EXHIBIT D

2419

New York Stock Exchange, Inc. Rule 419

Financial Statements to Customers

Rule 419. (a) Customers, Stockholders and Capital Contributors

Each member organization, except one subject to supervision by State or Federal banking authorities, shall make available to any customer and to any partner, stockholder or subordinated lender of such organization at his request a statement of its financial condition, in the form prescribed by paragraph (c) of this Rule, as of the date of its most recent answer to the financial questionnaire of the Exchange or as of a date subsequent thereto.

Each statement of account sent to a customer pursuant to Rule 409 shall bear a legend as follows:

"A financial statement of this organization is available for your personal inspection at its offices, or a copy of it will be mailed upon your written request."

Within ninety-five days of the date of the annual surprise audit pursuant to Rule 417, each customer, partner, stockholder and subordinated lender shall be sent either:

(1) A statement of financial condition of the organization based upon such audit, including the independent public accountant's report on the statement of financial condition of the organization, or if the audit is not completed,

(2) Appropriate notice disclosing the reason such financial statement has not yet been made available. A financial statement of the organization, based on such audit must be mailed to all customers, partners, stockholders and subordinated lenders as of the time when such statement becomes available for distribution.

(Note: The term "customer" as used in the above Rule means any person or party who either at the time of requesting such a financial statement or at the time of the distribution of such audited annual statement has an open account with the member organization.

Each member organization shall file with the Department of Member Firms of the Exchange copies of interim quarterly and annual fiscal unaudited reports required to be publicly disclosed prior to such public disclosure, and, promptly after completion of the required annual surprise audit, an exact copy of the statement of financial condition, based upon such audit, which the firm intends to submit to its customers. However, copies of other unaudited statements of financial condition made available or distributed to customers at other times need not be filed with the Department of Member Firms unless the organization has not been in existence a sufficient length of time to have had such a required annual audit.)

Each member organization shall report to the Exchange any material unsecured or partly secured loans, drawings in excess of share of profits, or other obligations owed to the member organization by (a) any person, including subordinated lenders having a capital interest in the member organization, (b) any employee of the member organization, or (c) any other corporation, firm or entity in which any member, allied member or employee of the member organization holds office or has a material financial interest. This report may show such obligations owed to the member organization by category without personal identification, except that personal identification shall be made in respect to any person having such obligations equal to five percent or more of the member organization's net worth (exclusive of subordinated borrowings).

(b) Public Disclosure

Each member organization, except one subject to supervision by State or Federal banking authorities, which has outstanding any freely transferable securities shall, unless all such freely transferable securities are held only by members, allied members or employees of the member organization, make prompt public disclosure of the following: (1) quarterly and annual audited or unaudited statements of financial condition and the annual statement of financial condition as of the date of the surprise audit required by Rule 417, all in the form prescribed by paragraph (c) of this Rule; (2) unaudited or audited (if an audit has been effected) quarterly statements of earnings and an annual statement of income and changes in stockholders' equity of such member corporation and subsidiaries required to be consolidated in accordance with generally accepted accounting principles (with appropriate disclosures in connection with such subsidiaries which are not consolidated) all in the form prescribed by paragraph (c) of this Rule: (3) any change in dividend policy; (4) any stock split or recapitalization: (5) any major management changes; (6) any merger or consolidation; (7) any acquisition or disposition of assets not directly related to the ordinary transaction of business as a broker or dealer in securities, representing an amount in excess of ten percent of the member organization's net worth (exclusive of subordinated borrowings) or stockholders' equity; and (8) any other timely significant fact. Each member organization, except one subject to supervision by State or Federal banking authorities, shall make immediate public disclosure (including releases to news media) of any non-compliance with the minimum net capital requirements of Rule 325 of the Exchange, which continues for fifteen days or more following the determination of the occurrence of such violation of said Rule.

For the purposes of items (1) and (2) in the above paragraph, "prompt public disclosure" shall mean release within 45 days of the close of an accounting period as of which unaudited financial statements are to be disclosed and within 95 days of the close of an accounting period as of which audited financial statements are to be disclosed. At a minimum, public disclosure also requires that a release should be given to Dow Jones & Company, Inc., Reuters Economic Services, Associated Press or United Press International, and to The New York Times, and to a newspaper (s) of general circulation in the city where the member organization is headquartered. A copy of the written release must be maintained for at least three years.

