After a battle that pitted community banks against money-center institutions, a proposed rule change that would encourage retail stockholders to settle trades electronically was rejected by the National Automated Clearing House Association.

The defeat late last month was a setback for the money-center banks that have been the biggest advocates of the proposal.

Big banks, led by the New York Clearing House Association, backed the proposed rule change as the most effective way to satisfy recommendations made by the Group of 30, an international body that has set guidelines for clearing and settling securities trades.

Many smaller banks disagreed. As primarily receivers of the transactions, they argued that the change would be costly in terms of software upgrades and training.

Benefits for Brokers

The proposal would have created a new class of automated clearing house transaction for securities and commodities payments that would eliminate the consumers' right to rescind a transaction for certain types of payments, so that brokers would feel more secure about using the automated clearing house.

Brokers would clear a stock purchase by electronically debiting a customer's account.

"We think we ought to try again, and do a better job of educating," automated clearing house members, said John F. Lee, president of the New York Clearing House Association. The rejected proposal "clearly is the simplest way to meet Group of 30 objectives.

N.Y. Link May Have Hurt

Mr. Lee said the rule changes might have been seen "as a New York idea -- that might be what hurt it."

The proposal placed "a lot of burden on receiving institutions. There was a lot of confusion about how to handle return items," said Joyce Carelli, training and membership director at the Florida Clearing House Association, which opposed the proposal. Nacha comprises 40 regional automated clearing houses.

The securities industry estimates that if a rule change were effected, at least half of the 160 million payments it receives annually by check would be sent electronically within three years. That would boost volume on the ACH, whose growth has been disappointing.

Increased volume would bring a new source of revenue to the banks that provide services to broker-dealers and mutual funds, mainly large New York banks.

Lower Operating Costs

Advocates of the change argue that receiving banks would also benefit by reducing their operating costs. It is less expensive to process an ACH debit than it is to process a check, and many of the checks written to pay for securities transactions must go through a signature verification process.

The rejection "is significant," said Jeremiah F. O'Leary, senior vice president at Chemical Banking Corp. "I would hope it would be reconsidered.

Although 23 of the national clearing house members favored the proposal, a large enough minority, 17, were opposed. According to the association's rules, if 25% of the members vote against a proposed rule change, the rule does not become effective.

Nacha's 14-member executive committee will meet this week to discuss whether to modify the proposal, to try again with the original plan, or to try to persuade the securities industry to use the ACH under existing rules, according to Elliott McEntee, president of Nacha.

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