FINRA Manual: Contents
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For Your Information
The NASD amended Section 1, Schedule A to the NASD By-Laws to increase the credit against a member's annual gross income assessment from 62 to 67 percent for calendar year 1993. The credit will be reduced to 59 percent for 1994.
Because members have already paid their 1993 assessments with the 62 percent credit in effect, the increase to 67 percent will create a credit balance in their accounts for 1993 that the NASD will carry forward and apply to 1994 assessments. The first assessment invoices for 1994 will be based on 1992 gross income reported in 1993 with the 59 percent credit applied. After 1993 gross income reports are received in the spring of 1994, the NASD will, as has been the practice, adjust the mid-year assessment invoices to reflect 1993 actual gross income, less payments already made.
American Stock Exchange Increases Registration, Re-Registration, and Renewal Fees
Effective January 1, 1994, the American Stock Exchange (ASE) increased its agent registration fee to $45 and agent re-registration fee to $30. In addition, effective with the 1993-94 renewal program, the ASE's agent renewal fee increased to $25.
If you have any questions regarding these changes, please call the NASD's Member Services Phone Center at (301) 590-6500.
NASD Fingerprint Fee Increases
The Federal Bureau of Investigation is increasing its fee for processing fingerprint cards submitted to it for noncriminal licensing and employment purposes. Effective January 3, 1994, the fingerprint fee for processing initial submissions and the third submission will increase by $1.00 per card to $24.50 per card. The second submission will remain $2.50, provided that the illegible card is attached. If the illegible card is not attached, the fee per card will be $24.50.
The NASD amended Section 1, Schedule A to the NASD By-Laws to decrease the credit against a member's annual gross income assessment from 67 percent to 59 percent for calendar year 1994.
The decrease is based on the estimated operating budget for 1994 and is subject to revision based on final actual gross income reports for 1993. After the NASD receives 1993 gross income reports this spring, it will adjust the mid-year assessment invoices to reflect 1993 actual gross income, less payments already made.
Government Securities Act Expands NASD Authority
In November, Congress passed the Government Securities Act Amendments of 1993. The bill, which permanently reauthorizes the original Government Securities Act passed in 1986, gives the NASD full sales-practice authority over its members that conduct a government securities business. In addition to enforcing capital and recordkeeping rules for its government securities dealers, the NASD now will write and enforce sales-practice rules. The new legislation also requires the Federal Reserve and the SEC to study the effectiveness of private systems in disseminating price and volume information on government securities and permits the Treasury to require large-position reporting.
CMO/REMIC Brochure Can Help You Meet New NASD Requirements
The NASD has recently mandated that securities dealers provide investors with materials to ensure that they are fully educated about Collateralized Mortgage Obligations (CMOs)/Real Estate Mortgage Investment Conduits (REMICs).
The Public Securities Association (PSA), the international trade association of dealers in mortgage-backed securities, has published An Investor's Guide to REMICs, a 32-page booklet explaining the fundamentals of REMICs, their credit quality, interest and prepayment rates, tranches, types of REMICs, settlement and payment dates, minimum investments and liquidity, tax considerations, and other key points that every investor must know. It also features a worksheet, Questions You Should Ask Before Investing, and a full glossary of terms.
Copies of this brochure can be ordered directly from the PSA's Publications Department. The minimum order is 50; they can also be imprinted with your company's logo with a minimum order of 1,000. For pricing information, call Cheryl Dantoni at (212) 440-9430 or write to the Public Securities Association, ATTN: Publications Department, 40 Broad Street, New York, NY 10004-2373.
SEC Issues Alert Regarding So-Called "Prime" Bank And Similar Financial Instruments
On November 2, 1993, the SEC issued a Commission Information for Investors bulletin to alert investors and regulated entities to the recent escalation in the number of possibly fraudulent schemes involving the issuance, trading, or use of so-called "prime" bank, "prime" European bank, or "prime" world financial instruments. The complete text of that bulletin is reprinted on the following pages.
Information for Investors
From the U.S. Securities and Exchange Commission
So-Called "Prime" Bank and Similar Financial Instruments
The Securities and Exchange Commission ("Commission") is alerting investors and regulated entities to the recent escalation in the number of possibly fraudulent schemes involving the issuance, trading or use of so-called "prime" bank, "prime" European bank or "prime" world bank financial instruments.1 These instruments typically take the form of notes, debentures, letters of credit, and guarantees. Also typical in the offer of these instruments is the promise or guarantee of unrealistic rates of return; e.g., a 150 percent annualized rate of "profits." Common targets of these schemes include both institutional and individual investors, who may also be induced to participate in possible "Ponzi" schemes involving the pooling of investors' funds to purchase "prime" bank financial instruments.
