

[Federal Register: December 15, 2006 (Volume 71, Number 241)]
[Notices]               
[Page 75600-75601]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15de06-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54904; File No. SR-NYSE-2005-09]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change and Amendment Nos. 1 and 2 Thereto 
Relating to Rule 409 Regarding Statements of Accounts to Customers and 
Proposed New Rule 409A Regarding SIPC Disclosure

December 8, 2006.

I. Introduction

    On January 14, 2005, the New York Stock Exchange, Inc. (n/k/a New 
York Stock Exchange LLC) (``Exchange'' or ``NYSE'') filed with the 
Securities and Exchange Commission (``Commission'' or ``SEC''), 
pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') and Rule 19b-4 thereunder,\2\ a proposed 
rule change to amend NYSE Rule 409, which relates to customer account 
statements, and to adopt new Rule 409A, which relates to providing 
customers with information about the Securities Investor Protection 
Corporation (``SIPC''). On December 13, 2005, the Exchange filed 
Amendment No. 1 to the proposed rule change.\3\ On September 19, 2006, 
the Exchange filed Amendment No. 2 to the proposed rule change.\4\ 
Notice of the proposed rule change, as amended, was published for 
comment in the Federal Register on October 2, 2006.\5\ The Commission 
received no comments in response to the Notice. This order approves the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, NYSE withdrew its proposal to amend NYSE 
Rule 409(a), which would have permitted institutional customers 
conducting a Delivery versus Payment and Receive versus Payment 
(``DVP/RVP'') business to opt out of receiving customer account 
statements. NYSE refiled this proposal in File No. SR-NYSE-2005-90.
    \4\ In Amendment No. 2, NYSE proposed additional changes to NYSE 
Rule 409(a) and proposed new NYSE Rule 409A, which are discussed 
below.
    \5\ Exchange Act Release No. 54491 (Sept. 22, 2005), 71 FR 58032 
(Oct. 2, 2006) (``Notice'').
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II. Description of the Proposal and Comment Summary

    In May 2001, the U.S. General Accounting Office (``GAO'') \6\ 
issued a report in which the GAO made recommendations to the SEC and 
SIPC about ways to improve the information available to the public 
about SIPC and the Securities Investor Protection Act (``SIPA'').\7\ 
Among other things, the GAO recommended that self-regulatory 
organizations (``SROs'') explore ways to encourage broader 
dissemination of the SIPC Brochure to customers so that they can become 
more aware of the scope of coverage of the SIPA, and that SROs consider 
requiring firms to include information on periodic statements or trade 
confirmations advising investors that they should document account 
discrepancies in writing.\8\ Written documentation is important 
because, in the event a firm goes into liquidation, SIPC and the 
trustee generally will assume that the firm's records are accurate 
unless the customer can prove otherwise.\9\
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    \6\ The GAO has since been renamed the Government Accountability 
Office.
    \7\ GAO, Securities Investor Protection: Steps Needed to Better 
Disclose SIPC Policies to Investors, GAO-01-653 (May 25, 2001). In 
July 2003, the GAO noted that the Commission was working with SROs 
to explore ways in which the GAO's recommendations could be 
implemented. See GAO, Securities Investor Protection: Update on 
Matters Related to the Securities Investor Protection Corporation, 
GAO-03-811 (July 11, 2003).
    \8\ In response to these recommendations, NASD has amended its 
Rule 2340 to require that account statements include a statement 
advising each customer to report promptly any inaccuracy or 
discrepancy in that person's account to his or her brokerage firm 
and clearing firm (where these are different firms). Such statement 
also must advise the customer that any oral communication should be 
re-confirmed in writing to further protect the customer's rights, 
including rights under SIPA. See Exchange Act Release No. 54411 
(Sept. 7, 2006) 71 FR 54105 (Sept. 13, 2006) (SR-NASD-2004-171), as 
corrected by Exchange Act Release No. 54411A (Oct. 6, 2006) 71 FR 
61115 (Oct. 17, 2006).
    \9\ SIPC advises investors who discover an error in a 
confirmation or statement to immediately bring the error to the 
attention of their brokerage firm in writing and to keep a copy of 
any such writing. See SIPC, ``Documenting Unauthorized Trading'' 
(available at http://www.sipc.org/how/unauthorized.cfm); SIPC, ``How SIPC Protects You'' (available at http://www.sipc.org/how/

brochure.cfm).
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    Consistent with GAO's recommendations, the NYSE is proposing to 
amend NYSE Rule 409(e) to require that each statement of account sent 
to a customer include a legend advising the customer to promptly report 
any inaccuracy or discrepancy in that person's account to his or her 
brokerage firm. If the account is subject to a clearing agreement 
pursuant to NYSE Rule 382, amended NYSE Rule 409(e) would require the 
legend to advise that the customer's notification

