[Federal Register Volume 69, Number 56 (Tuesday, March 23, 2004)]
[Notices]
[Pages 13608-13609]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6405]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49415; File No. SR-NYSE-2003-29]


Self-Regulatory Organizations; New York Stock Exchange; Order 
Granting Approval of a Proposed Rule Change Relating Partial Transfers 
and Other Non-Standard Customer Account Transfers

March 12, 2004.
    On October 1, 2003, the New York Stock Exchange (``NYSE'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-NYSE-2003-29 pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on December 29, 2003.\2\ Three 
comment letters in support of the proposed rule change were 
received.\3\ For the reasons discussed below, the Commission is 
granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 48958, (December 18, 
2003), 68 FR 75008 (December 29, 2003)(File No. SR-2003-29).
    \3\ Letters from Steven P. Callan, Associate Director, Bear, 
Stearns Securities Corp., (January 12, 2004); John Cusumano, 
President, and Kristie Thompson, Vice President, Customer Account 
Transfer Division, Securities Industry Association (January 20, 
2004); Kristie Thompson, Department Leader, Customer Account 
Transfer, Edward Jones (January 20, 2004).
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I. Description

    Rule 412 of the NYSE's Rules (``Customer Account Transfer 
Contracts'') prescribes procedures for member organizations to transfer 
customer accounts. It requires use of the Automated Customer Account 
Transfer Service (``ACATS''), an electronic system administered by the 
National Securities Clearing Corporation (``NSCC'') to facilitate the 
transfer of customer account assets from one broker-dealer or bank to 
another broker-dealer or bank, where both the carrying and receiving 
broker-dealers are members of NSCC. Since ACATS inception in 1985, 
numerous enhancements to it and to Rule 412 have allowed for faster and 
more efficient transfers of customer accounts. For example, the most 
recent amendments to the Interpretation of Rule 412 provided for the 
expedited transfer of accounts containing third party or proprietary 
products (e.g., mutual funds).\4\
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    \4\ Securities Exchange Act Release No. 44596 (July 26, 2001), 
66 FR 40306 (August 2, 2001) (SR-NYSE-00-61); NYSE Information 
Memorandum No. 01-23 (August 16, 2001).
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A. Non-Standard Account Transfers

    Prior to this rule change, Rule 412 and its Interpretation applied 
only to ``standard'' transfers (e.g., where customer account assets in 
their entirety are transferred from one member organization to another) 
processed through ACATS. Rule 412 and its Interpretation, as currently 
applied to standard transactions, include specified response times 
which a delivering firm and a receiving firm are to verify assets, 
resolve discrepancies, and complete the transfer. Standard transfers 
processed through ACATS are also subject to the automated processing of 
transfer-related fails (e.g., monies posted by a delivering firm where 
the security to be transferred is not transferred), reclaims (e.g., 
claims by delivering firm for the return of securities transferred), 
and of residual credits (e.g., transfer of dividends, etc. received 
after an account has been transferred).
    While ACATS could also used to process non-standard transfers, such 
as ``partial'' transfers (i.e., the transfer of only specifically 
designated assets from a customer account), Rule 412 did not require 
the use of the automated processing capabilities of ACATS or that non-
standard transfers be accomplished in accordance with Rule 412 
timeframes.

[[Page 13609]]

