[Federal Register Volume 62, Number 196 (Thursday, October 9, 1997)]
[Notices]
[Pages 52801-52804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26723]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39190; File No. SR-NYSE-96-27]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by New York Stock Exchange, Inc. Relating to an Interpretation
of Rule 409 (``Statements of Accounts to Customers'')
October 2, 1997.
I. Introduction
On December 5, 1996, \1\ the New York Stock Exchange, Inc.
(``NYSE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4
thereunder, \3\ a proposed rule change interpreting Exchange Rule 409.
A notice of the proposed rule change appeared in the Federal Register
on January 9, 1997.\4\
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\1\ In response to comment letters and membership concerns, the
NYSE has submitted three amendments to this proposed rule change.
See letter from James E. Buck, Senior Vice President and Secretary,
NYSE, Inc., to Ms. Katherine A. England, Assistant Director,
Division of Market Regulation, SEC, dated April 24, 1997 (responding
to comment letters)(``Amendment No. 1''); Letter from James E. Buck,
Senior Vice President and Secretary, NYSE, Inc., to Ms. Katherine A.
England, Assistant Director, Division of Market Regulation, SEC,
dated June 9, 1997 (amending the rule language to clarify the
proposed interpretation and stipulating to a one year phase-in
period for implementation of the Rule's requirements)(``Amendment
No. 2''); Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, Inc., to Ms. Katherine A. England, Assistant
Director, Division of Market Regulation, SEC, dated September 18,
1997 (eliminating redundant provisions in the
interpretation)(``Amendment No. 3''). These amendments are technical
in nature and do not need to be published for comment.
\2\ 15 U.S.C. Sec. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ Securities Exchange Act Release No. 38106 (December 31,
1996), 62 FR 1353 (January 9, 1997).
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The Commission received five comment letters addressing the
proposed rule change.\5\ One commenter endorsed the proposed
amendments,\6\ while the remaining commenters opposed the proposal.\7\
This order approves the proposed rule change.
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\5\ Letter from Sarah A. Miller, Senior Government Relations
Counsel, Trust and Securities, American Bankers Association, to
Jonathan G. Katz, Secretary, SEC, dated January 30, 1997 (``ABA
Letter''); Letter from Deborah H. Kaye, Vice President and Assistant
General Counsel, Retail Banking and Securities, The Chase Manhattan
Bank, to Jonathan G. Katz, Secretary, SEC, dated January 28, 1997
(``Chase Letter''); Letter from Thomas W. Evans, Vice President,
Citibank, to Secretary, SEC, dated January 29, 1997 (``Citibank
Letter''); Letter from Steven J. Freiberg, Chairman and Chief
Executive Officer, Citicorp Investment Services, to Secretary, SEC,
dated January 29, 1997 (``CIS Letter''); Letter from Monica M.
Barbour, Vice President and Legal Counsel, First Chicago NBD, to
Margaret H. McFarland, Deputy Secretary, SEC, dated January 31, 1997
(``First Chicago Letter'').
\6\ See First Chicago Letter.
\7\ See ABA Letter, Chase Letter, Citibank Letter, and CIS
Letter.
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The proposed rule change sets forth an interpretation of Exchange
Rule 409 with respect to the establishment of standards regarding the
distribution of ``summary statements'' and the use of ``third party
agents'' to prepare or distribute customer account statements. The
proposed interpretation also codifies existing Exchange policy as to
certain information that must be disclosed on account statements. Other
items addressed in the proposed interpretation include account
statements that reflect assets not in the possession or control of a
member organization and the use of logos and trademarks on account
statements by an entity other than the carrying or introducing
organization.
II. Description of the Proposal
Exchange Rule 409 addresses the responsibility of member
organizations carrying customer accounts to send statements of these
accounts to their customers. Currently, the rule requires member
organizations to send their customers account statements showing
security and money positions and entries at least quarterly to all
accounts having an entry, money or security position during the
preceding quarter. As amended, the rule will allow Exchange member
organizations, jointly with other financial institutions (e.g., banks
and investment companies), to formulate and distribute to common
customers a ``summary statement'' of the customers' accounts with the
respective institutions. These consolidated statements will reflect
information from entities that are part of a financial services
``group'' or ``family,'' which could include an Exchange member
organization that carries accounts for another broker-dealer.
