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Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the New York Stock Exchange, Inc., To Amend the Interpretation of NYSE Rule 412, “Customer Account Transfer Contracts”

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Start Preamble May 14, 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 thereunder,[2] notice is hereby given that on December 22, 2000, the New York Stock Exchange, Inc. (“NYSE”), filed with the Securities and Exchange Commission (“Commission”) the proposed rule change and on February 12, 2001, amended the proposed rule change [3] as described in Items I, II, and III below, which Items have been prepared primarily by the NYSE. The Commission is publishing this notice to solicit comments on the amended proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The NYSE proposes to amend its Interpretation of NYSE Rule 412, “Customer Account Transfer Contracts,” to expedite the transfer of customer accounts containing proprietary and/or third party products. The text of the proposed rule change is available upon request from the NYSE's Office of the Secretary or through the Commission's Public Reference Branch.

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 NYSE included statements concerning the prupose 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 NYSE has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.[4]

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

1. Purpose

a. Introduction. NYSE Rule 412 prescribes procedures for member organizations transfering customer accounts and requires the use of the automated Customer Account Transfer Service (“ACATS”) which is administered by the National Securities Clearing Corporation (“NSCC”). Since ACATS's inception in 1985, several enhancements to the system and to NYSE Rule 412 have allowed for faster and more efficient transfers to customer accounts. Recent ACATS modifications offer the capability to facilitate the transfer of accounts containing third party and/or proprietary products. The proposed amendments to the Interpretation of NYSE Rule 412 relate to these modifications and would provide the number greater flexibility to expedite the transfer of such accounts.

b. Background. The transfer process is initiated when, upon a customer's written instructions, the receiving firm [5] submits a Transfer Instruction Form or Transfer Initiation Form (“TIF”) to the Start Printed Page 28211carrying firm.[6] Although most securities can be transferred through ACATS, member organizations vary widely in their ability to accept and support certain proprietary and/or third party investment products. These differences in servicing capability are particularly problematic with regard to mutual funds.

In order to carry a mutual fund position for a customer's account, the member organization must have a marketing agreement with the investment company that has issued the fund and must have certain corresponding servicing capabilities (e.g., capacity to by and sell shares, reinvest dividends, etc.). The extraordinarily large number of mutual funds that have become available over the last decade has resulted in great variance among member organizations with respect to the third party funds they can sell, service, and support.

c. Current Situation. In the current ACATS environment, a carrying firm must deliver third party client mutual funds without knowing whether the receiving firm has the capability to accept, service, and support such funds. If the receiving firm cannot support a particular fund, the delivery will be made to the receiving firm and then to be reversed back to the carrying firm, resulting in substantial processing time by both firms and an overall delay in completing the transfer. To illustrate the point, member organizations approximate that 50% of their ACATS “fails-to-deliver” that must ultimately be reversed are caused by mutual funds the receiving firm is unable to support. The ACATS-generated fails result in considerable expense to carrying firms because they are required to credit the receiving firm funds equivalent to the value of the assets they are unable to deliver.

d. Proposed Amendments to the Interpretation of NYSE Rule 412. The proposed amendments to paragraphs (b)(1)/01,/04, and /06 of the Interpretation of NYSE Rule 412, in conjunction with the corresponding modifications to the ACATS system, would allow the receiving firm to review an asset validation report provided by the carrying firm and designate those proprietary and/or third party products (i.e., mutual funds/money market funds) it is unable to support. As to those products it is unable to support, the receiving firm would have to provide the customer with a list of the specific assets and request in writing prior to or at the time it makes such designation, further instructions from the customer with respect to the disposition of such assets. The customer would, at minimum, have to be provided with the following options′:

(1) Liquidation;

(2) Retention by the carrying organization;

(3) Physical shipment in the customer's name to the customer; or

(4) Transfer to the third party that is the original source of the product.[7]

The transfer of the other assets in the account would be undertaken simultaneously with the receiving firm's designation of nontransferable assets. The proposed designation requirements on the part of the receiving firm should reduce the overall timeframe for transferring proprietary and/or third party products and should lower the related costs incurred by member organizations.

The proposed amendments also include a notification enhancement that will expedite the disposition of nontransferable carrying firm proprietary products.[8] The current Interpretation requires that the carrying organization provide general notification to the customer if an account to be transferred contains any nontransferable assets. The proposed amendments would require the carrying organization to notify the customer of the specific nontransferable, proprietary assets of the carrying firm that are in the account and would further require the carrying organization to provide the customer with a list of those specific assets.

e. Internal Reassignment of Accounts. An additional amendment to the Interpretation of NYSE Rule 412 [9] is being proposed to address situations where a carrying organization internally reassigns customer accounts to other registered representatives and establishes new account numbers. The proposed amendment places responsibility for tracking these account number changes with the carrying organization and makes clear that a transfer request rejected on the basis of such reassignment will not be considered a legitimate exception under the new rule.

2. Statutory Basis

The NYSE believes the proposed rule change is consistent with section 6(b) of the Act [10] in general and furthers the objectives of section 6(b)(5) of the Act [11] in particular in that it is designed to: promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest. These interests are served when procedures governing the transfer of customer accounts are made more efficient.

B. Self-Regulatory Organization's Statement on Burden on Competition

The NYSE believes that the proposed rule change will not impose any burden on competition that is not necessary or appropriate in the furtherance of the purposes of the Act.

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

The NYSE has neither solicited nor received written comments on the proposed rule change.

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

Within thirty-five 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 ninety 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, as amended, is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 Start Printed Page 28212provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at NYSE's principal office. All submissions should refer to File No. SR-NYSE-00-61 and should be submitted by June 12, 2001.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[12]

Jonathan G. Katz,


End Signature End Preamble


3.  Letter from Darla C. Stuckey, Assistant Secretary, NYSE to Jerry Carpenter, Assistant Director, Division of Market Regulation (February 8, 2001).

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4.  The Commission has modified the text of the summaries prepared by the NYSE.

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5.  Within the context of NYSE Rule 412, the term “receiving firm” refers to a member organization to which a customer is transferring his account.

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6.  Within the context of NYSE Rule 412, the term “carrying firm” refers to a member organization from which a customer is transferring his account.

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7.  Rule 412(b)(/06(B).

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8.  Rule 412(b)(1)/06(A).

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9.  Rule 412(b)(1)/02.

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[FR Doc. 01-12791 Filed 5-21-01; 8:45 am]