On October 21, 1993, the federal financial institution supervisory agencies2 issued an Interagency Advisory to their regulated financial institutions. The Interagency Advisory also warned of the use of schemes involving "prime" bank financial instruments and noted that:
- The agencies had been advised that "individuals have been improperly using the names of large, well-known domestic and foreign banks, the World Bank, and central banks in connection with their 'Prime Bank' schemes."
- These institutions "had no knowledge about the unauthorized use of their names or the issuance or anything akin to 'Prime Bank'-type financial instruments."
- The staffs of the federal financial institution supervisory agencies are unaware of the legitimate use of any financial instrument called a "Prime Bank" note, guarantee, letter of credit, debenture, or similar type of financial instrument
- Financial institutions should be attentive to the attempted use of traditional types of financial instruments that are referred to in an unconventional manner, "such as a letter of credit referencing forms allegedly produced or approved by the International Chamber of Commerce."
As to this latter point, the Interagency Advisory referred to examples of "bogus schemes involving the supposed issuance of an 'ICC 3034' or an 'ICC 3039' letter of credit by a domestic or foreign bank."
The Interagency Advisory also noted that many of the illegal or dubious schemes that have come to the attention of regulatory agencies "appear to involve overly complex loan funding mechanisms." In the eyes of an unsophisticated investor, this complexity may make a questionable investment appear worthwhile. The Commission warns investors and those who may advise them, particularly broker-dealers and investment advisors, of this possible hallmark of fraud and reminds them of a basic rule for avoiding securities fraud, "If it looks too good to be true, it probably is!"
1 These schemes do not involve the offer or sale of financial instruments issued by any financial institution having the word "prime" in its name; rather, that word (or a synonym, as in the phrase "top fifty world banks") is used to refer, generically, to financial institutions of purportedly high repute and financial soundness.
2 These agencies are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
* * * * *
The Commission requests that those with information regarding the offer or sale of "prime" bank or similar financial instruments provide that information to one of the Commission offices listed below. When information is sent to one of the Commission's regional or district offices, it should be sent to the attention of the Assistant Regional Administrator (Enforcement).
Northeast Regional Office
7 World Trade Center
New York, NY 10048
Boston District Office
73 Tremont Street
Boston, MA 02108-3912
Philadelphia District Office
The Curtis Center, Suite 1005 E. 601
Philadelphia, PA 19106-3322
FAX: (215) 597-5885
Southeast Regional Office
1401 Brickell Avenue
Atlanta District Office
3475 Lenox Road, N.E.
Atlanta, GA 30326-1232
Midwest Regional Office
Northwestern Atrium Center
500 West Madison Street
Chicago, IL 60661-2511
Central Regional Office
1801 California Street
Denver, CO 80202-2648
Fort Worth District Office
801 Cherry Street
Fort Worth, TX 76102
Salt Lake District Office
500 Key Bank Tower
50 S. Main Street, Suite 500
Salt Lake City, UT 84144-0402
Pacific Regional Office
5670 Wilshire Boulevard
Los Angeles, CA 90036-3648
San Francisco District Office
44 Montgomery Street
San Francisco, CA 94104
FAX: (415) 705-2501
Seattle District Office
3090 Jackson Federal Building
915 Second Avenue
Seattle, WA 98174
FAX: (206) 220-7560
Division of Enforcement
Mail Stop 4-8A
Washington, DC 20549
Exercise Caution When Opening New Offshore Accounts
The NASD Market Surveillance Department has been advised that a number of member firms have opened new accounts with customers who represented themselves to be corporate/institutional type accounts domiciled offshore who were unknown to the firms. These accounts are dealing in large dollar transactions and are not fulfilling contractual obligations to pay for the transactions, often resulting in significant losses for the firms executing the transaction. Accounts of this nature have been identified at firms in New York and Texas. The NASD investigation of these matters continues, and in the meantime, the NASD recommends that members be particularly careful when approached to open such accounts for customers unknown to the firm.
NASD Member Voting Result
As a member service, the NASD publishes the result of member votes on issues presented to them for approval in the monthly Notices to Members. Most recently, members voted on the following issue:
- Notice to Members 93-76—NASD Solicits Member Vote on Filing Requirements for Use of Mutual Fund Rankings and Elimination of Sunset Provisions in Prefiling Requirements for CMO Advertisements; Last Voting Date: December 31, 1993. Ballots For 1,759; Against 333; and Unsigned 15.
Correction To Notice to Members 94-1
Under the definition of the term "maximum order size" on page 3 of Notice to Members 94-1 dated January 5, 1994, the line of copy beginning at the bottom of the middle column and carrying over to the top of the last column incorrectly reads "Maximum order sizes for NASDAQ/NMS securities shall be 200, 500, or 1,000 shares depending upon trading characteristics of the securities." It should read "Maximum order sizes for NASDAQ/NMS securities shall be 200 or 500 shares depending upon trading characteristics of the securities," with the words "or 1,000" deleted.