Specifically, the Exchange will require that the summary statement:
indicate that the statement is informational and includes assets held
at different entities; identify each entity, their relationship to each
other and their respective functions; distinguish clearly between
assets held by each entity; \8\ identify the customer's account numbers
at each entity and provide a customer service telephone number at each;
\9\ disclose which entity holds each of the different assets on the
summary; and identify each entity that is a member of the Securities
Investor Protection Corporation (``SIPC'').\10\ Additionally, any
aggregation of account values must be recognizable as having been
derived from the separately stated totals; the beginning and end of
each separate underlying statement must be clearly distinguishable; and
there must be a written agreement between the parties jointly
distributing the statements that each has developed procedures and
controls for testing the accuracy of its own information on the summary
statement. Furthermore, the member organization must indicate on the
summary statement that it is not responsible for any information
derived from the customer or other external source relating to
externally-held assets.
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\8\ Columns, coloring or other distinct forms of demarcation may
be used to clearly distinguish assets. The Interpretation requires
only that a physical distinction of assets be made on the summary
page. It was not intended to mandate the manner in which such
identification is made. see infra note 13, at pg. 4.
\9\ Where the customer account number and telephone number for
customer service at each entity are included on each entity's
respective customer account statement, such account and telephone
numbers need not be included on the summary statement. See also note
26, infra.
\10\ See supra note 1, Amendment No. 2.
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The proposed interpretation also clarifies that certain information
must be disclosed on the front of account statement, i.e., the identity
of the introducing and carrying organizations, where customer assets
included on the statement are held, whether such customer assets are
covered by SIPC, and the opening and closing account balances.
Moreover, the interpretation requires that where the account statement
includes assets not within the possession or control of the member
[[Page 52802]]
organization, such assets must be clearly separated on the statement.
In addition, the statement must clearly indicate that such externally
held assets: are not within the possession or control of the member
organization and are included on the statement solely as a service to
the customer; and are not covered by SIPC.
Concerning the use of logos and trademarks, the proposed
interpretation provides that where the logo, trademark or other
identification of an entity (other than that of the carrying or
introducing organization) appears on an account statement, the identity
of such entity and the relationship to the introducing, carrying or
other organization must be provided on the statement. With respect to
the summary statement, the location of the name of the entity may not
be misleading or cause customer confusion. The proposed interpretation
codifies that carrying firms are responsible for sending statements to
customers and for ensuring the accuracy of such statements. However,
because in many cases ``third party agents'' (e.g., service bureaus or
other independent entities) prepare or transmit customer account
statements, the proposed interpretation to Rule 409 would also
establish Exchange policy regarding use of ``third party agents'' to
prepare or transmit statements of accounts and to set forth certain
representations which must be made in writing by the member
organization to the Exchange when employing their party agents.
Specifically, the member organization must represent that the third
party is acting as agent for the member organization, that the member
organization retains responsibility for compliance with Rule 409(a),
that the member organization has developed procedures and implemented
controls for reviewing and testing the accuracy of statements, and that
it will retain copies of all such statements. In addition, the
interpretation states that an introducing organization that is a
provider of services included in a member organization's statements of
accounts may not function as a ``third party agent'' and may neither
prepare nor transmit such statements itself.
III. Summary of Comments
The Commission received five comment letters in response to the
proposed rule change.\11\ The First Chicago Letter generally endorsed
the proposed rule change as a ``significant step in meeting customer
needs by creating a more efficient and less costly delivery system of
customer statements.\12\ The remaining letters, however, raised several
issues that the Commission believes should be addressed. The Exchange,
at the Commission's request, has proffered a response.\13\
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\11\ See supra note 5.
\12\ First Chicago Letter at pg. 2.
\13\ See supra note 1, Amendment No. 1.
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The remaining commenters argued that the Exchange lacked the
authority to regulate how non-Exchange members communicate with their
customers and the type of information disseminated to their
customers.\14\ One commenter, Chase, noted that if the NYSE member firm
must develop procedures and controls for reviewing the accuracy of
statements of accounts prepared by third party agents then this implies
that the Exchange member must have access to bank records and
statements.\15\ Chase questioned whether the NYSE has the authority to
require NYSE member firms to review bank statements.\16\ Another
commenter suggested that requiring banks (or other financial entities)
to possibly establish and make accessible a customer service department
was an indirect attempt by the Exchange to regulate banking activity
and as such, was beyond the Exchange's purview.\17\
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\14\ Chase Letter, pp. 2-3, Citibank Letter, p. 3, and CIS
Letter p. 4.
\15\ Chase Letter, p. 3.
\16\ Id. See also Citibank Letter, (stating that the NYSE has no
authority to access customer account numbers or information or to
require customer service numbers at a bank or other financial
entity), p. 3.
\17\ CIS Letter, pp. 3-4.
