FINRA Manual: Contents
|View Whole Section||Text only||Print Manager||Link|
For Your Information
SEC Approves Amendment To Section 65 Of Uniform Practice Code
On November 30, 1994, the SEC approved an amendment to Section 65 of the Uniform Practice Code relating to customer account transfers. The NASD filed the amendments along with other amendments to the NASD's rules designed to implement the SEC's mandate to move to T+3 settlement of securities transactions. Although the SEC continues to consider the remaining NASD T+3 rule changes, the amendments to Section 65 were approved on an accelerated basis to permit the implementation of changes to the Automated Customer Account Transfer System (ACATS).
The amendments to Section 65, among other things: (1) require members to validate or object to a transfer within three days; (2) require members to complete the transfer within four days of validation; (3) place more limits on the ability of a member to object to a transfer; (4) resolve discrepancies within five days; (5) mandate the use of ACATS for partial account transfers and transfers of mutual fund shares; and (6) mandate the transfer of residual credit balances for six months. To coincide with the implementation of changes to the ACATS system, the amendments to the NASD's rules and other self-regulatory organizations took effect on December 2, 1994, except for the requirement to transfer residual credit balances for six months, which will take effect on March 3, 1995.
NASD Free-Riding And Withholding Interpretation Changed
On December 7, 1994, in Release No. 34-35059, File No. SR-NASD-94-15, the SEC approved amendments relating to the NASD's Free-Riding and Withholding Interpretation (Interpretation), an Interpretation of the Board of Governors under Article III, Section 1 of the Rules of Fair Practice. The changes to the Interpretation affect stand-by purchase arrangements by restricted persons; the definition of immediate family members, public offerings, and associated persons; the use of the "carve out" mechanism for restricted persons in Investment Partnerships and Corporations; issuer-directed securities; and other provisions of the Interpretation. The NASD will be publishing a Notice To Members in February 1995 that will contain a detailed discussion of these changes.
Reuters New York financial news bureau moved on January 16, 1995. As of this date, the corporate news reporting desk, industry specialist correspondents, and stock market reporting team will be located at:
166 Water Street
New York, NY 10038
Telephone: (212) 859-1700
Fax: (212) 859-1717.
SEC Approves Extension Of "Interim SOES Rules"
In January, the Securities and Exchange Commission (SEC) approved the extension of the Interim Small Order Execution System (SOESSM) rules until March 27, 1995. These Interim SOES Rules, which the SEC approved in late 1993 on a pilot basis until January 25, 1995, provide for:
- a reduction in the maximum size order eligible for execution through SOES from 1,000 shares to 500 shares;
- a reduction in the minimum exposure limit for "unpreferenced" SOES orders from five times the maximum order size to two times the maximum order size, and for the elimination of exposure limits for "preferenced orders";
- implementation of an automated function for updating market-maker quotations when the market maker's exposure limit has been exhausted; and
- the prohibition of short sales through SOES.
Given that the NASD now has a short-sale rule, all of the Interim SOES Rules were extended, except the provision that prohibits short sales through SOES.
Members are reminded, however, that short-sale orders in Nasdaq National Market® securities entered into SOES will be executed in accordance with the NASD short-sale rule. Thus, if the current inside bid in Nasdaq® at the time of execution is lower than the previous inside bid, market orders to sell short entered into SOES and marketable limit orders to sell short entered into SOES will not be immediately executed. SOES will not execute such short sales until the inside bid is an "up" bid.
Direct any questions concerning this issue to Nasdaq Market Operations at (203) 378-0284.
Members Must Annotate Affirmative Determinations
In January, the NASD filed a proposal with the SEC to change the effective date of one provision of a previously approved rule change that amended the Interpretation of the Board of Governors—Prompt Receipt and Delivery of Securities (Interpretation). Effective January 9, 1995, absent an exemption, members must annotate their affirmative determinations as to stock availability when effecting short sales for their own proprietary accounts or the account of a customer. In making their affirmative determinations, however, members may rely on daily fax sheets and other "blanket" or standing assurances to satisfy the new annotation requirement until August 1, 1995. After August 1, 1995, absent further action by the NASD, members will not be permitted to rely on daily fax sheets. The new annotation requirement for short sales does not modify any exemptions from the affirmative determination requirements that are presently in the Interpretation (such as, the market-maker exemption).
As originally approved, the new annotation requirement specifically stated that an affirmative determination and annotation of that affirmative determination must be made for each and every transaction. A "blanket" or standing assurance that securities would be available for borrowing, would not be acceptable to satisfy the requirement. Thus, by requiring firms to annotate each and every affirmative determination, the amendment made clear the NASD's policy that firms cannot rely on daily fax sheets of "borrowable stocks" to satisfy the Interpretation's requirements. However, with its January 1995 proposal to the SEC, the NASD extended the use of these standard assurances to give the NASD and its members ample time to consider whether to retain this provision or modify it to better reflect industry practice.
Chronology Of The Rule Change
In May 1994, the NASD filed with the SEC the proposed rule change for Article III, Section 1 of the NASD Rules of Fair Practice. The SEC approved the proposal in September 1994; and the NASD announced in Notice to Members 94-80 (October 1994) a November 30, 1994, effective date for the Interpretation.
In response to Notice to Members 94-80, many NASD members raised concerns about their ability to comply with the changes to the Interpretation by November 30, 1994, because they needed to make a variety of operational adjustments. On November 29, 1994, the NASD announced a January 9, 1995, effective date to give members enough time to prepare for the rule change. The NASD sent a reminder to members in early January that the rule change would go into effect on January 9, and noted the one provision prohibiting the use of standard assurances that securities are available for borrowing would not go into effect until August 1, 1995.
Effective January 9, 1995, the new rule required members to annotate, on the trade ticket or on some other record they maintain for that purpose, the following:
- if a customer assures delivery, the member must annotate that conversation, noting the present location of the securities; whether the securities are in good deliverable form; and whether they will be delivered to the firm within time for settlement; or
- if the member locates the stock, the member must annotate the identity of the individual and firm contacted who offered assurance that the shares would be delivered or were available for borrowing by settlement date; and the number of shares needed to cover the short sale.
