Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving a Proposed Rule Change Relating to Customer Account Transfer Contracts

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34633; File No. SR-NYSE-94-21]

Self-Regulatory Organizations; New York Stock Exchange, Inc.;

Order Approving a Proposed Rule Change Relating to Customer Account

Transfer Contracts

September 2, 1994.

On June 16, 1994, the New York Stock Exchange, Inc. (``NYSE'')

filed with the Securities and Exchange Commission (``Commission'') a

proposed rule change (File No. SR-NYSE-94-21) pursuant to Section

19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of

the proposal was published on June 29, 1994, in the Federal Register to

solicit comments on the proposed rule change.\2\ Two comment letters

were received in favor of the proposal.\3\ For the reasons discussed

below, the Commission is approving the proposed rule change.

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\1\15 U.S.C. 78s (b)(1) (1988).

\2\Securities Exchange Act Release No. 34246 (June 22, 1994), 59

FR 33559 [File No. SR-NYSE-94-21].

\3\Letter from John E. Nolan, Senior Vice President, Operations

and Compliance, Raymond James & Associates, Inc., to Jonathan G.

Katz, Secretary, Commission (July 15, 1994) and letter from Kevin

Farragher, Director of Operations, Distribution & Service, The

Investment Company Institute, to Jonathan G. Katz, Secretary,

Commission (July 11, 1994). The comment letters are discussed in

detail in Section B below.

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I. Description of the Proposal

A. Description

NYSE is amending its Rule 412, Customer Account Transfer Contracts,

and its related interpretations in order to incorporate into its

customer account transfer process enhancements the National Securities

Clearing Corporation (``NSCC'') has made to its Automated Customer

Account Transfer (``ACAT'') service. Presently, the transfer time for

transferring customers' cash or margin accounts is ten business days

and is fifteen business days for transferring retirement accounts. The

proposed amendments will reduce the time period for transferring

customers' cash, margin, and retirement accounts to seven business

days. This will be accomplished by reducing the five business day

validation period for accounts to three business days\4\ and by

reducing the delivery period from five business days to four business

days.\5\ The rule change also mandates the use of an automated customer

account transfer system for transferring mutual fund positions where

both the receiving broker-dealer and the delivering broker-dealer are

participants in a registered clearing agency which has such a

facility.\6\

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\4\The rule change deletes the interpretation that permitted a

ten day validation period for retirement accounts. NYSE Rule 12,

Interpretation (f)/01.

\5\NYSE Rule 412(b).

\6\NYSE Rule 412(e)(2).

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Where both receiving and delivery member organizations participate

in a registered clearing agency with an automated customer account

transfer system with residual credit processing capabilities, the rule

change requires the members to utilize such facilities to transfer

residual credit positions which accrue to an account after transfer.

Member organizations already are required to transfer credit balances

accruing in a transferred account within ten business days after

accrual for a minimum of six months following the transfer. This

requirement applies to all member organizations regardless of whether

they utilize an automated customer account transfer system.

The rule change also permits partial customer account transfers to

be accomplished through a registered clearing agency's automated

customer account transfer system. Presently, partial transfers are

accomplished outside of the system. The time frames required by Rule

412 for transfer of entire customer accounts do not apply to partial

transfers. However, the NYSE states in its filing and in existing

interpretations to NYSE Rule 412 that member organizations are expected

to expedite partial transfers of customer accounts.\7\

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\7\NYSE Rule 412, Interpretation (a)/01.

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In an effort to facilitate communication between organizations and

improve exchange oversight, the NYSE will provide more explicit reason

codes for rejection of customer account transfers.\8\ However, NYSE's

new reason codes will become effective only after NSCC implements

system changes which will allow use of such reason codes.\9\ Also,

member organizations that receive an account transfer related claim

letter will be required to resolve the claim within five business days

or respond in writing setting forth specific reasons for denying the

claim.\10\

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\8\NYSE Rule 412, Interpretation (b)(1)/02.

\9\Telephone conversation between Rudy Schrieber, Senior Special

Counsel of Rule and Interpretive Standards, NYSE, and Jerry W.

Carpenter, Assistant Director, Division, Commission (August 30,

1994). See NYSE Rule 412, Interpretation (b)(1)/02.

