[Federal Register Volume 59, Number 236 (Friday, December 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30261]


[[Page Unknown]]

[Federal Register: December 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35047; File No. SR-NYSE-94-02]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 to Proposed 
Rule Change and Notice of Filing and Order Granting Accelerated 
Approval to Amendment No. 2 to Proposed Rule Change Regarding an 
Interpretation of Exchange Rule 409 (``Statements of Accounts to 
Customers'')

December 2, 1994.

I. Introduction

    On February 22, 1994, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt an interpretation of 
NYSE Rule 409 (``Statements of Accounts to Customers'') regarding 
standards for holding mail for foreign customers. On March 2, 1994, the 
Exchange submitted to the Commission Amendment No. 1 to the proposed 
rule change in order to correct certain typographical errors.\3\ On 
October 7, 1994, the Exchange submitted Amendment No. 2 to the proposed 
rule change to limited communications that can be held by a member or 
member organization on behalf of a foreign customer to confirmations, 
account statements and broker-dealer financial statements.\4\ On 
November 29, 1994, the Exchange submitted a request that the Commission 
grant exemptive and no-action relief from the SEC rules prescribing the 
time frames for transmission of such communications to customers.\5\
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\See letter from Patricia Dorilio, Senior Special Counsel, 
Rule and Interpretive Standards, NYSE, to Cheryl Dunfee, Attorney, 
Division of Market Regulation (``Division''), SEC, dated March 1, 
1994 (``Amendment No. 1'').
    \4\See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Sandra Sciole, Special Counsel, Division, SEC, 
dated October 7, 1994 (``Amendment No. 2'').
    \5\See letters from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Catherine McGuire, Chief Counsel, Division, SEC, 
dated November 23, 1994 (``NYSE exemption letter''); and to Michael 
Macchiaroli, Associate Director, Division, SEC, dated November 23, 
1994 (``NYSE no-action letter'').
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    The proposed rule change, together with Amendment No. 1, was 
published for comment in Securities Exchange Act Release No. 33824 
(March 28, 1994), 59 FR 15957 (April 5, 1994). No comments were 
received on the proposal. This order approves the proposed rule change, 
including Amendment No. 2 on an accelerated basis.