For details on this rule change, see Notice to Members 94-80 (October 1994), or direct your questions about the affirmative-determination Interpretation to Tom Gira, Assistant General Counsel, at (202) 728-8957.
Alabama Joins Phase II
Effective January 16, 1995, the state of Alabama joined the Phase II program of the Central Registration Depository (CRD). By participating in Phase II, Alabama allows NASD member firms to apply for registration with that state by submitting a Form BD to the CRD requesting Alabama and depositing the BD registration fee of $200 in the firm's CRD account.
If you have any questions regarding these changes, please call the NASD Member Services Phone Center at (301) 590-6500 or your firm's assigned Quality and Service Team.
Testing Center Changes
Effective immediately, two new automated testing centers have been added to the testing center locations:
- American College Testing
River Tree Court
701 N. Milwaukee Avenue Vernon Hills, IL 60061
- PROCTOR® Certification Testing
5540 Centerview Drive, Suite 307
Raleigh, NC 27606
Effective immediately, the following PROCTOR Certification Testing Centers are closed:
- Norfolk, VA; and
- Roanoke, VA.
Please note the following changes to the schedule of paper and pencil domestic testing locations:
- The room number in Boise, ID, is 102A.
- The May session in Great Falls, MT, will be held on May 13.
- The July, September, and October sessions at all locations will be held on July 8, September 9, and October 14.
Please note the following changes to the schedule of paper and pencil foreign testing locations:
- Paris, France—April 1, June 24, October 14.
- Heidelberg, Germany—June 10, August 12, October 14.
- Geneva, Switzerland—April 8.
If you have any questions regarding these changes, please call NASD Member Services Phone Center at (301) 590-6500.
SEC Adopts Rule 11 Ac1-3 And Amendments To Rule 10b-10
Effective April 3, 1995, the SEC is adopting new Rule 11Ac1-3 and amendments to Rule 10b-10 concerning payment-for-order-flow practices. These changes require:
- Broker/dealers to inform customers in writing, when a new account is opened, about its policies regarding the receipt of payment for order flow, including whether payment for order flow is received and a detailed description of the nature of the compensation received.
- Broker/dealers to provide information in account opening documents about order-routing decisions, including an explanation of the extent to which unpriced orders can be executed at prices superior to the national best bid or best offer (NBBO) at the time the order is received.
- Broker/dealers to update this information and to provide this information annually to all customers.
- Broker/dealers to indicate on confirmations whether the broker/dealer receives payment for order flow, and the availability of further information on request.
These changes apply to Nasdaq National Market® securities, The Nasdaq Small Cap MarketSM securities, and OTC Bulletin Board® securities. For additional information, members may refer to the November 2, 1994, Federal Register.
Appointment Of A SIPC Trustee
On February 27, 1995, the U.S. District Court for the Southern District of New York appointed a Securities Investor Protection Corporation (SIPC) Trustee for:
Adler, Coleman Clearing Corporation
20 Broad Street,
New York, NY 10005
Questions regarding the firm should be directed to SIPC Trustee:
Edwin B. Mishkin, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Members may use the "immediate close out" procedures as provided in Section 59(i) of the NASD's Uniform Practice Code to close out open over-the-counter contracts. Also, Municipal Securities Rulemaking Board Rule G-12(h) provides that members may use the above procedures to close out transactions in municipal securities.
NASD Spring Securities Conference
The NASD Spring Securities Conference is scheduled for May 17-19 at The Peabody Hotel in Orlando, Florida. As in the past, the Arbitrator Skills Training Program will be held May 17, just prior to the start of the conference. Watch your mail for more information about these important events.
SEC Delays Requirements For Disclosure Of Payment-For-Order-Flow Practices From April 3 To October 2, 1995
On March 10, 1995, the SEC determined to delay, until October 2, 1995, the effective date of Rule 11Ac1-3 and certain amendments to Rule 10b-10 concerning disclosure of payment-for-order-flow practices. These changes originally were scheduled to go into effect on April 3, 1995.
In addition, the SEC is postponing an amendment to Rule 10b-10 requiring a broker/dealer that is excluded from membership in SIPC to make a disclosure of its non-SIPC status on customer confirmations. This amendment now is scheduled to take effect on October 2, 1995.
Although the SEC is delaying the effective date of these changes, the SEC staff has advised that it will not object if members begin complying with the new requirements before October 2.
SEC Approves Extension Of Two Of The Interim SOES Rules
On March 27, 1995, the SEC approved the NASD's proposal to extend, through October 2, 1995, the effectiveness of two of the Interim SOESSM Rules—the SOES Minimum Exposure Limit Rule and the SOES Automated Quotation Update Feature. The SOES Minimum Exposure Limit Rule provides for a reduction in the minimum exposure limit for unpreferenced SOES orders from five times the maximum order size to two times the maximum order size, and for the elimination of exposure limits for preferenced orders. The SOES Automated Quotation Update Feature permits market makers to automatically update their quotes when the market maker's exposure limit has been exhausted.
Effective March 28, 1995, however, the SOES Maximum-Order Size Rule lapsed and the maximum-size order eligible for execution through SOES returned to 1,000 shares. Accordingly, effective March 28, 1995, the minimum exposure limit for SOES is 2,000 shares (2 x 1,000). The maximum-size order eligible for execution through SOES in The Nasdaq SmallCap MarketSM securities remains 500 shares.
Questions concerning this should be directed to Glen Shipway, Nasdaq Market Operations, at (212) 858-4448 or Tom Gira, Office of General Counsel, at (202) 728-8957.
Foreign Exam Center Changes
Please note the following changes to the schedule of foreign examination centers:
- Paris, France—June 24, October 14
- Heidelberg, Germany—June 10, August 12, October 14
- Tokyo, Japan—June 24
- MANUAL for the NASD Manual;
- NOTICE for Notices to Members; and
- DISCIP for the Disciplinary Actions.
- if a customer assures delivery, the member must annotate that conversation noting the present location of the securities; whether the securities are in good deliverable form; and whether they will be delivered to the firm within time for settlement; or
- if the member locates the stock, the member must annotate the identity of the individual and firm contacted who offered assurance that the shares would be delivered or were available for borrowing by settlement date; and the number of shares needed to cover the short sale. The manner by which a member or person associated with a member annotates compliance with this "affirmative determination" requirement (such as, marking the order ticket, recording inquiries in a log, etc.) is left for each member to decide.