SEC Issues No-Action Letter Regarding Prime Broker Arrangements
On January 25, 1994, the Securities and Exchange Commission (SEC) issued a no-action letter that permits broker/dealers to treat a prime broker account as if it were a broker/dealer credit account pursuant to Section 220.11 of Regulation T.
The term "prime broker account" refers to an account maintained by a broker/dealer (usually a full-service firm) to facilitate the clearing and settling of securities transactions for substantial retail and institutional customers that are active market participants. A unique feature of these accounts allows the customer to place orders directly with one or more other registered broker/dealers (the executing broker).
The letter, which was issued by the SEC Division of Market Regulation after consultation with the Division of Banking Supervision and Regulation of the Federal Reserve System, establishes certain conditions that broker/dealers must meet to treat these accounts in this manner. In particular, the letter clarifies the responsibilities and obligations of the prime broker, the executing broker, and the customer.
The position is effective on an interim basis until December 31, 1995. During this time period, the SEC will review the operation of these accounts to determine whether to extend, modify, or terminate its no-action position.
Members maintaining prime broker accounts for their customers are urged to review the no-action letter in its entirety. If you participate in these prime broker arrangements and have not already received a copy of the letter, please contact your local NASD district office.
NASD Member Voting Results
As a member service, the NASD publishes the result of member votes on issues presented to them for approval in the monthly Notices to Members. Most recently, members voted on the following issue:
- Notice to Members 93-82— NASD Solicits Member Vote On Proposed Amendment Exempting Money Market Mutual Funds From Disclosure Requirements. Ballots For: 1,874; Against: 242; and Unsigned: 9.
Correction to Notice to Members 94-8
Please note in your copy of Notice to Members 94-8 that the missing fourth line from the top of the third column on page 41 should read "Rule 15c2-11." We regret any confusion this may have caused our readers.
NASAA Publishes Revisions To Form U-4 And DRP For Public Comment
The March 1994 edition of CCH NASAA Reports includes, for public comment, certain proposed revisions to Page 3 of Form U-4 and the Disclosure Reporting Pages (DRP). These changes represent an effort to categorize disclosure information and customize the reporting forms. Disclosures submitted in this format will be more precise, uniform, and consistent with the specifications being created for the redesigned Central Registration Depository (CRD).
The revised Form U-4 will not be implemented before the new CRD; however, the North American Securities Administrators Association (NASAA) has proposed these changes at this time to allow for development of the system and conversion of existing disclosure information to the new format. Additionally, the Securities and Exchange Commission (SEC) requested amendments to Item 7 on Page 4 of the Form U-4 to accommodate the consent to service of process and investigative subpoenas or other documents in administrative and civil proceedings initiated by the SEC and the Commodity Futures Trading Commission (CFTC).
The redesign of CRD will require additional changes to the Form U-4 and revisions to other forms.
Publication of these changes for comment should occur later this year, with final implementation expected to coincide with the new CRD.
Special Regulatory Alert
March 10, 1994
NASD Reiterates Members' Firm-Quote Obligations
During the past several weeks the SelectNetSM system has experienced a marked increase in the number of preferenced orders priced at the inside, entered in the system and an increase in the number of backing away complaints. The reliability of market makers' disseminated quotes and the assurance to market participants that they can trade at these quotes is one of the fundamental operating principles of The Nasdaq Stock Market™ (Nasdaq) that ensures the fair, efficient, and orderly operation of Nasdaq and the protection of investors.
Under the SEC's "firm-quote rule," Rule 11Acl-1, a market maker has the obligation to execute an order "presented" to it at its displayed quotation up to its displayed size. Additionally, Article III, Section 6 of the NASD's Rules of Fair Practice and Part V, Section 2(b) and Part VI, Section 2 of Schedule D to the NASD's By-Laws require market makers to honor their quotes up to their displayed size. A market maker is relieved from its firm-quote obligation if: (i) the market maker sends a quote change to the NASD before an order is presented or (ii) the market maker has effected or is in the process of effecting a transaction at the time an order sought to be executed is presented and immediately upon completion of the transaction communicates a revised quotation to the NASD. Thus, a market maker's firm-quote obligation with respect to a particular order is triggered when that market maker becomes aware of, or should reasonably be aware of, the pendency of that order.1
The NASD takes most seriously its regulatory obligation to ensure that NASD members fully comply with the SEC's firm-quote rule. When presented with a backing away complaint, the NASD conducts a preliminary facts and circumstances analysis to determine when an order was presented to a market maker and whether the market maker was entitled to rely on an exemption from the firm-quote rule. Thereafter, the NASD vigorously and thoroughly investigates all valid backing away complaints and will not hesitate to take prompt and appropriate disciplinary action when warranted.