(c) Form of Financial Statements

Statements of financial condition and related statements of earnings shall be reasonable, fair and clear presentations of the financial position of the member organization and the results of its operations for the period, prepared in conformity with generally accepted accounting principles and shall include in such financial statements and accompanying footnotes all necessary informative disclosures.

Each statement of financial condition with respect to each member corporation which has outstanding any freely transferable securities shall, unless such freely transferable securities are held only by members, allied members or employees of the member organization, be footnoted by a schedule of

material unsecured or partly secured loans, drawings in excess of share of profits, or other obligations owed to the member organization by (a) any person, including subordinated lenders having a capital interest in the member organization, (b) any employee of the member organization, or (c) any other corporation, firm or entity in which any member, allied member or employee of the member organization holds office or has a material financial interest. This footnote may show such obligations owed to the member organization by category without personal identification, except that personal identification shall be made in respect to any person having such obligations equal to five percent or more of the member organization's net worth (exclusive of subordinated borrowings).

The quarterly and annual statements of earnings also shall disclose adequately:

(a) major sources of income, expenses, Federal income tax and net earnings;

(b) earnings per share appropriately expressed;

(c) substantial items of unusual or non-recurrent nature.

Where continuity of the organization permits, the statement of financial condition and the quarterly and annual statements of earnings should be in comparative form commencing with the fourth quarter of the year 1971.

Disclosure of any financial statement based on an audit by independent public accountants must include the auditor's (opinion) report.

(See Par. 2325.30 for disclosure of subordinated borrowings in financial statements to customers.)

(d) Exceptions

The Exchange may in unusual circumstances grant approval for exceptions from specific provisions of this Rule for a limited time, based upon written application by the member organization clearly setting forth the need and circumstances for the request.

Amendments.

June 19, 1969.

February 24, 1971.

Mr. Moss. Thank you very much.

Mr. Andrew Barr.

STATEMENT OF ANDREW BARR, CHIEF ACCOUNTANT, SECURITIES AND EXCHANGE COMMISSION

Mr. BARR. Mr. Chairman and members of the committee, I am Andrew Barr, chief accountant of the Securities and Exchange Commission. I will keep my summary rather brief. The first point in the outline is the question of whether we should adopt uniform accounting procedures. We take the position, which you have heard before, that uniform reporting is a feasible approach and has better prospects of results. And we are prepared to cooperate with others in an effort to develop a uniform system of reporting.

On the question of customer disclosure of broker-dealer financial condition, I stated in my prepared paper that the time has come to improve reporting for customers, and at this time the Commission staff is working on a proposal to accomplish this.

All of the points raised in the subcommittee's outline are being considered, and again we think this is a matter that requires cooperation among all of the parties here this morning so that we won't have a proliferation of ideas in how to do this. So we are prepared to cooperate in this area.

On the matter of audit procedures, auditing is no substitute for management. We hold that management is responsible for running the business and preparing a proper record.

Our form X-17A-5 is one of the few questionnaires-in fact the only one that prescribes a minimum audit procedure. The prescription is more extensive than you will find for commercial and industrial companies, as Mr. Dill has outlined. We are now working with Mr. Dill's committee, as he stated and as Mr. Grannis has stated, in reviewing a present exposure draft on a new audit guide in this area.

On the question of the surprise audit, our rules don't require a surprise audit, but the filing date for the annual report on 17A-5 is such that we encourage surprise audits. We are not prepared to abandon them, but we are prepared to discuss feasible alternatives that would serve some of the advantages of a surprise audit.

Mr. Grannis has outlined, and Mr. Dill, the problems here of multiple use of reports and the absolute necessity of reviewing this problem.

On the question of rotation of auditors, we have taken a different approach to this matter, and we just published today a release which will require a report by management when they change auditors because of some disagreements over an accounting matter. Accompanying that report must be a letter from the accountants, saying that they either disagree or agree with the statement made by management in this respect. These will go in the public file. I have a copy of that release if the committee would like to have that added to the record.

