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  • 1991

    • For Your Information

      NASD Encloses New Guide to Information and Services

      With this issue of Notices to Members, NASD members are receiving the new edition of the NASD Guide to Information and Services. The Guide is arranged by subject headings and includes the names and phone numbers for NASD contacts on each subject.

      Date Changes for January First Saturday Examination

      The date for the January 1991 first Saturday examination in Rio Piedras, Puerto Rico, has been changed to January 19, 1991. Appointments will be necessary for all candidates who wish to take an examination that day and can be made by calling the NASD Member Services Phone Center at (301) 590-6500. Appointment requests must be received no later than Wednesday, January 9, 1991.

      Date Changes for February Foreign Examination in Tokyo

      The date for the February 1991 regular foreign examination in Tokyo, normally held on the third Saturday, has been changed to February 2.

      American Stock Exchange Raises Agent Fees Effective January 1

      As of January 1, 1991, the American Stock Exchange raised its fees for agent registration and transfer. The agent registration fee increased from $25 to $40, while the agent transfer fee rose from $10 to $25. Questions regarding these changes should be directed to the NASD Member Services Phone Center at (301) 590-6500.

      NASD Sends Two New Publications to Member Firms

      With this issue of Notices to Members, the NASD is sending member firms one complimentary copy of its new brochure, "Understanding Your Role as an RR." The publication explains to new applicants for registration their obligations to customers and responsibilities to their firms. It will be sent to each applicant's home address when the registration is processed. Additional copies of the brochure are available at 50 cents each for up to 50 copies, 40 cents each for from 51 to 500 copies, and 35 cents each for more than 500 copies. Send a check or money order, payable to the National Association of Securities Dealers, Inc., to NASD, Book Order Department, P.O. Box 9403, Gaithersburg, MD 20898-9403.

      Separately, the NASD recently mailed to each member firm an updated copy of the NASD Compliance Check List. The 24-page publication provides members with basic guidelines for evaluating their operational and compliance needs. Additional copies are available at $25 each by sending a check or money order to the above address. Each order must include a gummed mailing label with the return address.

      Address of District 8 Cleveland District Office Changes

      Effective immediately, address correspondence to the NASD's District 8 Cleveland office to 1350 Euclid Avenue, Suite 900, Cleveland, OH 44115. The phone and FAX numbers remain (216) 694-4545 and (216) 694-3048, respectively.

      New Hot Line Number Begins Service for Certain Schedule H Reporting

      The new "hot line" number, which began operating January 31, for SEC Schedule H non-Nasdaq over-the-counter securities reporting and related problems is 1-800-288-3855. Firms with questions regarding the Automated Regulatory Reporting System (ARRS) also should use this number.

      Three PLATO Development Centers Relocate or Close

      Effective February 1, 1991, the Richmond, Virginia PLATO Development Center relocated to Culpepper Building, 1606 Santa Rosa Road, Suite 133, Richmond, Virginia 23288.

      Effective March 31, 1991, the following PLATO Development Centers will close permanently: Toledo, Ohio, and Erie, Pennsylvania.

      SIPC Trustees Appointed for Two Securities Firms

      On January 22, 1991, the United States District Court for the Southern District of Texas appointed the Securities Investor Protection Corporation (SIPC) trustee for:

      John M. Sorensen & Co., Inc.
      10565 Katy Freeway #235
      Houston, Texas 77024.

      Questions regarding the firm should be directed to SIPC trustee:

      Securities Investor Protection Corporation
      805 Fifteenth Street, NW, Suite 800
      Washington, DC 20005-2207
      (202) 371-8300.

      On December 22, 1990, the United States District Court for the Eastern District of Pennsylvania appointed a Securities Investor Protection Corporation (SIPC) trustee for:

      Lloyd Securities, Inc.
      7837 Old York Road
      Elkins Park, Pennsylvania 19117.