Following are some guidelines that market makers should follow when simultaneously handling orders from multiple sources:
- Once a market maker becomes aware of the receipt of an order, regardless of how the order is transmitted to the market maker, it is obligated under the firm-quote rule to process and execute that order at its disseminated quote up to its displayed size, absent an exemption from the firm-quote rule.
- Preferenced orders received through SelectNet should be monitored with the same degree of diligence afforded other means of traditional order communication.
- If a market maker failed to act on a preferenced SelectNet order before it "timed out" and did not execute any other order during the time that SelectNet order was pending, the NASD will infer, in the absence of convincing contrary evidence, that the market maker saw the SelectNet order and backed away from its quote. The NASD also would draw the same inference if the market maker changed its quote while the order was pending and did no trades during the pendency of the SelectNet order.
In addition, to facilitate the aggressive review of all backing away complaints in a prompt manner, and, when backing away is established, to permit resolution that benefits the complainant, the NASD believes it is incumbent on members alleging backing away to raise their complaints in a timely manner. Moreover, the NASD believes that it is inappropriate for a firm to defer pursuing a backing away complaint, particularly in instances where the firm has an opportunity to determine if the market is moving in an advantageous direction for its order.
- Members complaining of backing away should contact, or take reasonable steps to contact, the relevant market maker as soon as possible after the alleged backing away. While it is difficult to establish a hard and fast rule governing when backing away complaints should be lodged with the relevant market maker, the NASD notes that the Intermarket Trading System Plan entered into and followed by the NASD and every national securities exchange provides that trade-through complaints must be lodged within five (5) minutes of the alleged trade-through. Thus, a member's failure to take reasonable steps to contact the relevant market maker within five (5) minutes after the alleged backing away will be a very important factor that the NASD will consider when evaluating what action, if any, may be appropriate in response to a backing away complaint. The market maker also should ensure that it has the ability to timely receive and respond to potential backing away complaints.
- If contact with the relevant market maker does not resolve the alleged backing away, the complaining member should notify the NASD's Market Surveillance Department within fifteen (15) minutes after the alleged backing away occurs, either by phone at (301) 590-6080 or by fax at (301) 590-6671. A member's failure to take reasonable steps to notify the NASD within fifteen (15) minutes of the alleged backing away will be a very important factor that the NASD will consider when evaluating what action, if any, may be appropriate in response to a backing away complaint. Thereafter, the complaint also must be filed on an official backing away complaint form within twenty-four (24) hours of the alleged backing away, copies of which can be obtained by contacting Market Surveillance at (301) 590-6080.
- Recently, some order-entry firms have been cancelling their preferenced SelectNet orders within the minimum three-minute time period that the order is pending without having received a "decline" from the relevant market maker and, thereafter, alleging backing away. The NASD notes that the cancellation of preferenced SelectNet orders which have not been declined effectively precludes market makers from satisfying their firm-quote obligations. Thus, members should be advised that their cancellation of preferenced SelectNet orders before a market maker has declined the order or before the order "times out" will generally be deemed conduct evidencing a lack of an intent to trade, thus precluding the member from raising a valid backing away complaint.
Questions regarding this notice may be directed to Bernard Thompson, Assistant Director, Market Surveillance, at (301) 590-6436, Sheila Dagucon, Market Surveillance, at (301) 590-6432, Robert Aber, Vice President & General Counsel, at (202) 728-8290, or Thomas Gira, Assistant General Counsel, at (202) 728-8957.
National Association of Securities Dealers, Inc. • 1735 K Street, NW Washington, DC 20006-1506 • (202) 728-8000
1 The Policy accompanying Article III, Section 6 of the NASD's Rules of Fair Practice also imposes upon market makers an obligation to monitor orders being received.
NASD Mail Insurance Program Provides Low-Cost Security
The NASD Member Purchasing Service is constantly striving to provide protection in areas that are of paramount concern to our member firms. After discussing the shipping schedules and subsequent mail insurance needs of a number of our members, the NASD has developed a comprehensive mail insurance program that is specifically customized for the securities industry.
In our discussions with members, they noted the features they'd like in a mail insurance program. They want coverage that extends to all sources of shipping, including their transfer agents and independent contractors, and that wouldn't require reporting, auditing, or back billing of shipments. They cited their frustration with cumbersome reporting and additional premiums associated with many insurance programs on the market. In response, with the assistance of Seabury & Smith, the program's administrator, and the Aetna Casualty and Surety Company, we have developed the NASD-sponsored Mail Insurance Program. This program covers transfer agents, independent contractors, and incoming shipments. In addition, it does not require reporting, auditing, or back billing of shipments.