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The NYSE states that its proposed Interpretation is directed only
to those persons or entities that themselves are subject to the
jurisdiction of the Exchange.\18\ The Exchange believes that its
interpretation will apply generically to the practice of formulating
and disseminating summary statements together with combined statements
of various entities, regardless of whether these entities are
members.\19\ The Exchange states that it is not seeking to directly
impose regulation on third parties; however, to the extent that member
organizations enter into contractual arrangements with third parties,
these relationships will necessarily be affected by Exchange
regulation.\20\
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\18\ Amendment No. 1, p. 2.
\19\ Id.
\20\ Id.
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In its response, the NYSE has clarified its intent concerning
specific jurisdictional issues raised by several commenters. First, the
requirement that a member firm develop procedures and controls for
reviewing the accuracy of statements of accounts prepared by third
party agents only applies to the customer account statement of a member
organization.\21\ For example, ``if a third party agent prepares
account statements which include assets held at the member organization
broker-dealer, there must be a system in place to ensure the accurate
receipt by the third party agent of such information and the
transmission of accurate information to customers.'' \22\ The
Interpretation does not seek to address the responsibility for the
preparation of statements or accuracy of information related to assets
not held at the broker-dealer.\23\ Thus, concerning customer
information provided by non-member entities, the responsibility of
ensuring the accuracy and transmission of their information lies solely
with them.
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\21\ Amendment No. 1, p. 5.
\22\ Id.
\23\ Id.
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Another concern most commonly raised addressed the requirement that
each entity provide a customer service number on its respective
customer account statement. In its response, the NYSE stated that the
summary page must also identify the relevant customers' account numbers
at each entity and provide a customer service number for each such
entity, ``but only if such information is not included on each entity's
underlying customer account statement.'' \24\ According to the
Exchange, indicating the customer service telephone numbers will allow
customers to contact the appropriate entity for assistance in regard to
the information presented on the summary page or any of the attached
statements.\25\
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\24\ Amendment No. 1, p. 4.
\25\ Id.
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The Commission believes the requirement that a customer service
number be provided from each entity will ensure that inquiries
concerning an asset or account are directed to the entity controlling
the same. If a subsidiary does not have a customer service number, it
may use the customer service number of its parent company or other
affiliate.\26\ With respect to the jurisdictional issues, the
Commission recognizes that the development and distribution of these
joint customer account statements would be a voluntary undertaking
between the parties involved. If a broker-dealer affiliate chooses not
to distribute joint account statements with the broker-dealer, then it
would not be subject to the Interpretation.
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\26\ If an alternate number is used, the customer must be able
to receive assistance concerning his inquiries or be directed to the
appropriate person or department for assistance.
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Several comments took exception to the requirement that the summary
[[Page 52803]]
statement identify and distinguish between those accounts and assets
covered and not covered by SIPC.\27\ According to these commenters,
most financial entities have already addressed insurance disclosure and
have established procedures to comply with the banking regulators'
requirements.\28\ Thus, requiring banks to specifically disclose to
customers that deposit accounts, insured by the Federal Deposit
Insurance Corporation (``FDIC''), are not insured by SIPC would create
unnecessary customer confusion \29\ and may create the illusion that
the two types of coverage are comparable.\30\ One commenter noted that
this requirement imposes a disproportionate impact \31\ on financial
entities because they would be burdened with distinguishing between
FDIC and SIPC coverage and educating the customer about the
differences.\32\
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\27\ Chase Letter, p. 4, Citibank Letter, pp. 1-2, CIS Letter,
p. 2, and ABA Letter, p. 4.
\28\ Id. The banking regulators' requirements are outlined in
the Interagency Statement on Retail Sales of Non-deposit Investment
Products, dated February 15, 1997 (``Interagency Statement''). See
also Joint Interpretations of the Interagency Statement, dated
September 12, 1995, (indicating that the banking agencies may seek
to apply the Interagency Statement more broadly outside the bank
than they do within the bank).
\29\ Chase Letter, p. 4, Citibank, p. 1, and ABA Letter, p. 4.
\30\ Citibank Letter, pp. 1-2.
\31\ CIS Letter, (requiring additional disclosures will have an
anti-competitive effect because NYSE Rule 409 will
disproportionately affect banks, thus disadvantaging a class of NYSE
competitors) at p. 2.
\32\ ABA Letter, pp. 3-4.