- an indexed database of training courses and vendors that can be used to match the training needs of covered persons;
- the ability to prepare, track, and manage the training progress of covered persons;
- increased on-line and print reporting capabilities including exception reporting; and
- expanded on-line help and tutorial screens.
- 3.5" PC FOCUS v2.00 diskette*
- Installation Instructions
- Summary of Enhancements and Additions
- PC FOCUS User Guide vl.02 Update (stickers)
- NASD Manual (with updates through 10/31/95)
- Notices to Members (1987 to present)
- Regulatory and Compliance Alert
T+3 Impact On Short-Interest Reporting
The settlement date for monthly short-interest reporting will remain the 15th of themonth, or prior business day if the 15th is a non-settlement day. However, beginning in June, the trade date will be three business days before settlement, in conformance with Securities and Exchange Commission (SEC) Rule 15c6-l, which establishes a standard T+3 settlement period.
The monthly short-interest reporting schedule is:
Report Due Date
Questions regarding the monthly short-interest reporting schedule may be directed to NASD Regulatory Systems at (800) 321-6273, or your local NASD District Office.
T+3 Changes To Reg. T Extension System
The Reg. T/Rule 15c3-3 Extension Request System has been modified to comply with the change in standard settlement period to three business days after the trade date for most securities, beginning on June 7, 1995, according to SEC Rule 15c6-l. A four-day settlement period will be used for the trade dates of June 5, 1995, and June 6, 1995, during the transition period.
The schedule for extensions during the transition period is:
SEC Rule 15c3-3(m) Date
Questions regarding the submission of extension requests through the ARRS System may be directed to NASD Regulatory Systems at (800) 321-6273, or your local NASD District Office.
Definitions Of DNR And DNI Clarified When Used With Open Orders
On February 7, 1995, the SEC approved an amendment to Article IE, Section 46 of the Rules of Fan-Practice clarifying the meaning of the terms "Do Not Reduce" (DNR) and "Do Not Increase" (DNI) as used in connection with open orders. Section 46 requires members holding open orders to adjust the price and size of the order in proportion to the dividend or other distribution on the day the security is quoted "ex."
The amendment to Section 46 clarifies that DNR instructions only apply to cash dividends, while DNI instructions apply to stock dividends. The amendment to Subsection 46(e) reads:
(Note: New text is underlined; deletions are in brackets.)
Members should note carefully the scope of the exemptions. Notwithstanding Notice to Members 94-63, where a dividend or distribution is payable in stock, such as in a stock split, a DNR instruction will not apply and the order must be adjusted for price and size as required by Section 46.
Treasury Extends Comment Period For Proposal On Large Position Reporting For Government Securities
The Department of the Treasury is extending until May 24, 1995, the deadline for submitting comments on its Advanced Notice of Proposed Rulemaking (ANPR) under the Government Securities Act of 1986 (GSA). Treasury intends to implement rules to require persons holding, maintaining, or controling large positions in to-be-issued or recently issued Treasury securities to keep records and file reports of these large positions. In its ANPR, Treasury requested comment on how these large-position rules should be structured. For additional information about this proposal, please refer to Notice to Members 95-15, March 1995.
Persons interested in submitting written comments should submit them by May 24, 1995, to:
Kenneth R. Papaj, Director
Bureau of the Public Debt
Department of the Treasury
999 E Street, NW, Room 515
Washington, DC 20239-0001
NASAA Implements New Uniform Combined State Law Exam
Effective July 1, 1995, the North American Securities Administrators Association (NASAA) will implement the Uniform Combined State Law Examination (Series 66). This examination has been developed by a Committee of NASAA representatives to satisfy the agent and investment adviser qualification testing requirements. Before the implementation of the Series 66, candidates required to register as agents of broker/dealers and as investment advisers had to pass two qualifications examinations—the Uniform State Law Examination (Series 63) and the Investment Adviser Law Examination (Series 65). This new test will provide brokerage firms with a way to comply more efficiently with these state qualification requirements. After July 1, candidates will have the option of taking the individual examinations (Series 63 and Series 65) or of taking the combined Series 66.
Candidates may use the Series 63 and Series 65 training materials to prepare for the Series 66. The testing time for this new examination is two and one-half hours and consists of 100 multiple-choice questions based on the Uniform Securities Act and the Uniform Investment Adviser Act. There are four major sections on the Uniform Combined State Law Examination (see box below).
The test will be graded on the basis of two group scores—Group 1 includes Section 1 and Group 2 includes the remaining three sections. Candidates will be required to achieve a score of at least 70 percent in each group to pass the Series 66. Candidates who fail either group or both groups will receive a fail for the entire test and will have to retake the entire Series 66.
The Series 66 will be administered by the NASD® at the 55 PROCTOR® Certification Testing Centers, as well as at the 13 paper-and-pencil locations. Candidates will submit a Page 1 of Form U-4 and the $105 examination fee to request the test. The enrollment period will be valid for 90 days. There will be no waiting period between failed attempts.
Direct any questions to Sheila Cahill, Chair, NASAA Exams Advisory Committee, at (402) 471-3445 or Jeff Himstreet, Associate Counsel, NASAA, at (202) 737-0900.
Also effective July 1, 1995, the examination fee for the Series 63 will increase to $65.
Number Of Questions
Uniform Securities Act
SEC Release IA-1092
Unethical Business Practices of Investment Advisers
Enhanced Score Report For Series 7
Starting in June, a second page will be added to the score report candidates receive at PROCTOR Certification Testing Centers after completing the General Securities Representative Examination (Series 7). The second page will show a detailed list of the topics in each of the section scores that appear on the first page.
The first page will continue to show the candidate's overall number correct, percentage correct, and a grade. National averages will continue to be shown. Using enhanced scoring statistics, subscores for each section of the test will be reported in a from/to percentage range format.
Questions regarding these changes may be directed to David Uthe, Assistant Director, NASD Qualifications and Exams, at (301) 590-6695.