The NASD-sponsored Mail Insurance Program was designed on a "Non-Reporting Basis," which means your initial cost will remain intact throughout the policy term. You might find a less expensive mail insurance product in the marketplace, but it will probably require the maintenance of a shipping log for back-billing purposes and ultimately cost you more money. Not only is the NASD-sponsored Mail Insurance Program cost-effective, its non-reporting feature provides a simplified approach in which to provide coverage for your valuable shipments. Comparable policies would require up to three times as much in annual premiums.
If you'd like more information on the NASD Mail Insurance Program, phone Kathy Jacobson, Seabury & Smith, (800) 922-9242 or direct, (202) 296-9640.
NASD Initiates New Subordination Filing Procedures
Many securities dealers tend to rely on their blanket fidelity bond to provide coverage for their shipments. Although the Form 14 or Securities Dealers Blanket Bond affords protection for securities, coverage is only provided while the shipment is on-premises or in the custody of a messenger, and ceases once the package is placed in the mail or in the custody of a Carrier for Hire. Moreover, most of the overnight carriers fail to provide any coverage for shipments. Other firms rely on coverage provided by the U.S. Postal Service, which provides insurance for shipments via registered mail. Unfortunately, the U.S. Postal Service provides a mere $25,000 of coverage for registered mail shipments, leaving most members significantly underinsured.
As of April 1, 1994, the NASD transferred responsibility for processing and approving subordination agreements to the local district offices. Please note that the transfer date for the New York District Office is July 1. As of the effective transfer date, members should cease sending these filings to the NASD Washington, D.C., Office.
Members must now file proposed agreements with the district office for the district in which the member maintains its principal place of business. All subordination agreements, with the original copy manually signed, must be filed, in duplicate, at least 30 days before the agreement's proposed effective date (10 days for temporary subordination agreements).
Renewals of existing subordination agreements, as well as requests for prepayment, assignments, and conversions to capital, also must be filed with the appropriate district office.
The NASD has standardized forms for subordinated loan agreements and secured demand note agreements. Use of the standardized forms, which are available from the district offices, will facilitate review by the NASD and reduce processing time. Members should note that there is no change to how these forms are completed, or to the required documentation; the only change involves sending the completed forms to the appropriate district office, rather than the Washington, D.C., Office.
The NASD believes that this change will result in greater efficiency and will improve service for members. Questions concerning subordination agreements may be directed to members' local district offices.
SEC Approves Several NASD Proposals
On March 7, 1994, the Securities and Exchange Commission (SEC) approved an amendment to add new Subsection (b)(6) (G), Article III, Section 44 of the Rules of Fair Practice. This new rule requires that members file with the Corporate Financing Department a detailed explanation of, and any documents related to, any change in or modification of any item of underwriting compensation made after the NASD has reviewed and approved the proposed compensation arrangements for a public offering. This change ensures that NASD staff are notified of changes to previously approved underwriting arrangements.
The SEC also approved amendments to Subsection (b)(10)(B), Article III, Section 44 of the Rules of Fair Practice and Subsection 6(b), Schedule A to the By-Laws to clarify that the calculation of the additional fee required as a result of additional securities being offered pursuant to an amendment to the initially filed documents shall be equal to .01 percent of the result of the number of new shares being offered multiplied by the offering price of the new shares.
Finally, the SEC approved an amendment to Subsection 3(c), Schedule E to the By-Laws to remove the phrase "without limitation as to the amount of securities to be distributed by the member." The phase is a carryover from an early provision of Schedule E, eliminated in 1988, that restricted a member's participation in the syndicate or selling group to an amount not exceeding 10 percent of the dollar amount of the offering underwritten on a firm commitment basis and managed by a qualified independent underwriter. When the restriction was in effect, Schedule E required two qualified independent underwriters. However, if the member's participation was limited to 10 percent or less, Schedule E required only one qualified independent underwriter. The removal of the 10 percent restriction provision renders the quoted phase unwarranted and no longer operable.
Nasdaq Now Reports Trades In Smaller Fractions
Since Monday, April 4, The Nasdaq Stock Market™ has been reporting last-sale transactions in fractions smaller that 1/8. Before then, most Nasdaq last-sale transactions were rounded to the nearest 1 /8 fraction with certain exceptions. Now all last-sale transactions are rounded to the nearest 1/64 fraction.
Credit Division Schedules Prime Brokerage Meeting
The Credit Division of the Securities Industry Association (SIA) has scheduled a special meeting on Prime Brokerage, Wednesday, June 22, 1994, at Salomon Brothers Inc., Executive Center, 39th Floor, Seven World Trade Center, New York, New York. Registration is at 8:30 a.m. For more information, please contact Arthur Quartermaine, President, SIA Credit Division, (212) 902-7891.