II. Description of the Proposal

    Exchange Rule 409 requires that a member organization send its 
customers statements of their accounts, showing security and money 
positions and entries, at least quarterly. In addition, Commission 
rules require a broker-dealer to transmit certain information to 
customers within a specified time frame. For example, Rules 10b-
10(a),\6\ 15c3-2,\7\ and 17a-5(c)\8\ under the Act establish the time 
frames for delivery of confirmations, statements of accounts with free 
credit balances and broker-dealer financial statements, respectively.
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    \6\17 CFR 240.10b-10(a) (1993).
    \7\17 CFR 240.15c3-2 (1993).
    \8\17 CFR 240.17a-5(c) (1993).
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    Pursuant to NYSE Rule 409(b)(2), confirmations, statements or other 
communications may not be addressed to a non-member customer at the 
address of any member or member organization or in care of a partner, 
certain stockholders or an employee of a member organization. This 
effectively prohibits the receipt and retention of customer mail by a 
member, member organization, registered representative or other 
associated person. The Exchange, however, is authorized to waive Rule 
409(b)'s prohibition upon written request. According to the NYSE, it 
has established certain informal guidelines for the review and approval 
of such requests.
    The Exchange proposes to adopt new Interpretation .01 to Rule 
409(b) to codify its standards for granting waivers from that rule.\9\ 
Under the proposal, the NYSE will consider, on a case-by-case basis, 
written requests to implement policies and procedures for holding 
certain foreign customer mail. A member or member organization whose 
procedures satisfy the minimum requirements set forth in the 
interpretation will be able to receive and temporarily retain on its 
premises confirmations, account statements and broker-dealer financial 
statements\10\ on behalf of foreign customer accounts.\11\ All other 
information sent in the ordinary course of a broker-dealer's business 
must be transmitted to the foreign customer through his home country's 
mail system.
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    \9\Upon Commission approval, the proposed rule change will be 
published as an Interpretation Memorandum for inclusion in the 
NYSE's Interpretation Handbook.
    \10\As used herein, the term ``communications'' or ``mail'' 
refers exclusively to confirmations, account statements and broker-
dealer financial statements.
    \11\Once its procedures are approved by the NYSE, the member or 
member organization will determine whether particular foreign 
customer accounts fall within the scope of its Rule 409 waiver. See 
infra, note 15 and accompanying text.
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    To enable members and member organizations to delay transmission of 
the designated communications without violating the Act or the rules 
thereunder, the NYSE has requested an exemption form Rule 10b-10(a) and 
no-action relief from Rules 15c3-2 and 17a-5(c).\12\ Under the terms of 
that request and the relief granted,\13\ a member or member 
organization may hold a foreign customer's mail until it can be 
delivered directly to the customer, so long as certain conditions are 
met and procedures are established; the member or member organization 
must make such communications available to the customer at all times 
and at no special cost.\14\
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    \12\See NYSE exemption and no-action letters, supra, note 5 and 
accompanying text.
    \13\See letter from Catherine McGuire, Chief Counsel, Division, 
SEC, to James Buck, Senior Vice President and Secretary, NYSE, dated 
November 30, 1994 (``SEC exemption letter''); and letter from 
Michael A. Macchiaroli, Associate Director, Division, SEC, to James 
E. Buck, Senior Vice President and Secretary, NYSE, dated December 
2, 1994 (``Division no-action letter'').
    \14\More generally, no additional charge or expense may be 
imposed on a foreign customer who requests that his mail be held 
pursuant to this interpretation.
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    In its waiver request, a member or member organization must 
represent that it will obtain, at least annually, a written statement 
from each foreign customer for whom it is holding mail. In his or her 
statement, the customer must request that communications temporarily be 
retained on his or her behalf due to either the ``inefficient local 
mail service'' (e.g., misrouted or opened mail) or the ``unstable 
political climate'' in the foreign country. The customer also must 
state, in writing, that it is not feasible to make alternative 
arrangements for the regular receipt of such communications.\15\ It is 
anticipated that members and member organizations will hold mail in 
accordance with this interpretation generally for customers that are 
foreign natural persons.
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    \15\As a condition for granting exemptive and no-action relief, 
the Commission has interpreted this language to require that the 
NYSE grant a Rule 409(b) waiver only where the member or member 
organization has represented that it will take steps to determine 
that the foreign customer has no other U.S. location (such as a U.S. 
fiduciary or U.S. mailing address) reasonably available for receipt 
of the communications. See infra, note 22 and accompanying text.
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    The member or member organization also must represent that it has 
written procedures in place that require the branch or principal sales 
office servicing the account to maintain a log of all communications 
held on behalf of the foreign customer. The log must note the date such 
materials are transmitted directly to the customer and where they are 
