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Self-Regulatory Organizations; Order Approving Proposed Rule Change by the New York Stock Exchange, Inc., Amending the Interpretation of NYSE Rule 412, “Customer Account Transfer Contracts”

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Start Preamble July 26, 2001.

On December 22, 2000, the New York Stock Exchange, Inc., (“NYSE”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and on February 12, 2001, amended the proposed rule change.[1] Notice of the proposal was published in the Federal Register on May 22, 2001.[2] Four comment letters were received.[3] For the reasons discussed below, the Commission is approving the proposed rule change.

I. Description

NYSE Rule 412, “Customer Account Transfer Contracts,” prescribes procedures for member organizations transferring customer accounts and requires the use of the Automated Customer Account Transfer Service (“ACATS”) that 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 of customer accounts. Recent ACATS modifications facilitate the transfer of accounts containing third party and/or proprietary products.

In the current ACATS environment, a carrying firms must deliver third party 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 firms and then reversed back to the carrying firm. This results in substantial processing time by both firms and an overall delay in completing the transfer.[4]

The proposed amendments to paragraphs (b)(1)/01, /04, and /06 of the Interpretation of NYSE Rule 412, in conjunction with the corresponding recent modifications to the ACATS system, require the receiving firms to review an asset validation report provided by the carrying firms and designate those third party products (i.e., mutual funds/money market funds) it is unable to support. Regarding the third party products it is unable to support, the receiving firm will have to provide the customer with a list of the specific assets and will have to request in writing further instructions from the customer with respect to the disposition of those third party products prior to or at the time it makes such a designation. The customer would, at minimum, have to be provided with the following options: (1) Liquidation; (2) retention by the carrying organization; (3) physical delivery in the customer's name to the customer; or (4) transfer to the third party that is the original source of the product. The transfer of the other assets in the account will be undertaken simultaneously with the receiving firm's designation of nontransferable assets.

The amendments also include a notification enhancement that will expedite the disposition of nontransferable proprietary products of Start Printed Page 40307the carrying firm. 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 amendments require the carrying organization to provide the customer with a list of the specific nontransferable, proprietary products of the carrying firm that are in the customer's account.

Finally, the NYSE is amendment the Interpretation of Rule 412 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 Rule 412.

II. Comments

The Commission received four comment letters. All the commenters expressed strong support for the proposed changes to the Interpretation of Rule 412 discussed above.

III. Discussion

The Commission finds that the proposed rule change is consistent with the Act's requirements and the rules and regulations thereunder and particularly with the requirements of Section 6(b)(5) of the Act.[5] Section 6(b)(5) of the Act [6] requires that the rules of a national securities exchange be designed to 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 obligations are met when procedures governing the transfer of customer accounts are made faster and more efficient. For example, 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 NYSE's member organizations. The change to the Interpretation should also reduce customer confusion and facilitate decisions by customers concerning the disposition of proprietary and third party products.

IV. Conclusion

On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the act and in particular with the requirements of Section 17A 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-00-61) be, and hereby is, approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[7]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


2.  Securities Exchange Act Release No. 44302 (May 14, 2001), 66 FR 28210.

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3.  Letters to Jonathan G. Katz, Secretary, Commission from Richard Bommer, President, Customer Account Transfer Division, Securities Industry Association (June 6, 2001); Brian Warshaw, Director, Merrill Lynch, Pierce, Fenner & Smith (June 8, 2001); Pattie Schuchman, Associate Vice President, A.G. Edwards & Sons, Inc. (June 11, 2001); and Frederic M. Krieger, Senior Vice President, Charles Schwab & Co., Inc. (June 15, 2001).

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4.  NYSE-member organizations approximate that 50% of their ACATS “fails-to-deliver” that are ultimately reversed are caused by the attempted transfer of mutual funds that 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.

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[FR Doc. 01-19280 Filed 8-1-01; 8:45 am]