NAIC's "Own Your Share of America" Campaign Gets Underway
To increase direct individual investment, the National Association of Investors Corporation (NAIC) is conducting its third annual "Own Your Share of America" campaign. This month-long promotional effort is intended to encourage people to become direct owners of the common stock of publicly traded companies. The last two campaigns have proven quite successful with corporate participants reporting increases of as much as 20 percent in their employee stock purchase and investment programs during that time period.
The NASD supports NAIC's efforts because The Nasdaq Stock Market™ is the market of individual investors—they own 60 percent of Nasdaq® securities by market value, and their participation in this market is growing. According to recent survey data, between 1985 and 1990 the number of individual investors in Nasdaq securities jumped from 8.3 to 11.1 million, an increase of 33.7 percent.
If you or your firm would like more information on the program, call NAIC at (810) 543-0612 ext. 323, or write NAIC, P.O. Box 220, Royal Oak, MI 48068.
Treasury Proposal Would Affect Government Securities Broker/Dealers
The U.S. Department of the Treasury (Treasury) recently published for comment amendments to the financial responsibility requirements established under the Government Securities Act of 1986 (GSA). The proposed amendments raise the minimum capital requirements for all government securities broker/dealers subject to the provisions of Section 402.2 of the regulations implemented under the GSA, and require written notification for certain withdrawals of capital. The changes parallel recent Securities and Exchange Commission (SEC) actions in these areas. Treasury also is proposing a conforming change to its recordkeeping requirements. Comments are due on or before August 22, 1994. This rule will affect 15C sole government securities broker/dealers only.
The amendments create four minimum capital categories, to be phased-in over an 18-month period.
- Government securities broker/dealers that carry customer or broker/dealer accounts would be subject to a minimum level of $250,000.
- Government securities broker/dealers that carry customer accounts but operate under the exemption provided by Rule 15c3-3(k)(2)(i) would have a minimum requirement of $100,000.
- Government securities broker/dealers that introduce accounts on a fully disclosed basis and receive but do not hold customer securities would be subject to a minimum requirement of $50,000.
- Introducing firms that never handle customer funds or securities would be subject to a minimum requirement of $25,000.
The proposed notification provisions require post-withdrawal notification of certain significant capital withdrawals as well as prior notification for larger withdrawals. Whether notification is required prior to the withdrawal depends upon the aggregate size of total withdrawals relative to the government securities broker/dealer's excess liquid capital over a 30-calendar-day period.
- Aggregate withdrawals that exceed 20 percent of a government securities broker/dealer's excess liquid capital in a 30-calendar-day period require notification within two business days after the withdrawal.
- Aggregate withdrawals in excess of 30 percent of excess liquid capital in any 30-calendar-day period require notification two business days prior to such withdrawal.
The proposed rule excludes the reporting of net withdrawals that, in the aggregate, are less than $500,000 in any 30-calendar-day period or those that represent securities or commodities transactions between affiliates, except that forward settling transactions between affiliates are not eligible for this exclusion. The exclusion for securities and commodities transactions requires that the transactions be conducted in the ordinary course of business and settled no later than two business days after the date of the transaction.
Notification must be sent to the SEC and to the broker/dealer's designated examining authority, not to Treasury.
* * *
A Special Notice to Selected Members subject to the provisions of Section 402.2 of the regulations implemented under the Government Securities Act of 1986 will be distributed separately. These members are urged to review the proposed amendments in their entirety.
Questions regarding this Notice may be addressed to Brad Darfler, District Coordinator, (202) 728-8946.
CRD Enhanced For PHLX Dual Registration
Beginning August 1, 1994, a Central Registration Depository (CRD) enhancement will be rolled in for firms that are dually registered with the Philadelphia Stock Exchange (PHLX) and the NASD.
This enhancement is a result of a PHLX request made pursuant to Exchange Rule 604. The Rule was amended in 1993 to require all Series 7 General Securities (GS) Representatives to register with PHLX via CRD. A CRD conversion in October 1993 identified all NASD-GS approved agents with PHLX firms and added a PHLX-GS status line. Thereafter, PHLX/NASD registered firms were instructed to mark the "PHLX" box in Item 10 of Form U-4 on all initial, transfer, or amended applications requesting a GS license.
PHLX expressed a concern that omissions might occur respecting firm requirements to mark the PHLX box on these applications and would therefore fail to meet the Rule 604 requirement. The CRD enhancement will address this concern by systematically generating a PHLX-GS status line for any initial, transfer, or amended U-4 containing a GS registration request, even if the PHLX box is not marked.