    As amended, Rule 412 and its Interpretation will generally apply 
the same procedural standards to both standard and non-standard 
transfers (e.g., partial transfers, fail reversals, reclaims, and 
mutual fund fail clean ups) processed through ACATS. The amendments 
will mandate use of ACATS for non-standard transfers unless otherwise 
specifically requested by a customer.\5\ For example, customers will 
not be precluded from using authorized alternate instructions to effect 
partial transfers.
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    \5\ Rule 412(e)(1) will not provide an exception to the members' 
obligation to accomplish transfers in accordance with NSCC's rules 
when the customer authorizes alternative instructions to transfer 
``specifically designated assets.'' The phrase ``specifically 
designated assets'' refers to partial transfers only. Telephone 
conversation between the NYSE, NSCC, and Commission staff (November 
20, 2003).
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    However, certain aspects of Rule 412 and its Interpretation will 
continue to be applicable to standard transfers only. The amendments to 
Rule 412 distinguish between the transfer of security account assets 
``in whole'' (i.e., standard transfers) and security account assets 
``in specifically designated part'' (i.e., partial transfers). This 
distinction is necessary given differing customer and broker-dealer 
obligations that result from transferring an entire account from a 
delivering firm as opposed to obligations related to the transfer of 
specified assets from an account that will remain active at the 
delivering firm.
    For example, should a customer request the transfer of an entire 
account, she must authorize the liquidation of any nontransferable 
proprietary money market fund assets in the account and the transfer of 
any resulting credit balance to the receiving organization.\6\ In 
addition, any residual credit balance resulting from dividend payments 
subsequent to the transfer must be forwarded to the receiving 
organization.\7\ Clearly, these are obligations that would attach only 
in instances of account asset transfers in whole, and not in instances 
of specifically designated asset transfers.
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    \6\ Rule 412 Interpretation (b)(1)/01.
    \7\ NYSE Rule 412(e)(3) and (e)(4).
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    Another procedural distinction between the transfer of an entire 
account and the transfer of specifically designated asset transfers can 
be found in the treatment of ``non-transferable assets.'' Non-
transferable assets are defined as either a proprietary product of a 
delivering organization or as an asset that is the product of a third 
party (e.g., a mutual fund). When transferring account assets in whole, 
the Interpretation of Rule 412 requires that a customer be provided a 
letter with disposition options consistent with closing out an account 
regarding any non-transferable assets.\8\ This requirement would not be 
applicable to partial transfers since a request to transfer 
specifically designated assets would not result in closing the 
customer's account at the delivering firm.
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    \8\ Rule 412 Interpretation (b)(1)/06.
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B. Customer Authorization

    Rule 412 and its Interpretation currently make reference to 
``written'' customer authorization requirements. The amendments to Rule 
412(a) clarify the scope of such customer authorization to include 
electronic signatures ``in a format recognized as valid under federal 
law to conduct interstate commerce.'' This modification contemplates 
legal alternatives to ``pen and paper'' methods of customer 
authorization on the condition that such methods otherwise comply with 
Rule 412 and its Interpretation.

C. Prescribed Forms

    The interpretation of Supplementary Material .30 to Rule 412 had 
required members use the transfer instructions and provide the reports 
prescribe by the NYSE when making account transfers pursuant to Rule 
412 and that such instructions and reports must be substantially 
similar to those required by NSCC. Since NSCC no longer requires 
specific formats with respect to transfer instructions or reports, the 
Interpretation to Supplementary Material .30 is being deleted.
    In order to allow member organizations sufficient time to develop 
and implement necessary system changes to comply with amended Rule 412, 
the NYSE will set an effective date six months from the date of 
Commission approval of the proposed amendments.

II. Comment Letters

    The Commission received three comment letters, all in support of 
the proposed rule change.\9\ The commenters supported both the 
application of standard procedures to non-standard transfers (including 
partial transfers, fail reversals, reclaims, and mutual fund fail clean 
ups) and supported the clarification that client authorizations 
includes electronic signatures in a format recognized as valid under 
federal law to conduct interstate commerce.\10\ The commenters believe 
that these changes will enhance and streamline the account transfer 
process and will ultimately benefit investors.
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    \9\ Supra note 3.
    \10\ The commenters noted that the description of the proposed 
rule change only mentioned partial transfers as non-standard 
functionality, but the rule change as filed by the NYSE encompasses 
all non-standard transfers such as fail reversals, reclaims, and 
mutual fund fail clean ups.
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III. Discussion

    Section 6(b)(5) of the Act that requires rules of an exchange are 
designed to promote just and equitable principles of trade, to remove 
impediments to and to perfect the mechanism of a free and open market 
and a national market system and, in general, to protect investors and 
the public interest.\11\ As amended, Rule 412 expands the scope of 
transactions required to be processed through ACATS in order to include 
non-standard transfers (e.g., partial transfers, fail reversals, 
reclaims, and mutual fund fail clean-ups) and allows broker-dealers to 
accept electronic signatures in a format recognized as valid under 
Federal law for such transactions. In so doing, the rule change should 
expedite the transfer of customer assets between broker-dealers, 
increase broker-dealer accountability in transferring customer 
accounts, and further competition among broker-dealers by more easily 
allowing investors to transfer their assets to the broker-dealer of 
their choice. For these reasons, the Commission believes that the 
NYSE's rule change is consistent with the exchange's obligations under 
the Act.
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    \11\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular section 6 of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NYSE-2003-29) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-6405 Filed 3-22-04; 8:45 am]
BILLING CODE 8010-01-P