Mr. Moss. Without objection, the item will be received and included in the record immediately following your prepared statement.

Mr. BARR. Thank you, sir. I think that is all that I need to say at this time. My predecessors have covered the subject pretty thoroughly, so I will let that stand.

(The prepared statement of Andrew Barr and the release referred to follows:)

STATEMENT OF ANDREW BARR, CHIEF ACCOUNTANT, SECURITIES AND EXCHANGE COMMISSION, BEFORE THE SUBCOMMITTEE ON COMMERCE AND FINANCE OF THE HOUSE OF REPRESENTATIVES COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE

1. UNIFORM ACCOUNTING PROCEDURES

In responding to the questions in this part of the outline, it is assumed that the term "Uniform Accounting Procedures" (UAP) is intended to mean a uniform system of accounts rather than uniform reporting. At this time neither the Commission nor any of the various self-regulatory bodies prescribe UAP for the securities industry; however, the specific nature of the reporting requirements of the two basic financial reports which broker-dealers are required to file with the Commission and the appropriate self-regulatory authorities pursuant to rules under the Securities Exchange Act of 1934 on Forms X-17A-5 and X-17A-10,1 or their equivalent, and the Income and Expense Report filed with the NYSE by its members are such that a reasonable degree of uniformity of reporting exists among broker-dealers of a given size group.

(a) How significant an effort would be involved in establishing uniform accounting procedures in terms of cost and time invested? To what extent would there be a disruptive effect on business?

The development of UAP would require a substantial effort on the part of Commission staff and outside parties inasmuch as it would require a definition and codification of existing practice and a reconciliation of the differing views on all aspects of recordkeeping to achieve uniformity of practice. This would necessarily involve some arbitrary decisions. Since, directly or indirectly, the project would affect all broker-dealers, the various national securities exchanges, the NASD, and the accounting profession, the experience and views of these groups would have to be considered. The nature of this type of project is such that conceivably a period of several years might be involved in its development. Our general experience in the development and revision of our rules is such that it is not possible to evaluate the dollar cost of the time which would have to be applied to the project either on the part of the Commission staff or outside interested parties.

The process of development of uniform accounting procedures would not in itself have a disruptive effect on business but their adoption would undoubtedly require extensive changes in the existing accounting systems of many brokerdealers. Assuming that a compelling need is demonstrated for UAP, the impact of implementing such a system could be lessened to some degree by the investment community's participation in the development of such a system and by giving sufficient advance notice of the effective date of adoption of the uniform accounting procedures.

A particularly important consideration in the adoption of uniform accounting procedures is that they must be continually reviewed and amended to reflect the changing nature of the business, new accounting standards and changes in the regulatory purpose for which they may be prescribed.

(b) If uniform accounting procedures could be developed, what would be gained? For example, would they provide meaningful data for measuring the reasonableness of commission rates and possibly establishing separate charges for various types of services as customers may desire?

In judging the benefit to be derived from UAP, consideration must be given to the use to be made of reports which will be prepared from accounts maintained

1 The Form X-17A-5 report is basically a regulatory document consisting of a detailed financial questi onnaire showing money balances and related security valuations accompanied by certain supporting schedules. The information presented must be sufficient to permit the determination of the financial condition of the respondent. Form X-17A-10 is a general information report and consists of an Introduction and three Parts. All broker-dealers must file the Introduction and, except for some relatively small brokers who meet certain specific exemptions, a financial report on Part I, II or III. Generally, the three Parts are designed for small, medium or large companies and the degree of detail on each Part corresponds to the size criteria. Each Part includes a statement of income and expenses, a statement of capital funds, and a statement of financial condition. In addition, certain statistical information concerning the number of personnel and number of transactions is required. Each Part is accompanied by instructions to aid respondents in its preparation.

For example, the comprehensive Financial Questionnaire that broker-dealers file with the Commission (Form X-17A-5) was extensively revised in 1967. Adoption of the amended Form in October 1967 followed public notice in August 1965 that the Commission was considering revisions and requesting comments. Thus, more than two years was required in this instance from public invitation for comment to adoption. This period, of course, does not include the time spent in developing the exposure draft. The cost in terms of man hours involving Commission staff and industry personnel cannot be determined.