NASD Manual, Notices to Members, and Disciplinary Actions Now Available Through Lexis
To view all documents—the NASD Manual, Notices to Members, and Disciplinary Actions—through Lexis, users with Lexis accounts can go to the FEDSEC library, and type in the filename NASD. Each document can be accessed directly using its individual filename:
Users do not have to use all capital letters when typing in filenames.
Direct questions about how to access NASD information via Lexis to the Lexis/Nexis Customer Service Hotline at (800) 543-6862.
Continuing Education Program: $75 Regulatory Element Fee
In February 1995, the SEC approved amendments to Schedule C of the NASD By-Laws to add new Part XII prescribing requirements for the continuing education of certain registered persons subsequent to their initial qualification and registration with the NASD.1 The rule takes effect on July 1, 1995, and establishes a formal two-part Securities Industry Continuing Education Program for securities industry professionals that require uniform periodic training in regulatory matters (the Regulatory Element) and ongoing programs by firms to keep employees informed of the products, services, and investment strategies of their firms (the Firm Element).
To cover the costs incurred by the NASD for the administration of the Regulatory Element, the NASD filed with the SEC for immediate effectiveness an amendment to Section 2 to Schedule A of the NASD By-Laws to assess a $75 session fee against each individual required to complete the Regulatory Element. The fee will apply to recoup the expenses of the Council and to cover the development, start-up, and on-going operational costs of administering the Regulatory Element. The amendment will be effective July 1, 1995.
New PROCTOR Certification Testing Center Opens In Sacramento, CA
The PROCTOR Certification Testing Center in Emeryville, CA, will be closing on June 30, 1995.
Effective July 10, 1995, anew testing center will open in Sacramento, CA:
American College Testing 555 Capitol Mall Suite 550 Sacramento, CA 95814
The telephone number will be available in July.
1 See, Securities Exchange Act Release No. 34-35341 (February 8, 1995); 60 FR 8426 (February 14, 1995).
FBI Alerts Members, Seeks Leads
U.S. Department of Justice Federal Bureau of Investigation One Center Plaza, Suite 600 Boston, MA 02108 June 14, 1995
Willis Riccio Director
260 Franklin Street, 16th Floor
Boston, MA 02110
Dear Mr. Riccio:
Within the last few months, the Boston Division of the Federal Bureau of Investigation (FBI) has undertaken fraud investigations concerning Boston investment firms that have been victimized by out-of-state parties posing as potential investors. In an effort to prevent further losses and to solicit information that could assist in apprehending the individuals responsible, the following generalized method of operation, names and addresses, are being furnished to your agency for dissemination to member organizations:
In each instance under investigation shareholder accounts were opened by mail utilizing corporate checks which were stolen after being issued by the payor. The accounts were opened in the name of the payee, which in nearly every instance was another corporation or business entity. False identification was presented in the applications opening the accounts and the checks were fraudulently endorsed and deposited. The individual opening the account requested check writing privileges, and withdrawal checks were written depleting the account balance.
Investigation has determined that addresses and telephone numbers provided for the account holders are either mail drops or voice mail answering businesses whose services have been subscribed to by those engaged in the alleged criminal activity. These businesses are not subjects of this investigation and are not alleged to have engaged in any criminal conduct. The addresses utilized are identified as:
1126 Kings Highway Brooklyn, NY 11229
1204 Ave. 1,Apt. 1280 Brooklyn, NY 11229
7014 13th Ave., Suite 187 Brooklyn, NY 11228
1611 73rd Street Brooklyn, NY 11204
1230 Hempstead Turnpike Franklin Square, NY 11010
1019 Beach 20th Street, #117 Far Rockaway, NY 11691
191 Victory Blvd. Staten Island, NY 10301
244 W. 54th Street, Suite 235 New York, NY 10018
960 S. 3rd Street Louisville, KY 40203
186-09 Jamaica Ave. Jamaica, New York 11423
100 Henry Street, Apt. 222 New York, NY 11201
The above information is furnished for your attention and dissemination. The Boston Division FBI Special Agent assigned to these matters is Robert A. Keane and he may be contacted at (617) 223-6464.
Richard S. Swensen Special Agent In Charge
By: Robert E.Schlabach Supervisory Special Agent
Pennsylvania And CBOE Increase Fees
Effective July 1, 1995, Pennsylvania's agent registration and re-registration fees increased to $77. In addition, effective with the 1995-96 renewal program, PA's agent renewal fee will increase to $62.
Also effective July 1, 1995, the Chicago Board Options Exchange increased its agent registration fee to $25 and the agent re-registration and renewal fee to $20.
If you have any questions regarding these changes, please call the NASD Member Services Phone Center at (301) 590-6500 or your firm's assigned Quality and Service Team.
Corporate Financing Rule Change Ups Non-Cash Limit To $100
On June 16, 1995, the Securities and Exchange Commission (SEC) approved amendments to Article III, Section 44 (c)(6)(B)(xi) of the NASD Rules of Fair Practice to raise the value of non-cash sales incentives that an issuer or its affiliates may provide NASD members from $50 to $100 per person, annually. [See, Securities Exchange Act Rel. No. 34-35853 (June 16, 1995); 60 FR 32722 (June 23, 1995)]. Such non-cash sales incentives are typically de minimis in nature, such as small souvenir or gift items provided by issuers to a member or associated persons of a member. The amendment makes the value-limitation provisions of the Rule consistent with similar provisions in Article III, Sections 10 and 34 of the Rules of Fair Practice, with proposed amendments to Sections 26 and 29 now pending SEC approval, and with Rule 350(a) of the New York Stock Exchange.
NASD Material Now Available On C-Text
NASD Manual, Notices to Members, and NASD Guide to Rule Interpretations are now published on C-Text by Compliance International, Inc.
Further information regarding the C-Text service can be obtained directly from Compliance International Inc., at (201) 808-0955.
Participants Receive State Surety Bond Program Refunds
The NASD recently sent refund checks to those members who are participants in the NASD State Surety Bond Program. The letter to participants that accompanied the refund checks is reprinted below.
Dear NASD Member:
Over 90% of NASD member firms have less than 100 registered representatives. These firms often do not have the individual leverage needed to negotiate advantageous terms with insurance companies and other service providers. The NASD Member Benefits Department, under the guidance of the Membership Committee, uses the group buying power of our members to deliver services that are unavailable in the commercial market or that outperform available services. We are pleased to be able to send you the enclosed refund check for the State Surety Bond program as one of the first fruits of their labors.