\10\NYSE Rule 412(d).

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The amendments relating to use of an automated system for

transferring mutual fund positions and residual credit processing will

become effective 180 calendar days after Commission approval of the

amendments. All other amendments referred to above will become

effective ninety days after Commission approval.

B. Comments

As noted above, two comments were received in support of the

proposed rule change. One letter addressed only that portion of the

rule change dealing with the mandatory participation in NSCC's ACAT

service.\11\ The commenter noted that the ACAT service benefits broker-

dealers and mutual fund companies, but the retail investor is the

ultimate benefactor of the process. The commenter also stated that

unless the Commission makes participation mandatory, the process of

transferring mutual fund assets will continue to be done manually in

some instances and possibly will take months to complete. According to

the commenter, this subjects the beneficial shareholders of mutual fund

shares to market fluctuation due to the inability to redeem or exchange

their shares.

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\11\Letter from John E. Nolan, Senior Vice President, Operations

and Compliance, Raymond James & Associates, Inc., supra note 3.

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The second letter strongly recommends adopting the proposed rule

change citing the changes pertaining to ACAT as its primary

concern.\12\ According to this commenter, the benefits of ACAT-Fund/

Serv are twofold. The first advantage is the timely, high quality

customer service provided through ACAT. The second advantage is the

cost savings arising from its efficiency compared to the highly

inefficient manual means used to effect the transfer of mutual fund

accounts from one broker-dealer to another.

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\12\Letter from Kevin Farragher, Director of Operations,

Distribution & Service, The Investment Company Institute, supra note

3.

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This commenter cited the standardized settlement cycle and the

decrease in the amount of work the fund ultimately has to do as one of

the most important aspects of ACAT-Fund/Serv transfers. A standardized

settlement cycle safeguards shareholder accounts from market

fluctuation by limiting the duration of the ``fail to receive'' period

during which shares are unavailable for redemption or exchange.

II. Discussion

The Commission finds that the proposed rule change is consistent

with the requirements of the Act and the rules and regulations

thereunder and particularly with the requirements of Section

6(b)(5).\13\ Section 6(b)(5) requires, among other things, that the

rules of an exchange be designed to promote just and equitable

principles of trade, to foster cooperation and coordination with

persons engaged in regulating, clearing, settling, processing

information with respect to, and facilitating transactions in

securities.\14\ For reasons set forth below, the Commission believes

that the NYSE's amendments are consistent with the requirements of

Section 6(b)(5).

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\13\15 U.S.C. 78f(b)(5) (1988).

\14\Id.

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Shortening the time period for transferring accounts from ten days

to seven days is appropriate because of the enhanced automation of the

process by member organizations and clearing agencies. The shortened

time period should be beneficial to both customers and member

organizations. In addition, reducing the time allowable for account

transfers is consistent with Commission Rule 15c6-1 mandating a three

business day settlement cycle effective June 1, 1995.\15\

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\15\For a complete description of Rule 15c6-1, refer to

Securities Exchange Act Release No. 33023 (October 13, 1993), 58 FR

52891 [File No. S7-5-93] (adopting Commission Rule 15c6-1).

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The development by registered clearing agencies of automated

systems to transfer mutual funds positions and residual credit balances

and their mandatory use should benefit both customers and member

organizations by increasing efficiency, reducing paperwork, and

providing significant cost savings. Permitting partial account

transfers to be accomplished through automated account transfer systems

should allow member organizations to provide more efficient and

expeditious transfers. The use of NYSE's more explicit reject codes

should help reduce unnecessary back office operations functions and

should allow members to determine the exact reason for rejections of

customer account transfers. The new reject codes also will allow the

NYSE to better monitor its members' rejections. The amendments

requiring the resolution or denial of claim letters within five

business days should help provide a regulatory framework in an area

where no specific requirements currently exist and should expedite

resolution of such claims.

III. Conclusion

The Commission finds that the proposal is consistent with the

requirements of the Act and particularly with Section 6(b)(5) 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-94-21) be, and hereby

is, approved.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\16\

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\16\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-22469 Filed 9-9-94; 8:45 am]

BILLING CODE 8010-01-M