[Federal Register Volume 69, Number 210 (Monday, November 1, 2004)]
[Notices]
[Pages 63424-63427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2919]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50586; File No. SR-NYSE-2004-13]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. 
To Adopt Rule 405A (``Non-Managed Fee-Based Account Programs--
Disclosure and Monitoring'')

October 25, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on February 25, 2004, the New York Stock Exchange, 
Inc. (``NYSE'' or the ``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or the ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. On October 22, 2004, the NYSE filed 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mary Yeager to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission, dated 
October 22, 2004.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Proposed new NYSE Rule 405A (``Non-Managed Fee-Based Account 
Programs--Disclosure and Monitoring'') would prescribe certain 
requirements for members and member organizations that offer programs 
that charge customers a fixed fee or percentage of account value in 
lieu of commissions. The requirements include disclosure, 
appropriateness determination, monitoring of transactional activity, 
and a follow-up system to contact customers. The text of the proposed 
new rule appears below. Proposed new language is in italics.
* * * * *

Rule 405A (``Non-Managed Fee-Based Account Programs--Disclosure and 
Monitoring'')

(1) General Disclosures Required

    Each member or member organization shall provide each customer, 
prior to the opening of an account in a Non-Managed Fee-Based Account 
Program, and annually thereafter, a disclosure document describing the 
types of Non-Managed Fee-Based Account Programs available to such 
customer. The document shall disclose, for each such Program type, 
sufficient information for the customer to make a reasonably informed 
determination as to whether the Program is appropriate for them, 
including, at minimum: a description of the services provided, eligible 
assets, fees charged including projected customer costs, any conditions 
or restrictions imposed, and a summary of the Program's advantages and 
disadvantages.

(2) Opening of Accounts

    Members and member organizations are required to make a 
determination, prior to opening an account in a Non-Managed Fee-Based 
Account Program, that such Program is appropriate for each customer 
taking into account the services provided, anticipated costs, and 
customer objectives.

(3) Monitoring of Accounts

    Each member or member organization must establish and maintain 
systems and procedures adequate to monitor, on an ongoing basis, 
transactional activity by customers in Non-Managed Fee-Based Account 
Programs. Such systems and procedures must include specific 
transactional parameters or criteria for identifying levels of customer 
account

[[Page 63425]]

activity that may be inconsistent with the Program costs incurred by 
the customer.

(4) Review and Follow-Up

    Each member or member organization must maintain written procedures 
for contacting and following-up with customers identified pursuant to 
Paragraph (3) of this rule, at minimum, every 12 months. More frequent 
contact is required should circumstances warrant. The means (e.g., 
letter or phone call) and general content of each follow-up customer 
contact must be documented and retained in an easily accessible place. 
At minimum, such contact must include notification that the level of 
account activity for a specified time-frame may be inconsistent with 
the Program costs incurred by the customer.

(5) Applicability of Rule

    This rule shall not apply to accounts opened on behalf of 
``Qualified Investors'' as that term is defined in Section 3(a)(54) of 
the Securities Exchange Act of 1934 (15 U.S.C. 78c) or to any member or 
member organization that does not offer Non-Managed Fee-Based Account 
Programs to its customers.

(6) Definition

    For purposes of this rule, the term ``Non-Managed Fee-Based Account 
Program'' shall refer to arrangements in which no investment advisory 
services are provided by the member or member organization and in which 
customers are charged a fixed fee and/or a percentage of account value, 
rather than transaction-based commissions.
    Supplementary Material:
    .10 See also Rule 405(1) requirement that member organizations use 
due diligence to learn the essential facts relative to every customer 
and every cash or margin account, including accounts in Non-Managed 
Fee-Based Account Programs, accepted or carried by such member 
organization.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose

Background

    In keeping with evolving investors' sentiment and needs, members 
and member organizations have increasingly been offering a wider 
variety of account types beyond traditional brokerage accounts, 
including on-line accounts and fee-based programs such as ``wrap'' 
accounts, whereby all the services (investment advice, execution, and 
clearance) provided by a broker-dealer are bundled together for a fee. 
Members and member organizations are also increasingly offering Non-
Managed Fee Based Account Programs (``NFBA Programs'') to their 
customers.
    NFBA Programs are agreements between a broker-dealer and a customer 
in which the customer is charged a fixed fee and/or a percentage of 
account value rather than transaction-based commissions. Unlike 
``wrap'' accounts, NFBA Programs do not offer investment advisory 
services but are directed by the customer or by an agent of the 
customer pursuant to a separate agreement. The primary advantage of 
NFBA Programs is that they offer a ``volume discount'' from traditional 
transaction-based commission charges.

