act before the receiving SRO decides on an extension request. In 
addition, information sharing would involve two SROs reviewing 
extension requests and result in substantial expense and modifications 
of existing extension processing systems. This would necessarily 
involve considerable duplication of efforts since two SROs would review 
extension information. In contrast, the NYSE proposal is consistent 
with the current regulatory structure of designating one SRO as the DEA 
for firms that are members of more than one SRO. The DEA scheme was 
adopted in order to eliminate unnecessary duplication of efforts in the 
area of member regulation.\67\ As a result, the Commission does not 
believe that the Act mandates that information sharing be utilized in 
place of the NYSE's approach.
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    \67\See SEC Rule 17d-1, 17 CFR 240.17d-1 (1993), which provides 
that the Commission shall consider, inter alia, unnecessary 
regulatory duplication when designating an SRO for purposes of 
examination for compliance with financial responsibility rules.
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    The Commission also believes that the regulatory benefits from NYSE 
Rule 434 outweigh any competitive concerns raised by the commenters. 
Under section 6(b)(8) of the Act, the Commission may not approve an 
exchange rule if it imposes a burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. For 
the reasons discussed below, the Commission believes that any 
competitive burden raised by NYSE Rule 434 is necessary and appropriate 
under the Act.
    First, the Commission believes that the NYSE, as the DEA for most 
of its member firms, is in the best position to monitor extension 
requests and to ensure that they do not affect the financial viability 
of member firms. In this regard, the NYSE has a sound system for 
monitoring extension requests and ensuring that member firms do not 
exceed established parameters. We do not believe that approval of the 
rule and the resulting lessening of competition for processing NYSE 
members' requests will have a harmful effect on the system for handling 
credit extension requests. In particular, because of the NYSE's 
responsibility as the DEA, it will have a continuing responsibility to 
ensure that firms are not receiving numerous credit extensions that may 
indicate potential abuse and financial difficulties, and accordingly, 
they will have an incentive to properly maintain their monitoring 
systems.
    Second, the Commission believes that the DEA may experience 
difficulty in meeting its responsibilities when extensions are granted 
by another SRO.\68\ Consistent and current information about firm 
requests for extensions of time for payment or delivery of securities 
will help the NYSE to measure the financial viability of the firm. As 
the DEA, the NYSE is solely responsible for examining its members for 
compliance with industry financial responsibility rules. Therefore, the 
Exchange is best-suited to monitor and effectively impose restrictions 
on the extension of credit by its members. If the NYSE obtains all 
extension information, credit related financial restrictions placed 
upon a member firm will be made based upon complete information, 
comprising all extensions requested. Therefore, any potential burden on 
competition stemming from the NYSE proposal is justified by the 
overriding regulatory benefit.
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    \68\See FRB Letter, supra note 9.
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    Third, the Commission does not believe that the proposal reduces 
competition in an inappropriate manner. The SRO's monitoring of margin 
requirements, as with their other regulatory responsibilities, was not 
and is not intended to act as a profit making arm of the market 
activities of SROs. Provision of necessary regulatory services by the 
DEA is an essential component of its statutory requirements, and should 
not be impaired by price competition from other SROs who do not carry 
DEA responsibilities.
    Fourth, as with any regulatory fee, the Commission has the 
authority under the Act to review and abrogate excessive fees. Even if 
approval of the rule proposal eliminates fee competition, the 
Commission will continue to exercise its statutory authority to ensure 
that only reasonable fees for extension requests are imposed by the 
NYSE on member firms.\69\
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    \69\Section 6(b)(4) of the Act, 15 U.S.C. 78f(b)(4) (1988), 
requires that the rules of an exchange provide for the equitable 
allocation of reasonable dues, fees, and other charges.
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    Accordingly, for all of the above reasons, the Commission believes 
that to the extent that the proposal does impose a burden on 
competition, such burden is justified as necessary and appropriate 
under the Act.