The Membership Committee, NASD Member Benefits staff and Seabury & Smith, the program's broker, have been working with insurance carriers since November 1994 to reduce the costs to members of state surety bonds. The result of their combined efforts is a 40% reduction in premium rates charged to participating members and the establishment of one of the lowest bond premium rates in the surety industry. This rate reduction will save our industry over $500,000 in 1995. Your refund check represents 40% of your December 1994 and April 1995 bond renewal premiums, as applicable.
A key element to achieving these types of program savings is your participation. The greater the participation in a program, the greater the opportunity to leverage our combined purchasing power. The Membership Committee is working with Member Benefits staff to improve existing NASD Benefits by Association programs and to offer new benefits to reduce your operating costs and enhance your risk management. These programs are offered as a member service. They are not used to fund other NASD activities, nor are they subsidized by the NASD.
We encourage you to consider the other Benefits by Association programs so you can realize the cost savings and enhanced risk management they offer. If you would like information on these programs, please call Dean Boyle, Director, Member Benefits, at (301) 590-6525.
Joseph R. Hardiman President
Carl E. Lindros
Chairman, Membership Committee
Blanket Or Standing Assurances Not Allowed To Satisfy Affirmative Determinations For Short-Sale Transactions
Effective September 5, 1995, members may not rely on blanket or standing assurances as to stock availability to satisfy their affirmative determination requirements when effecting short-sale transactions.
On January 9, 1995, an amendment to the NASD Prompt Receipt and Delivery of Securities Interpretation (Interpretation) went into effect that required 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. The amended Interpretation requires members to annotate the following information on the trade ticket or on some other record:
Since January 9, 1995, however, the effectiveness of one provision of the amended Interpretation was held in abeyance until August 1, 1995. Specifically, this provision clarified that an affirmative determination and annotation of that affirmative determination must be made for each and every transaction since a "blanket" or standing assurance that securities are available for borrowing is not acceptable to satisfy the affirmative determination requirement. This provision will now go into effect on September 5, 1995. Thus, effective September 5, 1995, members will not be able to rely on daily fax sheets of "borrowable stocks" to satisfy their affirmative determination requirements under the Interpretation.
Direct questions concerning this to NASD Market Surveillance at (800) 925-8156 or (301) 590-6080.
NASD Preventive Compliance Program Offers New Computerized Support For Continuing Education Program
As part of an on-going and significant effort to provide education and preventive compliance initiatives, the NASD recently announced the development of the Member Compliance Support System (MCSS). Upon completion, the MCSS will provide member firms with an array of software applications to access, understand, and comply with NASD rules and regulations.
The Training Analysis and Planning Tool, Release 1.0, was the first component of the MCSS and was provided to all members, free of charge, in June 1995. This Tool, a user-friendly, Windows-based application, was designed with extensive industry input to help members prepare a needs analysis and develop a written training plan pursuant to the July 1, 1995, Firm Element requirement of the newly adopted Continuing Education Program.
Release 2.0 of The Training Analysis and Planning Tool, which is currently being developed and targeted for release in the fall, will provide a smooth transitional upgrade for current Release 1.0 users. While building significantly on the functionality established in Release 1.0, Release 2.0 will include the following major enhancements:
These additional features will help members comply with the January 1, 1996, Continuing Education Program requirement of implementing their written training plans. A reasonable fee will be charged to parties wishing to purchase The Training Analysis and Planning Tool, Release 2.0.
Specific information regarding the distribution of Release 2.0 will be provided to members in subsequent Notices to Members and NASD Regulatory & Compliance ALERT. If you have general questions about the Continuing Education Program call (301) 590-6500, or your Quality & Service Team.
SEC Approves Amendments To NASD By-Laws To Withdraw The Current Option For Member Firms To Report Annual Gross Revenue For Assessment Purposes
On July 11, 1995, the Securities and Exchange Commission (SEC) approved amendments to Section 1 of Schedule A of the NASD By-Laws to withdraw the current option for member firms to report annual gross revenue for assessment purposes on a calendar-year or fiscal-year basis, and to require all member firms to report annual gross revenue on a calendar-year basis only.
Currently, Section 5 of Schedule A to the By-Laws defines gross revenue for assessment purposes as income reported on the FOCUS Report. The FOCUS Report reports income only on a calendar-year basis. The amendments rectify the current inconsistency between Sections 1 and 5 of Schedule A and simplify the data collection and reporting process for the NASD.
NASD Proposes To Delay Implementation Date Of Primary Market-Maker Standards From September 6, 1995, To November 1, 1995
Subject to regulatory review and any necessary approval by the SEC, the NASD proposes to delay the implementation date of the Primary Market-Maker Standards to be used to determine the eligibility of market makers to an exemption from the NASD's short-sale rule from September 6, 1995, to November 1, 1995. The NASD will immediately notify members of any regulatory action taken with respect to this proposal.
To qualify for an exemption from the short-sale under the new multi-part quantitative test, market makers must satisfy at least two of the following four criteria: (1) the market maker must be at the best bid or best offer as displayed in Nasdaq no less than 35 percent of the time; (2) the market maker must maintain a spread no greater than 102 percent of the average dealer spread; (3) no more than 50 percent of the market maker's quotation updates may occur without being accompanied by a trade execution of at least one unit of trading; and (4) the market maker executes one-and-a-half times its "proportionate" volume in the stock. Members should review Special Notice to Members 94-68 for a more detailed explanation of the Primary Market-Maker Standards. The multi-part quantitative test will replace the present 20-day test where short sales by market makers that have maintained quotations in a particular security for 20 consecutive business days are exempt from the rule, provided the short sales are made in connection with bona fide market making activity.
