New York Stock Exchange, Inc.
Via email to firstname.lastname@example.org
March 17, 2004
Jonathan G. Katz
Re: File No. S7-05-04; Release No. 34-49104
Dear Mr. Katz:
The New York Stock Exchange ("NYSE" or "Exchange") appreciates the opportunity to comment on the proposed rule (the "Proposal") regarding collection practices under Section 31 of the Securities Exchange Act of 1934 (the "Exchange Act").
The Exchange understands why the Commission has determined to propose changes to the methodology the SROs have used to ascertain and collect the fees due, and the Exchange has been working actively with staff from National Securities Clearing Corporation ("NSCC") and various member firms to assure that the necessary information can be gathered and mechanisms effected to implement the collection process that the Commission has proposed. We support the Commission's desire to make uniform the way in which the collection process is conducted among the various Self Regulatory Organizations ("SROs") subject to the Section 31 fee.
The Exchange is optimistic that the proposed process can be efficiently implemented on a going forward basis, perhaps subject only to the need for a suitable lead-time prior to the effective date. Detailed information on what system technology and other changes may need to be implemented is being developed by NSCC, working with the various SROs, and the Exchange may wish to comment further on this issue after that information is made available. Overall, however, the Exchange believes that the desired approach is feasible.
Concern with retroactive implementation.
Our concern is with the additional aim of the proposal to effectively begin the process retroactively, with effect from September 30, 2003. While our understanding is that we can as a general matter produce data from that date forward, we cannot be confident that we are obtaining all the information that would be necessary to produce a complete and accurate record. For prospective implementation, we and NSCC and the other SROs will have the opportunity to tailor our systems to obtain exactly the information needed for the new collection regimen. On a retrospective basis we would have to rely on systems that were not set up to capture data for the purposes of calculating Section 31 fees, and we are concerned that this would result in inaccurate data.
To elaborate, preliminary conversations with NSCC staff indicate that this data will be derived from NSCC's historical database, which was not developed to provide information for these purposes. While we understand from NSCC that the data is valid on an overall basis, there is some concern that it is not currently available in a format to be able to provide the member firms sufficient supporting details to enable them to provide necessary verification. Even if all the needed information is available, the task of validating more than six months of retrospective trade data will be an onerous one.
An additional issue regarding retroactive application is the fact that during this period the Exchange has been collecting amounts from member firms under our existing rule related to Section 31 fees (NYSE Rule 440H), and in fact on March 15, 2004 will make a required payment to the SEC of the fees collected for the last four months of 2003. As we will explain below, a change in the collection approach as proposed by the Commission would appear to necessitate a material change to NYSE Rule 440H, which could not easily be adjusted retroactively, since it represents monies already collected by member firms from their customers for the specific purpose of funding the Section 31 fee obligation.
Given the foregoing difficulties with retroactive application of the fee collection proposals, the Exchange strongly prefers that the Commission impose the new regimen only on a going forward basis, and with a suitable lead-in period to allow system development and testing. Ideally, we would prefer that the Commission implement the new system with effect from the beginning of the U.S. government's next fiscal year, October 1, 2004.
Open issues regarding prospective implementation.
There are also some open issues that have to be addressed across all SROs so that NSCC can in fact provide the service contemplated in the release. One area involves the proper treatment of step-out trades, correspondent clearing trades, riskless principal trades and universal "flips". The issue is whether they should be treated as separate trades or not.1 We believe the SROs and NSCC will require guidance from the SEC in order to make a final determination on this set of issues. Another issue that may require SEC input is whether data should be calculated based on trade date or settlement date. It is our understanding that NSCC believes settlement date data is preferable, since trade date data may be modified prior to settlement, which would impact the ultimate calculation. NYSE has traditionally used settlement date data, so we agree with NSCC's position on this matter. Other SROs, however, have traditionally used trade date data, and may be reluctant to change. We agree with NSCC that for the process proposed by the SEC to work, everyone must use the same basis for calculating the data.
There are some other, more mechanical issues that remain to be worked out among the SROs and NSCC. One is to make sure that reversals and corrections are properly identified. Another is making sure that NSCC obtains certain data it now does not, such as internalized trades reported to ACT, and non-regular way trades done away from the listed market.
To the best of our knowledge the SROs and NSCC are working expeditiously to address all these various issues. We are confident the SEC staff will be able to assist where such assistance is required to resolve matters. Our primary concern is that we and NSCC be provided adequate opportunity to address the various open issues and complete the systems development work necessary to implement the new process.
NYSE rule change.
As noted earlier, the new approach to collection of Section 31 fees would appear to necessitate a change to the NYSE rule that has long governed member firm collection from securities customers.
The Exchange rule, NYSE Rule 440H, was enacted as part of a self-reporting regimen that was based essentially on collections from securities customers under specific procedures prescribed by the Exchange and approved by the SEC. Under the new approach dictated by the Proposal, the NYSE is concerned that its existing rule will no longer be adequate or the most appropriate way to address the collection issue between the member firms and the Exchange. If the Exchange is to avoid a mismatch between what it is billed by the SEC and what it collects from the firms, the most appropriate course would appear to be for the NYSE to switch to billing the firms. Such bills would be based on the data produced by NSCC, the same data that would form the basis for the SEC bills to the SROs.
The Exchange recognizes that this would in turn require the firms to reconsider how they would charge their customers to fund the firm's obligation to the Exchange, as that charge would no longer be one prescribed by Exchange rule.
The Exchange is open to discussing with the firms an alternative to pure Exchange billing. However, the Exchange will want to be sure that any methodology that is proposed - that continues reliance on Exchange rules to prescribe the amount to be collected - is able to achieve collections from customers that are as accurate as possible. Absolute precision is likely not possible, if only because of the need to round off amounts collected to whole cents. Nonetheless, the rounding convention that has historically been used can likely be improved upon - the challenge is to find a convention that permits the SROs and firms to have reasonable confidence that there will not be shortfalls in the amounts collected.
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Thank you for the opportunity to comment on this important Proposal. As indicated above we will continue to cooperate with NSCC, the other SROs and the member firms to address the issues that must resolved to implement the new collection regimen in a fair, efficient and thorough manner. If we can answer any other questions that the Staff may have, please do not hesitate to call on us.
Very truly yours,
/s/ Darla C. Stuckey