delivered. In addition, the member or member organization must endeavor 
promptly to communicate the substance of the mail orally to the 
customer. A written record must be kept of all conversations, and the 
actual documents must be furnished to the customer at the earliest 
possible face-to-face meeting.
    Finally, the member or member organization must accord two levels 
of review to all accounts for which mail is held. At the branch or 
principal sales office, appropriate personnel must conduct ``frequent'' 
supervisory review of each account,\16\ with special attention to 
discretionary accounts. In addition, the compliance or internal audit 
department of the member or member organization (or the person(s) 
assigned or delegated such authority pursuant to NYSE Rule 342) must 
conduct an annual review of the broker-dealer's system for holding 
foreign customer mail. This independent review must include a 
``reasonable'' sampling of account documentation and activity. It 
should be determined, among other things, whether all communications 
are retained pursuant to written customer instructions.
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    \16\According to the NYSE accounts for which mail is held should 
be subject to a higher level of supervision and monitoring than is 
accorded other accounts. Telephone conversation between Patricia 
Dorilio, Senior Special Counsel, Rule and Interpretive Standards, 
NYSE, and Beth Stekler, Attorney, Division, SEC, on December 1, 
1994.
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    Assuming the conditions precedent to receipt of a waiver, as 
described above, are satisfied, the member or member organization will 
be responsible for applying these standards to particular foreign 
customer accounts. NYSE examiners will review the member or member 
organization's procedures and its adherence to such procedures during 
every regularly scheduled field examination, both financial/operations 
and sales practice.\17\
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    \17\See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Sharon Lawson, Assistant Director, Division, 
SEC, dated October 7, 1994 (``NYSE examination letter'').
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    According to the NYSE, the proposed rule change is consistent with 
the requirements of Section 6(b)(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, in that it establishes standards that enable members 
and member organizations to meet customer requests yet provide customer 
protection through appropriate monitoring and supervision.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b).\18\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public interest.
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    \18\15 U.S.C. Sec. 78f(b) (1988).
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    The Commission believes that investors need access to reliable 
information in order to monitor their accounts and the performance of 
the individual handling their accounts. In the Commission's opinion, 
such information helps investors protect themselves against potential 
fraud and abuse. For that reason, various Commission and exchange rules 
require broker-dealers to transmit account information and other 
communications directly to their customers. As a general matter, the 
Commission views these rules as an important element of investor 
protection. Nevertheless, the Commission previously has recognized that 
there may be circumstances where an exception is warranted.\19\
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    \19\See Securities Exchange Act Release No. 34596 (August 25, 
1994), 59 FR 45050 (August 31, 1994) (File No. SR-NYSE-93-37) 
(approving NYSE proposal to allow certain investment advisors to 
receive proxy solicitation materials, annual reports and other 
issuer communications in lieu of the beneficial owners of 
securities).
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    After careful review, the Commission finds that proposed 
Interpretation .01 to Rule 409(b) strikes an appropriate balance 
between ensuring that investors receive necessary account information 
and providing broker-dealers with flexibility regarding how such 
information is transmitted in unusual circumstances. Although the 
Commission continues to believe that the holding of customer mail 
raises serious regulatory concerns, the Commission has concluded, given 
the narrow scope of the proposed rule change, the procedural safeguards 
contained therein, and the Exchange's role in monitoring for compliance 
with the interpretation's requirements as well as the conditions 
contained in the Commission exemption letter and Division no-action 
letter discussed below, that the NYSE proposal should not have a 
significant adverse effect on the protection of investors.
    Along with this approval order, the Commission is granting an 
exemption from SEC Rule 10b-10(a) to the Exchange on behalf of NYSE 
members and member organizations that delay transmission of 
confirmations pursuant to Interpretation .01.\20\ In addition, the 
staff of the Division will recommend that the Commission not take 
action under SEC Rules 15c3-2 and 17a-5(c) if, consistent with the 
terms of the interpretation, members and member organizations delay 
transmission of account statements and broker-dealer financial 
statements.\21\ Each member or member organization receiving a waiver 
from the NYSE under Rule 409(b) must comply fully with Rules 10b-10, 
15c3-2 and 17a-5, except to the extent specifically permitted under the 
exemptive and no-action relief granted by the Commission.
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    \20\See SEC exemption letter, supra, note 13.
    \21\See Division no-action letter, supra, note 13.
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    In light of that relief and subject to the same conditions, the 