Assuming the phase-in schedule for the Primary Market-Maker Standards is delayed, beginning November 1, 1995, the multi-part quantitative test will be used as a basis to evaluate the eligibility of market makers to an exemption from the rule. On December 1, 1995, market makers can continue to be exempt from the rule if they have satisfied the new multi-part quantitative test based on their trading activity from November 1, 1995, through November 30, 1995. Until November 30, the 20-day test will continue to be used to evaluate market makers' eligibility for an exemption from the rule. After December 1, 1995, a "P" indicator will be displayed next to every qualified market maker that is exempt from the rule according to the new Primary Market-Maker Standards. When the new test for the market-maker exemption goes into effect, firms will be able to verify their primary market-maker status via the Nasdaq Workstation®.
Direct your questions concerning this to NASD Market Surveillance at (800) 925-8156 or (301) 590-6080; Glen Shipway, Senior Vice President, Nasdaq Market Operations, at (203) 385-6250; or Tom Gira, Assistant General Counsel, Office of General Counsel, at (202) 728-8957.
SEC Approves Amendment for not Amending Order Prices Where Dividend is Less Than One Cent
On August 22, 1995, The SEC approved an amendment to Article III, Section 46 of the Rules of Fair Practice to provide that where a dividend or other distribution is less than one cent ($.01), the price of the order will not be adjusted. The NASD believes that the effect of such a small dividend is de minimis and, therefore, the likelihood that unadjusted orders will result in poor executions (the problem Section 46 is designed to prevent) is remote. The effect of the amendment is immediate.
Affirmative Determination Requirements Postponed Until February 20, 1996
The effective date of the rule prohibiting members from using blanket or standing assurances as to stock availability to satisfy their affirmative-determination requirements made in connection with short sales was postponed until February 20, 1996. This action supersedes and replaces information sent to Compliance Directors on July 28, 1995, stating that, effective September 5, 1995, members will not be able to rely on daily fax sheets of "borrowable stocks" to satisfy their affirmative-determination requirements under the NASD® Prompt Receipt and Delivery of Securities Interpretation.
Implementation Of The Primary Market-Maker Standards Postponed Until December 1, 1995
The implementation date of the primary market-maker standards to determine the eligibility of market makers to an exemption from the NASD short-sale rule was postponed from September 6, 1995, until December 1, 1995. On December 1, 1995, market makers can continue to be exempt from the rule if they have satisfied the new multi-part quantitative test based on their trading activity from November 1, 1995, through November 30, 1995. Until November 30, the 20-day test will continue to be used to evaluate market makers' eligibility for an exemption from the rule. After December 1, 1995, a "P" indicator will be displayed next to every qualified market maker that is exempt from the rule according to the new primary market-maker standards. When the new test for the market-maker exemption goes into effect, firms will be able to verify their primary market-maker status via Nasdaq Workstation II""'.
Firms Receiving Payment For Order Flow Must Comply With New And Amended Rules
On October 2, 1995, all firms receiving payment for order flow must comply with new and amended rules. On October 27, 1994, the SEC amended Rule 10b-10 and adopted a new rule, Rule llAcl-3, to address SEC concerns regarding payment for order flow.
New SEC Rule llAcl-3 requires broker/dealers to inform customers in writing, when a new account is opened, about the firm's policies on the receipt of payment for order flow, including whether it is received and a detailed description of the nature of compensation received. Firms must also disclose information on order routing decisions, including whether market orders are subject to price improvement opportunities. Rule 11 Ac 1-3 also requires the dissemination of an annual update of this information to all customers.
The SEC also amended Rule 10b-10 to require that a firm must indicate on the confirmation whether it receives payment for order flow and the availability of further information on request. Amended Rule 10b-10(d)(9) also contains a detailed definition of payment for order flow that includes "any monetary payment, service, property, or other benefit that results in any remuneration, compensation, or consideration to a broker or dealer from any broker or dealer, registered securities exchange, registered securities association or exchange member in return for routing customer orders to such entity." The definition provides further examples of remuneration or compensation that is deemed payment for order flow.
SEC Approves Amendment To Schedule B To The NASD By-Laws
On September 29, 1995, the SEC approved an amendment to Schedule B to the NASD By-Laws to delete informational text on the number of members of the NASD Board of Governors (Board) elected from each District. The inclusion of the text regarding District representation was informational only and its inclusion unnecessarily limits the ability of the Board to act under Article VII, Section 4(b) of the By-Laws to make changes to the Board's composition.
Upcoming Release Of PC FOCUS Version 2.00 (For DOS)
An update to the PC FOCUS application will be released in December 1995. The PC FOCUS application has been modified to accommodate the electronic collection of the Schedule I paper supplement (Question 19, re: bank control) and of annual municipal income data (formerly collected on the NASD Annual Assessment Report).
The rules used to validate information have been enhanced to improve the validity and consistency of the data submitted to the NASD®. In particular, the rules applied to the annual Schedule I now include intraform edit checks. These new edits will verify that responses throughout the form are consistent. "Instructions" will be provided in the distribution package. Please read the new "Instructions" before preparing your 1995 Schedule I Report for guidance regarding the relationship between the various questions and the potential PC FOCUS errors that may occur.
The PC FOCUS v2.00 distribution package will include:
*"Note: If you need a 5.25" diskette, please call the Customer Support Hot Line at (800) 321-NASD.
This upgrade must be installed before you file your 1995 Schedule I, which is due on January 24, 1996. You may install the application immediately upon receipt, if you prefer.
To ensure complete compatibility between PC FOCUS v2.00 and the new Customer Complaints application, we strongly recommend that you install and test the Customer Complaints and PC FOCUS v2.00 applications as soon as possible. If you experience any technical difficulties, early testing will allow the Customer Support Hot Line to resolve any problems you encounter in sufficient time to meet the required filing due dates. If you need help installing or using either application, please call the Customer Support Hot Line at (800) 321-NASD.
National Association of Securities Dealers, Inc. • 1735 K Street, NW • Washington, DC 20006-1500 • 202-728-8000
Special Notices to Members
December 11, 1995
Dear NASD Member,
This upcoming New Year signals an unprecedented milestone in the evolution of the NASD and The Nasdaq Stock Market.
On November 17, acting on the recommendations of an NASD-created Select Committee headed by former U.S. Senator Warren Rudman of New Hampshire, the NASD Board of Governors approved a series of standard-setting changes in structure and governance that have broad implications for the securities industry and the investing public.