Proposal

    Every member and member organization is required by NYSE Rule 405 
(``Diligence as to Accounts'') to ``[u]se due diligence to learn the 
essential facts relative to every customer, every order, [and] every 
cash or margin account.* * *'' Likewise, NYSE Rule 342 (``Offices--
Approval, Supervision and Control'') requires that each member and 
member organization exercise supervision and control over each business 
activity. While NFBA Programs are subject to the provisions of these 
and all other applicable NYSE rules, they present potential regulatory 
issues that warrant a specifically tailored approach. For instance, as 
a general matter, a fee-based approach may be considered appropriate 
for customers who engage in moderate to high levels of trading activity 
since the price per trade is reduced as the number of trades increases. 
However, such arrangements may not be appropriate for customers who 
engage in a lower level of trading activity, as substantially greater 
transaction cost savings might be realized in the context of a 
traditional pay-per-trade commission structure.
    Various factors, including other services provided as part of the 
Program, must be considered to determine whether a given NFBA Program 
is an appropriate investment vehicle for a particular customer. The 
NYSE is proposing NYSE Rule 405A to address regulatory concerns in this 
regard by requiring initial informational disclosure to customers, 
appropriateness determination prior to account opening, ongoing 
monitoring, and follow-up as appropriate. Accordingly, the proposed 
rule requires each member and member organization to provide each 
customer, prior to the opening of an NFBA Program account and annually 
thereafter, a disclosure document describing the types of NFBA Programs 
available to such customer. The document would include for each account 
type, at minimum, a description of the services provided, eligible 
assets, fees charged, including projected customer costs, any 
conditions or restrictions imposed, and a summary of the Program's 
advantages and disadvantages. Essentially, the document should provide 
a reasonable basis upon which a customer can make an informed decision 
with respect to available NFBA Program options.
    The member or member organization must also make a determination, 
prior to opening an account in an NFBA Program, that such Program is 
appropriate for each customer taking into account the services 
provided, anticipated costs, and customer objectives. Cost is an 
important factor, but not the only one. For this reason, factors other 
than cost may properly be considered in determining whether an NFBA 
Program is appropriate for a particular customer. Members and member 
organizations must consider the overall needs and objectives of the 
customer when determining the benefits and costs of an NFBA Program for 
that customer, including the anticipated level of trading activity in 
the account and non-price factors, such as the importance that a 
customer places on aligning his or her interests with those of the 
broker.
    Proposed Rule 405A also requires a member or member organization to 
establish and maintain systems and procedures adequate to monitor, on 
an ongoing basis, transactional activity by customers in NFBA Programs. 
Such systems and procedures must include specific transactional 
parameters or criteria for identifying customer account activity that 
may be inconsistent with the Program costs incurred by the customers. 
The proposed rule does not

[[Page 63426]]

establish specific parameters or criteria since NYSE believes such 
determinations are best made by each member and member organization 
depending upon the specifics of the account Program(s) offered and 
customers' investment profiles.
    Proposed Rule 405A also requires a member or member organization to 
maintain written procedures for contacting and following up, at 
minimum, every 12 months, with those customers whose level of activity 
in an NFBA Program over a specified period of time has been identified, 
pursuant to the member or member organization's transactional 
parameters or criteria, as possibly inconsistent with their incurred 
Program costs. The minimum 12-month standard reflects the fact that, 
due to any number of variables, an NFBA Program's appropriateness may 
not be determinable except over a relatively extended period of time. 
Such variables could include, among others, general economic or market 
conditions, variations in customer trading patterns, changes in 
customer investment objectives, or the types of services/benefits 
included in a given Program. However, as noted above, members and 
member organizations have an ongoing obligation to monitor NFBA Program 
activity and, accordingly, more frequent customer contact should be 
made if warranted by the circumstances. At minimum, all such contact 
must include notification that the level of account activity for a 
specified time-frame may be inconsistent with the Program costs 
incurred by the customer. The proposed rule does not prescribe specific 
procedures for identifying, contacting, and following-up with customers 
since the variety of NFBA Programs, customer investment profiles, and 
member organization supervisory structures, allows for numerous 
effective alternate methods. However, the proposed rule does require 
that the means (e.g., letter or phone call) and general content of each 
follow-up customer contact must be documented and retained in an easily 
accessible place.
    Because proposed Rule 405A is intended to protect the interests of 
retail customers, it contains an exception for accounts opened on 
behalf of ``Qualified Investors'' as that term is defined in Section 
3(a)(54) of the Securities Exchange Act of 1934.\4\ For example, 
excepted from the proposed rule's provisions are accounts of registered 
investment companies, banks, insurance companies, certain employee 
benefit plans subject to the Employee Retirement Income Security Act of 
1974 (``ERISA''), any corporation, company or partnership that owns and 
invests on a discretionary basis not less than $25,000,000 in 
investments, or any natural person who owns and invests on a 
discretionary basis not less than $25,000,000 in investments. This 
exception is based on the assumption that such accounts are generally 
directed by persons that are financially sophisticated and thus better 
able to make informed decisions regarding the appropriateness of 
available NFBA Programs. The proposed rule would also not apply to any 
member or member organization that does not offer NFBA Programs to its 
customers.
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    \4\ 15 U.S.C. 78c(a)(54).
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    As noted above, proposed Rule 405A would not apply to arrangements 
in which a fixed fee and/or a percentage of account value is charged as 
payment for investment advisory services. Most such accounts are 
subject to the Investment Advisers Act of 1940\5\ and are thus subject 
to its regulatory scheme, as well as to existing NYSE and other self-
regulatory organization sales practice rules.
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    \5\ 15 U.S.C. 80b-1 et seq.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of Section 6(b)(5)\6\ of the Exchange 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 requirements for appropriate 
disclosure, monitoring, and follow-up procedures for the protection of 
customers who utilize NFBA Programs.
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    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposal does not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2004-13.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NYSE-2004-13. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW, Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NYSE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions

[[Page 63427]]

should refer to File Number SR-NYSE-2004-13 and should be submitted on 
or before November 22, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
Jill M. Peterson,
Assistant Secretary.
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    \7\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E4-2919 Filed 10-29-04; 8:45 am]
BILLING CODE 8010-01-P