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In its response, the NYSE notes that it intended that member
organizations be required to make the standard SIPC disclosures on
their customer account statements and on summary statements where
brokerage assets are included.\33\ The NYSE understands that if read
literally, the proposal could be construed as requiring summary
statement participants to make ``negative'' disclosures (i.e., specific
identification of account assets or accounts not covered by SIPC);
however, this was not its intent. Thus, with respect to SIPC
disclosures on the summary statement, the Exchange has amended the
proposed Interpretation to require that an entity disclose its
membership status, not the status of the accounts or assets.\34\
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\33\ Amendment No. 1, p. 4.
\34\ Amendment No. 2, p. 2.
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Finally, most commenters expressed concern about the additional
costs and burdens financial institutions will incur in attempting to
comply with the summary statement aspect of this proposal.\35\ These
commenters contend that expanding the disclosure requirements to
include, among other things, identifying each entity from which
information is provided or where the assets are held and explaining the
relationship between the various entities on the summary statement,
would not only increase the cost of producing the statement,\36\ but
would defeat the purpose of a statement summary by increasing its
length.\37\ If the proposal is approved, the commenters suggest that
those entities currently disseminating summary statements pursuant to
NYSE rules either be grandfathered \38\ or provided with a grace period
to implement the changes.\39\
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\35\ Chase Letter, p. 1, Citibank Letter, p. 3, CIS Letter, p.
2, and ABA Letter, p. 3.
\36\ Chase Letter, p. 3, Citibank Letter, p. 3, CIS Letter, p. 3
and ABA Letter, p. 3.
\37\ Chase Letter, p. 5 and Citibank Letter, pp. 3-4.
\38\ Citbank Letter, p. 4.
\39\ Chase Letter, p. 6 and Citibank Letter, p. 4.
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The NYSE has agreed that some flexibility in implementation is
warranted. Thus, the Exchange has agreed to a one year phase-in period,
commencing with Commission approval.\40\
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\40\ Amendment No. 1, p. 3.
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IV. Discussion
The Commission believes that the proposed rule change is consistent
with the Act and the rules and regulations promulgated thereunder.
Specifically, the Commission believes that approval of the proposed
rule change is consistent with section 6(b)(5) \4\ of the Act. Pursuant
to Section 6(b)(5), the proposed rule change benefits the public \42\
by codifying the information to be disclosed and delineating the
criteria for the use of third party agents in formulating and
disseminating statements of accounts to customers. Exchange Rule 409
also benefits the public by establishing requirements for related
financial entities to consolidate account information and distribute
this information in a ``summary statement'' to their common customers.
These summary statements will provide customers not only with an
overview of their accounts at the separate entities, but with concise,
detailed information that is easily accessible.\43\
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\41\ Section 6(b)(5) requires the Commission to determine that a
registered national securities exchange's rules are designed to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest.
\42\ Pursuant to Section 3(f) of the Act, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\43\ The Commission notes that this approval order addresses the
procedures that members and associated persons must follow to
disseminate this customer information. The Commission, however, is
not addressing the various entities' legal status or rights
concerning this information.
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Codifying the information to be disclosed on statements of accounts
assures customers of consistency in the type of information received on
their statements. It also establishes uniform standards which will be
applicable to all Exchange members. The rule language establishes
adequate procedures for members to follow if they chose to use third
party agents to disseminate statements of accounts to their customers.
The rule safeguards against possible conflicts of interest and requires
that members who exercise this option, monitor the activity of the
third party agents, to ensure accuracy of the information transmitted.
Having members develop the requisite procedures and controls to monitor
their agents' compliance with this rule should prevent the misuse of
customer information.
A summary statement consolidating a customer's accounts from
various related financial entities will provide the customer with
convenient access to the information in a single document. The
Commission agrees that if these statements are currently being produced
and disseminated, then uniform requirements need to be established for
member and non-member participants to follow. The Commission applauds
the Exchange's efforts in establishing requirements that attempt to
provide the customer with as much information as possible. However, the
Commission believes there is a fine line between a useful summary
statement and one that could prove misleading and could cause customer
confusion. Consequently, we urge the Exchange to be sensitive to any
concerns that may arise after the proposal is implemented.
The Commission also believes that allowing a one year phase-in
period for implementation of the Interpretation will provide entities
adequate time to comply with the requirements of the rule. Once the
Interpretation is fully implemented, the resulting summary statement
should achieve the Exchange's objectives while benefiting the customer
through increased disclosure.
V. Conclusion
For the above reasons, the Commission believes that the proposed
rule change is consistent with the
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provisions of the Act, and in particular with Section 6(b)(5).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule change (SR-NYSE-96-27) be, and hereby
is approved, as amended.
\44\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26723 Filed 10-8-97; 8:45 am]
BILLING CODE 8010-01-M