In essence, we will be putting the NASD at the forefront of setting new standards for self-regulation. We will be creating a new organizational structure, enabling us to more effectively meet our rapidly expanding regulatory responsibilities. We will be reconfiguring our governing boards, giving investors, Nasdaq companies, and other non-industry public representatives a partnering role with members in policy making. And we will be upgrading and expanding key professional and technology resources, adding sharp new focus to our enforcement and disciplinary operations.
The implementation plan that was adopted by the Board at its November meeting closely follows the Select Committee's "Principles of Effective Governance," endorsed by the Board in September and presented to you in the NASD Notice to Members 95-84, October 1995.
As a self-regulatory institution, it is critical that investors have a high level of confidence in the fairness of our markets and the nation's self-regulatory system. The NASD is fully committed to implementing all aspects of the plan. We believe that the perception and the reality of fairness are reinforced by the changes that will take place in structure and governance.
Your understanding of and support for this implementation plan is an integral part of our overall mission to continuously enhance investor protection. We solicit your favorable vote on By-Laws modifications that will move the restructuring process forward in a timely manner.
The Special Notices to Members which follow provide background on the Select Committee's recommendations, details on the restructuring and the reconfiguration of governing boards, the By-Laws Notice and ballot, and an overview of the changes that will take place to disciplinary and enforcement procedures.
Compelling Reasons For Change
Throughout its history, the NASD has searched for and found new and innovative ways to address marketplace trends and emerging industry issues. But unlike any previous period in its history, in 1994, the NASD came under intense public scrutiny of its regulatory oversight of member firms and its stewardship of The Nasdaq Stock Market.
Amidst this wave of criticism, augmented by a Department of Justice investigation of market makers and an SEC investigation of NASD enforcement of Nasdaq trading rules, the NASD Board of Governors, in cooperation with SEC Chairman, Arthur Levitt, asked former U.S. Senator Warren Rudman to lead a review of NASD governance and oversight.
This independent, seven-member Select Committee, composed of individuals who have significant experience in the securities industry or are former members or senior staff of the SEC, worked almost 10 months and interviewed nearly 200 people to produce the most substantive and thorough study of the NASD to date.
The NASD oversees the activities of over 5,400 securities firms, more than 57,000 member branch offices, and nearly 500,000 registered securities professionals. In addition, it conducts examinations of member firms; investigates possible violations of Association rules, SEC regulations, and the federal securities law; and conducts disciplinary proceedings involving member firms and associated persons. It is the principal arbitration forum for securities disputes and reviews of member advertising and corporate finance agreements. The NASD also administers qualification testing for all securities principals and registered representatives, on its own behalf and on behalf of state securities authorities.
Add to this charter the stewardship of The Nasdaq Stock Market—the fastest growing equities market in the world—and the substance and complexity of the NASD's overall obligations far surpass those of any other SRO, including the major exchanges. Nasdaq has become, in just 24 years, a major source of capital for America's growth companies, with more than 5,000 issuers and a total capitalization of over $1 trillion (three times 1990 levels). Its growth is nothing short of explosive: the Nasdaq Composite index, set at 100 in 1971, is now over 1,000, and daily volumes in 1995 have gone beyond 600 million shares (one week's trading on Nasdaq today is equivalent to Nasdaq's entire first year of operation).
The Select Committee found this to be a daunting role, and one that, if not addressed soon, threatens to undermine the NASD's ability to effectively carry out its mission. The Committee concluded that the NASD's governance structure has not kept pace with Nasdaq's explosive growth and the NASD's expanding regulatory responsibilities. In some cases, it said, the existing structure has led to ineffective rule making for the Nasdaq market. In others, it has required the NASD to mediate economic clashes among its members arising from their divergent interests in the Nasdaq market. Further, the Committee concluded that the current structure has also placed the NASD, as the owner of Nasdaq's trading systems, in the unenviable position of regulating the competing systems owned by NASD members. The result: NASD and Nasdaq missions are disserved.
At the Board's request, the Select Committee also examined first-hand our enforcement and disciplinary procedures, some going back 5 to 10 years; conducted surveys and held discussions with federal and state regulators; and reviewed extensive documentation on NASD regulatory operations. While the Committee found that the overall NASD disciplinary process is designed to be effective and fair, it noted that disciplinary proceedings have become more contentious, complex, and consequential than the existing system was designed to accommodate. And certain areas of the regulatory operation, it observed, have not been given the mandate, resources, or prominence necessary for effective oversight, including the critical internal review function.
With the explosive growth of Nasdaq and the rapid expansion of NASD regulatory responsibilities, the public's claim to representation on the NASD's governing bodies has increased. Here too, the Committee found that the organization has not kept pace with meeting the far-reaching needs of its diverse constituent groups.
The Select Committee reached a unanimous conclusion: fundamental change is required. "The NASD's relationship with Nasdaq should be restructured so as to put substantial 'daylight' between the membership association and the market, with separate governing bodies whose compositions are tailored to the particular requirements of their respective missions and constituencies."
To heighten investor confidence in the fairness of the markets and self-regulatory system and broaden public acceptance of the NASD's policies, the Committee strongly recommended that the Association's governing Board be reconfigured to have a majority of non-industry public representatives, which would set a new standard for public participation in the governance of our securities markets.
The NASD Board of Governors agreed and asked the staff to prepare an implementation plan that addresses all of the Committee's recommendations.
Implementation Plan Outlines Restructuring Imperatives
The plan, as approved by the Board at its November meeting, calls for the parent organization, NASD, Inc., and its non-industry public majority Board, to set policy for, provide key corporate services to, and oversee the effectiveness of two subsidiaries as they carry out their respective responsibilities. The two operating units will be independent subsidiaries: a reconstituted Nasdaq, and a newly created NASD Regulation, Inc. (NASDR). Each operating subsidiary will have a full-time president, elected by the subsidiary boards that will each have balanced representation—50 percent industry and 50 percent non-industry.
The parent organization will be headed by a Chief Executive Officer (CEO), a title that best describes the senior-most executive position in the Association. The parent Board will be composed of five Non-Industry Governors, three Governors from NASD member firms, and the CEO of NASD, Inc.