Commission finds that the proposed rule change is consistent with the 
requirements of Section 6(b)(5) of the Act. In this regard, the 
Commission notes that a member or member organization will be permitted 
to hold mail only for foreign customers who demonstrate that they 
experience particular hardship as a result of local conditions. As a 
practical matter, Rule 409(b) waivers will be limited to investors who 
live in foreign countries where mail is not delivered on a timely and/
or confidential basis and, thus, where use of the mail system may not 
be consistent with the customer's best interests and safety. It is 
anticipated that NYSE members and member organizations will apply these 
procedures generally for customers that are foreign natural persons.
    In addition, the customer must represent that it is not feasible 
for him to make alternative arrangements for the regular receipt of 
such communications. As a condition to the exemptive and no-action 
relief granted by the Commission, the member or member organization 
must take steps to determine that there is no other U.S. location 
(including a U.S. fiduciary or U.S. mailing address) reasonably 
available.\22\ In light of the very limited and unique circumstances 
presented by the NYSE proposal, the Commission believes that it is not 
inconsistent with the Act for the Exchange to allow its members and 
member organizations to respond to the special needs of certain foreign 
customers in the manner proposed by the rule change.
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    \22\See SEC exemption letter and Division no-action letter, 
supra, note 13. In making that determination, the member or member 
organization may rely on the customer's statement unless the member 
or member organization is on notice of facts to the contrary.
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    Moreover, the Commission is satisfied that the proposed rule change 
contains sufficient safeguards to ensure that foreign customers will be 
informed, on a timely basis, of the substance of any communications 
retained by their broker-dealer. For a Rule 409(b) waiver request to be 
approved, the member or member organization must have procedures that, 
in the NYSE's judgment, provide an acceptable level of investor 
protection. At a minimum, the member or member organization must 
promptly notify the foreign customer, via telephone or comparable 
means, of the content of the mail; must furnish the actual documents to 
the customer at the earliest possible face-to-face meeting; and must 
maintain records of all written and oral communications relating to the 
customer's account. Most importantly, mail held pursuant to a Rule 
409(b) waiver will be available, at all times and at no special cost, 
for the customer to review.
    The Commission believes that the NYSE proposal further minimizes 
the potential for fraud and abuse by requiring that members and member 
organizations have adequate internal controls. The Commission notes 
that the proposed interpretation's requirements are clear and thus 
relatively easy to monitor. In that context, the Commission finds that 
two tiers of review, including heightened scrutiny at the branch office 
level and an independent review by the member or member organization's 
compliance/internal audit department (or the person(s) delegated such 
authority under NYSE Rule 342), should be sufficient to detect and 
deter non-compliance with the broker-dealer's system for holding 
foreign customer mail. Furthermore, the member or member organization's 
procedures, and its adherence to such procedures, will be subject to 
review by NYSE examiners at every sales practice and financial/
operations examination.\23\ The Commission expects the NYSE to take 
appropriate action to remedy any violations of Rule 409(b), this 
interpretation or the relevant SEC rules.\24\
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    \23\See NYSE examination letter, supra, note 17.
    \24\For violations of the Act, the rules thereunder or the rules 
of the NYSE, an Exchange hearing panel has the authority to impose 
one or more of the following disciplinary sanctions: expulsion; 
suspension; limitation as to activities, functions and operations; 
fine; censure; or other fitting sanction. See NYSE Rule 476(a). In 
appropriate circumstances, the Commission would expect the NYSE to 
consider whether to revoke a member or member organization's Rule 
409(b) waiver.
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    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of the notice of 
filing thereof. Amendment No. 2 merely clarifies the scope of the 
original filing by specifying the communications that can be held on 
behalf of a foreign customer. Finally, the Commission did not receive 
any comments on the original proposal, which was noticed for the full 
statutory period.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2 to the proposed rule change. 
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 rules 
change that are filed with the Commission, and all written 
communications relating to Amendment No. 2 between the Commission and 
any persons, other than those that may be withheld from the public in 
accordance with the provisions of 5 U.S.C. Sec. 552, will be available 
for inspection and copying in the Commission's Public Reference 
Section, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such 
filing will also be available at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-94-02 and should be 
submitted by December 30, 1994.

IV. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-NYSE-94-02), including 
Amendment No. 2 on an accelerated basis, is approved.
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    \25\15 U.S.C. Sec. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30261 Filed 12-8-94; 8:45 am]
BILLING CODE 8010-01-M