In addition, a second conversion will take place the weekend of July 30-31 that will follow the same logic as the October 1993 conversion described above. (Duplicate PHLX-GS status lines will not be generated for agents already possessing one, however.)
If you have any questions, please contact Amy Kitzen, PHLX Market Regulation, at (215) 496-5378.
SEC Expands Wrap Fee Disclosure
The Securities and Exchange Commission (SEC) recently adopted amendments to the Investment Advisers Act of 1940 that require advisers sponsoring wrap fee programs to deliver to current and prospective clients a separate brochure describing the cost of the wrap fee programs and the services provided.
The specific information that must be included in the brochure is set forth in a new schedule, Schedule H, to Form ADV. The brochure must be delivered to prospective wrap fee clients and annually offered to an adviser's existing wrap fee clients.
Also, advisers must deliver the brochure to all clients on a one-time basis when the brochure is filed with the SEC. The brochure must be updated promptly for material changes; other changes must be added within 90 days after the end of the sponsor's fiscal year.
In addition, sponsors must file the brochure with the SEC as part of Form ADV. The amendments also mandate when the brochure must be updated. Sponsors must comply with the new requirements by October 1, 1994.
For complete details regarding these changes, members may refer to Release No. IA-1411, which was published in the April 26, 1994, Federal Register.
NAIC's "Own Your Share of America" Campaign Gets Underway
To increase direct individual investment, the National Association of Investors Corporation (NAIC) is conducting its third annual "Own Your Share of America" campaign. This month-long promotional effort is intended to encourage people to become direct owners of the common stock of publicly traded companies. The last two campaigns have proven quite successful, with corporate participants reporting increases of as much as 20 percent in their employee stock purchase and investment programs during that time period.
The NASD supports NAIC's efforts because The Nasdaq Stock Market™ is the market of individual investors—they own 60 percent of Nasdaq® securities by market value, and their participation in this market is growing. According to recent survey data, between 1985 and 1990 the number of individual investors in Nasdaq securities jumped from 8.3 to 11.1 million, an increase of 32.4 percent.
If you or your firm would like more information on the program, call NAIC at (810) 543-0612 ext. 323, or write NAIC, P.O. Box 220, Royal Oak, MI 48068.
NASD Extends Mutual Fund Reporting Deadline To 5:40 P.M.
The National Association of Securities Dealers, Inc. (NASD®), which collects and reports mutual fund net asset values (NAVs) to the public, extended the reporting deadline for them by 10 minutes to 5:40 p.m., Eastern Time, effective Monday, July 11, 1994.
The new deadline was set in consultation with representatives of the news media.
A representative from the Investment Company Institute (ICI) said that the trade association will encourage its mutual-fund members in a memo to make their best efforts to meet the new deadline and to alert the NASD in advance when the fund or reporting service may miss the deadline.
The NASD and the mutual fund industry are exploring ways to improve the technology used in collecting and reporting NAVs to vendors and the news media.
The NASD also issued procedures for funds to alert the NASD and the news media if delays occur in their reporting. These procedures will be distributed by the NASD and ICI to mutual funds.
Procedures For Alerting NASD And Media About Fund Delays
Farewell Reception And Retirement Dinner To Be Held For DTC Chairman
NASD and 25 other securities groups are sponsoring a reception and retirement dinner for departing DTC Chairman and CEO William T. Dentzer, Jr. The dinner will be held at the New York Hilton's Grand Ballroom September 20, 1994. Proceeds from the event will be contributed to the Securities Industry Foundation for Economic Education to establish the William T. Dentzer, Jr., Education Fund. For ticket information, call (212) 618-0580.
SEC Extends Comment Period On Proposed Capital Charges For Listed Options And Related Positions
The SEC is extending the comment period for Release No. 34-33761 (March 21, 1994, Federal Register) on proposed amendments to the net capital rule concerning capital charges for listed options and related positions. In its release, the SEC also solicited comments on the applicability of the proposed theoretical pricing haircut methodology to assess the market risk for OTC options. The new deadline for comments is now September 16, 1994.
Persons interested in submitting written comments should file three copies with Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Stop 6-9, Washington, D.C. 20549. All comments should refer to File No. S7-7-94.
Virginia, New Hampshire Provide IPO Exemption To Nasdaq National Market Securities
Securities listed on the Nasdaq National Market® are now regulated the same as securities listed on the New York and American stock exchanges in all 50 states. As of July 25, 1994, Virginia Securities Act Rule 504 is amended to grant an initial public offering (IPO) exemption from registration to Nasdaq National Market securities. Virginia was the last state that treated the Nasdaq market differently for "blue-sky" registration purposes. Since 1988 Nasdaq National Market securities have been granted an exemption by Virginia to trade six months after they have been issued without registration, although exchange-listed securities were exempt at issuance.