One nominating committee, composed of two representatives from each of the three governing Boards—balanced between industry and non-industry—and the CEO of the Association will recruit and nominate outstanding professionals and public figures who are knowledgeable, experienced, and have an interest in the securities industry for all three governing Boards. All governing Boards will be structured to provide a representation of relevant investor, member, issuer, and other constituent interests. Governors of all three Boards will normally serve for three-year terms, staggered to provide continuity, and will be eligible to serve more than one term. The Boards and the Nominating Committee will review the governing process on an ongoing basis to assure that no single constituency dominates a particular governing body or governance process.
With your approval of the necessary By-Laws modifications (Notice to Members 95-101) and SEC approval, the governing structure for the Association and the Nasdaq subsidiary could be in place as early as the first quarter of 1996.
The Nasdaq subsidiary will operate and surveil The Nasdaq Stock Market, electronic OTC markets, and all related systems, including trading-halt functions. It will also be responsible for enforcement of contractual obligations between Nasdaq and market participants. Nasdaq's balanced 13-member Board will include six non-industry public representatives, six from the securities industry (including three market-maker representatives), and the President of Nasdaq. The CEO of NASD, Inc., will serve on the Board in a non-voting capacity.
NASDR To Regulate Broker/Dealer Profession
The present NASD organization is structured primarily to conduct the NASD's regulatory and member service operations and present board members will be transferred during 1996 to the Board of the new NASDR subsidiary. By January 1997, the NASDR Board will shift from one composed of a majority of industry representatives to one with balanced representation of industry and non-industry public directors. At that time, it is expected to have no more than 25 directors with a goal of downsizing to 21—10 non-industry, 10 industry, and the president of NASDR. The CEO of NASD, Inc., will serve on the NASDR Board in a non-voting capacity.
NASDR will have primary authority to regulate the broker/dealer profession and provide member and constituent services. The subsidiary will develop and administer NASD Rules of Fair Practice, membership rules, and operational requirements for NASD, Inc., members. NASDR will examine and investigate member firms and their associated persons; enforce securities laws, NASD, Inc., NASDR, and Nasdaq rules and ethical standards; and administer the disciplinary process. NASDR will also be responsible for all disciplinary actions for violations of market-related rules. The actions may be based on initial investigations by the Nasdaq subsidiary or independent investigations by NASDR.
As a first step to implement the Select Committee's recommendations, it will be necessary to modify NASD By-Laws to reconfigure the NASD Board. No changes are required at this time to The Nasdaq Stock Market, Inc., By-Laws.
Please review the amendments in Notice to Members 95-101 carefully. The membership is asked to approve changes to Articles VII and X, and the deletion of Article V, of the NASD By-Laws. These changes will permit the NASD to begin the restructuring necessary to implement the principles set forth in the report of The Select Committee on Structure and Governance.
The Committee proposed, and the NASD Board agreed, that with the creation of a new subsidiary responsible for securities regulation, the governing Board of the Association should have a majority of non-industry members. It should be smaller than the current Board and should have in place a structure and policies that will ensure a balance of non-industry and industry representation on the Nasdaq and NASDR Boards.
Briefly, the changes to the By-Laws: create a national nominating committee comprising the CEO of the Association and an equal number of industry and non-industry persons; reconstitute the Board as a majority non-industry Board comprising the CEO and "Industry" and "Non-Industry" Governors, and reduces the minimum size of the Board from 25 to 5 (the implementation plan adopted by the Board at its November 1995 meeting specified a 1996 Board of 9 persons—the CEO, 3 Industry, and 5 Non-Industry Governors); deletes Article V to remove an archaic and unnecessary reference to the affiliation of other Registered Securities Associations with the NASD (such affiliations remain authorized by Section 15A of the Securities Exchange Act of 1934); and amends Article X to replace the term "President" with the term "Chief Executive Officer" to make clear that this person is the most senior executive of the Association. Additional changes clarify the procedures for the resignation, removal, and replacement of officers.
Adding Focus, Expanding And Upgrading Resources
In keeping with the Committee's recommendation that certain areas of the regulatory operation be given the mandate, resources, and prominence necessary for effective oversight, the implementation plan includes changes to NASD disciplinary and enforcement procedures. Other elements of the plan call for the addition of new offices, or the refocusing of responsibilities or priorities within existing offices.
For those of you who have participated in the NASD disciplinary process, you know that the issues we address today increasingly involve more complicated questions of law. Sanctions imposed in disciplinary proceedings have increased substantially in recent years. Therefore, NASDR will be augmenting its volunteer system with professional Hearing Officers on all panels adjudicating contested disciplinary cases. This will make the process more efficient, particularly in complex or contentious cases. Member volunteers will continue to bring their business experience and judgment to bear in evaluating the facts and assessing penalties.
Two additional aspects of the implementation plan are noteworthy: the expansion of the NASD Office of Internal Review and the creation of an Office of Investor Services.
To broaden the scope and focus of its operational reviews, the NASD will increase its Office of Internal Review staff to include the addition of an Ombudsman who will address concerns and issues from industry, internal, and public sources. The department will report to the CEO of NASD, Inc., as well as to the NASD Audit Committee.
The new Office of Investor Services will centralize the Association's activities focused on investors, including education, inquiries, outreach programs, liaison with investor organizations, and utilization of technology to provide additional information services to investors.
To summarize, these changes in structure will enhance the NASD's ability to meet its regulatory responsibilities both now and in the future. Significant member participation in governance has been, and will continue to be, a hallmark of self-regulation. More balance on the Boards will bring about solutions and results that receive far greater acceptance of our self-regulatory system by investors.
As a supplement to this Notice to Members packet, you will also receive a videotape featuring the perspectives of Ian Davidson, current Chairman of the NASD Board of Governors; Mary Alice Brophy, Chairman-elect of the NASD Board of Governors; and Richard DeMartini, chairman of the Nasdaq Board of Directors.
Please complete the enclosed ballot promptly and review the contents of both Notices carefully. We appreciate your support as we embark on this truly significant period in our history.
Joseph R. Hardiman
President and CEO
NASD Publications Available On CD-ROM
The following NASD® publications are now available for your convenience on CD-ROM format, which is updated each month with the NASD's latest publications:
For further information about the Securities Regulatory Library, contact Information Handling Services (IHS) at (800) 553-8629.