    The Commission also believes that it is appropriate to approve the 
NYSE's proposal notwithstanding the fact that both Regulation T and 
Rule 15c3-3 provide that a broker-dealer may go to any SRO for credit 
extension requests, irrespective of whether the SRO is the broker-
dealer's DEA. In this regard, the NYSE proposal does not prevent other 
SROs from granting extension requests, but simply narrows the choice 
for firms for which the NYSE is the DEA. Firms for which the NYSE is 
not the DEA can still use other SROs for their extension requests. In 
addition, the FRB has stated that it supports the NYSE's proposal and 
that it generally believes that only SROs with examination 
responsibilities of some kind should grant extensions. The FRB noted 
that the changes to Regulation T which were adopted in 1980 were 
intended to accommodate firms who found it more convenient to send 
extension requests to a nearby SRO and that this same need may not 
still exist in the computer age. Finally, because the terms of the 
proposal are not inconsistent with Regulation T and Rule 15c3-3, and 
the proposal furthers the NYSE's responsibility under the Act, the 
Commission believes that it is an appropriate exercise of the NYSE's 
ability to adopt rules consistent with the Act.
    The CSE also argues that the NYSE proposal should be disapproved 
because there has been not showing that the current extension approval 
systems have not been working.\70\ The Commission does not believe that 
in order to approve a proposal there must be a showing that the current 
system is not working, only a showing that the new rule would create 
better procedures or a better system and that the proposal is 
consistent with the Act. As discussed above, the NYSE's proposal will 
improve the regulation of extension requests. In addition, however, the 
Commission's review of extension request programs has indicated certain 
inadequacies in the extension process at various SROs. These 
inadequacies could be reduced if the NYSE proposal is approved. 
Moreover, the current structure lacks uniform standards and as a result 
can encourage forum shopping. Accordingly, the Commission believes that 
the proposal will address these concerns and help to create a more 
effective review of credit extensions. The Commission disagrees with 
the assertions of some commenters that approval of the proposal would 
be inconsistent with section 11A of the Act. Section 11A(a)(1)(C) 
provides that it is in the public interest and appropriate for the 
protection of investors to assure fair competition among exchange 
markets and between exchange markets. The NYSE proposal will not 
prevent competition among SROs in their role as markets, and it is 
intended to make the extension request process consistent with the DEA 
structure that the other SROs have already agreed to.
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    \70\See July 1989 CSE Letter, supra note 9 and 1993 CSE Letter, 
supra note 11.
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    The Commission also disagrees with some commenters' argument that 
approval of NYSE Rule 434 would greatly enhance the NYSE's power in the 
marketplace. Rule 434 will merely make such that in instances in which 
the NYSE is the DEA, the NYSE will obtain all pertinent regulatory 
information about firm activities. The commenters have made no showing 
that the rule would affect other markets' ability to compete for order 
flow. Moreover, the DEA program, to which all the SROs have joined, is 
intended to concentrate the provision of regulatory services into the 
major SROs for efficiency and effectiveness. Proposed Rule 434 is a 
logical adjunct to the DEA program.
    Several commenters argue that broker-dealers should be able to 
submit extension requests to any SRO which is convenient for them. The 
Commission, however, believes that proximity is not a significant 
factor because in today's electronic environment it would generally be 
just as convenient to submit extension requests to the NYSE as it would 
be to submit them to any other SRO.
    Finally, the Commission does not agree with some commenters who 
argue that broker-dealers should not be required to submit requests for 
extensions of time for payment or delivery of securities to any 
SRO.\71\ These commenters argue that broker-dealers should make such 
determinations since it is their capital at stake. The Commission does 
not need to address these arguments in the context of this rule 
proposal which concerns the allocation of extension requests among the 
SROs. The Commission, however, preliminarily believes that there is a 
need for checks on the granting of such extensions by broker-dealers. 
Without SRO review in this area, broker-dealers would be free to add 
unwarranted risk to securities transactions by granting credit in 
excess of what is reasonable or granting excessive extensions of time 
in order to ensure that a transaction for which a commission is earned 
is completed. The Commission, however, along with the FRB's ongoing 
review of Regulation T, will continue to examine these issues.
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    \71\See Bear Sterns and A.G. Edwards Letters, supra note 11.
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VI. Conclusion

    For the reasons discussed above, we believe that the proposal is 
consistent with the Act.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\72\ that the proposed rule change (SR-NYSE-88-35) be, and hereby 
is, approved.
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    \72\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\73\
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    \73\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12573 Filed 5-23-94; 8:45 am]
BILLING CODE 8010-01-M