On August 8, 1994, a New Hampshire Securities Act amendment becomes effective to exempt IPOs listed on the Nasdaq National Market, as well as those listed on the New York and American stock exchanges. Issuers must pay a fee to claim the exemption. Before this amendment, IPOs listed on these three stock markets were required to register with the New Hampshire Bureau of Securities Regulation.
NASD Member Voting Results
As a member service, the NASD publishes the result of member votes on issues presented to them for approval in the monthly Notices to Members. Most recently, members voted on this issue:
- Notice to Members 94-22—NASD Solicits Member Vote On Proposed Amendments To The Pre-Membership Interview Procedures. Ballots For: 1,879; Against: 161; and Unsigned: 6.
Questions regarding this item should be directed to Joan Conley, President's Office, at (202) 728-8381.
LA County Bar Association Schedules Regulation Seminar
The Business & Corporations Law Section of the Los Angeles County Bar Association has announced its 27th Annual Securities Regulation Seminar.
When: October 3, 1994 Where: Biltmore Hotel
506 South Grand Avenue
Los Angeles Cost: $175 section members
$200 non-section members
Top Washington and regional SEC officials, together with leading private practitioners, will present a comprehensive review of current events and developments in the securities field, including an overview of judicial, regulatory, and enforcement developments, and recent trends in the public and private offering of securities. Featured speakers will include Simon Lome, SEC General Counsel and the Hon. Stanley Sporkin, U.S. District Judge for the District of Columbia.
For more information or to register, call Gail Emery at (213) 896-6523.
Corporate Financing Moves From D.C. To MD
The NASD Corporate Financing Department is pleased to announce its offices are now located at:
9513 Key West Avenue 3rd Floor Rockville, MD 20850
Main: (301) 208-2700
Director: (301) 208-2786
FAX: (202) 728-8454 (until 9/30)
Market Hours For Upcoming Holidays
The Nasdaq Stock MarketSM will close at 1 p m., ET, on Friday, November 25. SelectNetSM trading will continue until 2:15 p.m., ET.
The Nasdaq Stock Market will be closed for business on Thursday, November 24, 1994, in observance of Thanksgiving Day.
The Nasdaq Stock Market will be closed on Monday, December 26, in observance of Christmas, and on Monday, January 2, 1995, in observance of New Year's Day.
The Nasdaq Stock Market will be open regular hours, 9:30 a.m. to 4 p.m. ET, on Friday, December 30.
Excess Spread Calculation Includes Exchange Quotes
On October 28, 1994, the Securities and Exchange Commission (SEC) approved an NASD proposal to include quotations from national securities exchanges in the calculation of excess spread parameters for CQS securities. The rule change went into effect on November 21, 1994.
Registered market makers in CQS securities are prohibited from entering quotations in CQS securities that exceed the NASD's parameters for maximum allowable spreads. Before this rule change, the maximum allowable spread for any given CQS security was 125 percent of the average of the three narrowest market maker spreads in that security, with the limitation that the maximum allowable spread could never be less than 1/4 of a point. This calculation methodology, however, only factored in quotations by CQS market makers and did not take into account quotations disseminated by exchanges. Accordingly, in order to have the excess spread parameters for CQS securities be more reflective of and related to quotations disseminated by all market centers trading CQS securities, the NASD proposed, and the SEC approved, the inclusion of exchange quotations in the calculations of excess spread parameters for CQS securities. Thus, with this rule change, the maximum allowable spread for any CQS security will be 125 percent of the average of the three narrowest market maker spreads in that security, which average spread calculations shall include quotations from national securities exchanges (if the number of CQS market makers in that security plus the number of national securities exchanges trading that security is less than three, the maximum allowable spread will be 125 percent of the average spread). In addition, as before the rule change, the maximum allowable spread shall never be less than 1/4 of a point.
Short-Sale Revision Postponed Until January 9, 1995
In Notice to Members 94-80, the NASD announced that the SEC approved an NASD rule change that amends the Prompt Receipt and Delivery of Securities Interpretation (Interpretation) issued by the NASD Board of Governors under Article HI, Section 1 of the NASD Rules of Fair Practice. Specifically, the Interpretation, as amended, requires members to annotate their affirmative determinations as to stock availability that are required to be made when effecting short sales for their own proprietary account or the account of a customer. This rule change was scheduled to go into effect on November 30, 1994; however, the NASD has postponed the effective date of the rule change until January 9, 1995.
The NASD is also clarifying that the Interpretation applies to any security traded by an NASD member, including exchange-listed securities, non-Nasdaq securities, and foreign securities. With respect to foreign securities, however, short sales in such securities effected on a foreign securities exchange or market through a member of such exchange or market are not subject to the Interpretation.