WealthManagement Magazine

SEC Waiting for New NYSE E-mail Rules

The SEC has come under fire for not quickly approving several SRO proposals that could have opened the door to client E-mail. But now it's put the ball back into the NYSE's court.The industry expected the SEC to act on the E-mail issue last summer (see "SROs Act on E-mail," June 1997 RR, Page 71). The key development was a September 1996 NYSE proposal that would have eliminated its requirement that

The SEC has come under fire for not quickly approving several SRO proposals that could have opened the door to client E-mail. But now it's put the ball back into the NYSE's court.

The industry expected the SEC to act on the E-mail issue last summer (see "SROs Act on E-mail," June 1997 RR, Page 71). The key development was a September 1996 NYSE proposal that would have eliminated its requirement that all correspondence-including E-mail-be reviewed before being sent. The proposal would substitute a new standard of "reasonable supervision," after the fact, for most client communications. The NASD submitted a similar proposal to the SEC in mid-April. The SEC was expected to act quickly, but it hasn't.

The NYSE's proposed rule would allow for some flexibility in what firms review. Client communications that include research reports, advertisements or marketing materials still would be subject to prior review, and the firms would have to educate their reps on the use of E-mail and document that training.

But the SEC believes that the NYSE has to provide firms with greater guidance, according to Robert Colby, the SEC's deputy director of market regulation. The NYSE rule as originally proposed would have "left almost all of the decisions as to what was adequate up to the examination process," he says. The SEC wants to see "more specificity as to what the factors were" in determining reasonable supervision.

The NYSE refused to comment, but Colby says the exchange is now working on a notice to members that will explain in greater detail how the rule will operate, and the SEC has "suggested that they try to be as clear as possible." The SEC, however, has no objections to the concept of reviewing E-mail after the fact, he confirms.

However, there's another angle to this, Colby says. Since the NYSE has consistently declined to speak about this issue, and the SEC normally doesn't comment on proposed rule changes, it's not apparent to most people in the industry that what the NYSE is proposing is really much broader.

The NYSE wants to move from a standard of "prior review of everything, to reasonable supervision of everything," including paper-based correspondence, Colby says. The proposed rule change doesn't specifically address E-mail or electronic correspondence; rather, it talks about "the procedures for review of communications with the public," Colby says, which includes all paper correspondence as well.

The fact that the proposal combines both paper and electronic communication makes the issue more complex. But the SEC "would have been concerned by the lack of clarity" in the NYSE proposal, "even if it had been just E-mail," Colby says.

The SEC believes that dealers need to continue reviewing all incoming paper correspondence because of problems that have occurred in the past such as checks being diverted or customer complaints being suppressed.

Diversion is not a problem on the electronic side, and with customer complaints delivered via E-mail, problems are less likely to occur because E-mail leaves an electronic trail, Colby says.

"Most people have focused exclusively on [outgoing] E-mail, and want to know: 'What's your problem, SEC?'" Colby adds. But it's the big changes being proposed in handling paper-based communications that's been the real reason why this has taken so long, he says. "We've talked to [the NYSE] several times, and I think we're close to seeing a filing that addresses our concerns."

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