[[Page 75601]]

be sent to both the introducing firm and the clearing firm. The legend 
also would need to advise the customer that he or she should re-confirm 
any oral communications with either the clearing or introducing firm in 
writing to further protect the customer's rights, including rights 
under the SIPA. The Exchange also is proposing to adopt a new rule, 
NYSE Rule 409A, which would require member organizations to advise each 
customer in writing, upon the opening of an account and at least 
annually thereafter, that he or she may obtain information from 
SIPC.\10\ Proposed Rule 409A would require the written advisories to 
include SIPC's Web site address and telephone number, and, if the 
account is subject to a clearing agreement pursuant to NYSE Rule 382, 
the rule would permit its requirements to be delegated to either the 
introducing firm or the clearing firm.
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    \10\ NASD also is proposing to adopt new NASD Rule 2342, which 
would require NASD members to advise new customers in writing at the 
opening of an account, and advise all customers in writing at least 
once each year, that they may obtain information about SIPC, 
including the SIPC Brochure, by contacting SIPC, and to provide 
customers with SIPC's telephone number and Web site address at those 
times. See File No. SR-NASD-2006-124.
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    NYSE initially proposed an effective date of 180 days after SEC 
approval of the proposed amendments to Rule 409(e) and proposed new 
Rule 409A. However, to coordinate the effective date of these rule 
changes with the effective dates proposed for related rule changes 
proposed by NASD,\11\ NYSE has changed the proposed effective date to 
May 31, 2007.\12\
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    \11\ See File Nos. SR-NASD 2006-128 (proposing May 31, 2007, as 
new effective date for rule change approved in SR-NASD-2004-171) and 
SR-NASD-2006-124 (with proposed effective date of May 31, 2007).
    \12\ Telephone conversation between William Jannace, Director, 
Rule and Interpretive Standards, NYSE, and Brice Prince, Special 
Counsel, Division of Market Regulation, Commission, on November 8, 
2006.
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III. Discussion and Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with the requirements of Sections 6(b)(5) of the Exchange 
Act.\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 remove impediments to and perfect the mechanism of a free and 
open market and national market system, and in general, to protect 
investors and the public interest. The Commission believes the proposed 
rule change is consistent with the provision of the Exchange Act noted 
above because it should help investors understand the scope of coverage 
of the SIPA, and it should help investors understand procedures for 
preserving their rights in the event of erroneous or unauthorized 
transactions in their accounts.
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    \13\ 15 U.S.C. 78f(b)(5).
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    While the Commission believes that the proposal would improve 
NYSE's current customer account disclosure requirements, we believe 
that the disclosure would be more beneficial to investors if it 
required NYSE member organizations to include on account statements 
both introducing and clearing firm contact information sufficient to 
allow investors to timely report unauthorized transactions or other 
account discrepancies to both firms (if the firms are different). We 
believe such disclosure would be consistent with current Commission 
guidance on this issue.\14\ We also believe that such disclosure would 
help ensure that a customer's concern is delivered to the most 
appropriate person at the firm. The Commission therefore encourages 
NYSE to issue guidance to its member organizations regarding the 
proposed change to Rule 409 that reminds member firms of their current 
obligations with respect to customer account statements.
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    \14\ See Exchange Act Release No. 31511 (Nov. 24, 1992), 57 FR 
56973 (Dec. 2, 1992) (amending the SEC's net capital rule and 
explaining the staff's interpretation that to avoid more stringent 
capital requirements under the rule, an introducing firm must ``have 
in place a clearing agreement with a registered broker-dealer that 
states, for the purposes of SIPA and the Commission's financial 
responsibility rules, customers are customers of the clearing, and 
not the introducing, firm. Furthermore, the clearing firm must issue 
account statements directly to customers. Each statement must 
contain the name and telephone number of a responsible individual at 
the clearing firm whom a customer can contact with inquiries 
regarding the customer's account.''). See also NYSE Interpretation 
Handbook at 4105 (carrying organization phone number may appear on 
the back of the customer account statement, but, if so, it must be 
in ``bold'' or ``highlighted'' text).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\15\ that the proposed rule change (SR-NASD-2005-09), as amended, be, 
and hereby is, approved,\16\ effective May 31, 2007.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E6-21362 Filed 12-14-06; 8:45 am]

BILLING CODE 8011-01-P