      Questions regarding the firm should be directed to SIPC trustee:

      Robert E. Shields, Esquire
      Drinker Biddle & Reath
      1100 Philadelphia National Bank Building
      Broad and Chestnut Streets
      Philadelphia, Pennsylvania 19107.

      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.

      Arkansas, Arizona Begin Participation in CRD Phase II Program

      Effective March 1, 1991, Arkansas and Arizona began participation in the Central Registration Depository (CRD) Phase II program for receipt and review of broker-dealer filings. While the Arkansas broker-dealer registration fee of $300 will be collected through CRD, Arizona will continue to receive the initial Form BD as well as the fee associated with a request for broker-dealer registration in that state.

      Questions regarding filing requirements for these two states should be directed to the Arizona Corporation Commission at (602) 542-4242 and the Arkansas Securities Department at (501) 324-9260.

      May Paper and Pencil Examination Date Changes in Montana

      The May paper and pencil administration of qualifications examinations at The College of Great Falls, Great Falls, Montana, will be held May 11 instead of May 4 because of commencement exercises.

      Two PLATO Testing Centers Slate Permanent Closing March 31

      Effective with the close of business March 31, 1991, the following two PLATO Testing Centers will close permanently as a result of low testing volume: Toledo, Ohio, and Erie, Pennsylvania.

      Questions regarding this action should be directed to the Member Services Phone Center at (301) 590-6500.

      Leading Industry Policymakers to Speak at Regional NASD Conference

      "Compliance, Competitiveness & Change" is the theme of the NASD's eastern regional membership meeting and securities conference at the Doral Resort & Country Club in Miami May 23 and 24. The program includes general sessions on the economic outlook for the securities industry and on media coverage of the markets. There also will be a special training session for NASD arbitrators. Workshop topics include advertising, arbitration, bank broker-dealers, branch-office compliance, compliance officers, corporate financing, financial and operational, insurance broker-dealers, investment companies, Nasdaq trading, The POR-TALSM Market and OTC Bulletin Board (demonstrations), public securities, qualifications, and securities regulation.

      Speakers at the meeting, which is sponsored by NASD Districts 5, 7, 8, 9,10, and 11, include NASD President and Chief Executive Officer Joseph R. Hardiman, Business Week correspondent Dean Faust, Wall Street Journal reporter Anne Newman, Securities Investor Protection Corporation President Theodore H. Focht, Assistant U.S. Treasury Secretary for Economic Policy Sidney Jones, SEC Assistant Director for Compliance and Financial Responsibilities Michael A. Macchiaroli, Municipal Securities Rulemaking Board Executive Director Christopher Taylor, Security Traders Association President John L. Watson III, Hambrecht and Quist Chairman Gordon S. Macklin, and McDonald & Company Securities President (and NASD Chairman) William B. Summers, Jr.

      Conference registration is limited and costs $295 per person ($275 per person for firms registering three or more persons). A10 percent early registration discount is available through April 22. Registration for the arbitration session only costs $75 per person. For registration details and additional information about the conference, contact Elisabeth Owen at the NASD at (202) 728-8005.

      Seabury & Smith Markets Renamed NASD Insurance Plan for Members

      Seabury & Smith, which has managed the NASD's fidelity bond program since 1982, has been selected to assume marketing of the NASD Insurance Trust Group Plan for member firms. The plan, renamed the NASD Employer Assurance Program, offers a choice of group term life, accident, major medical and dental plans structured to provide flexibility and cost containment.

      The program continues to be administered and underwritten by State Mutual Life Assurance Company of America.

      For quotations or other information on new coverage, call Seabury & Smith at 1-800-424-9883, extension 354 between 9 a.m. and 5 p.m., Eastern Time. Current policyholders with questions should call 1-800-262-NASD.

      1991 Nasdaq Fact Book & Company Directory Published

      The NASD has combined two of its major publications into the 1991 Nasdaq Fact Book & Company Directory, which is now available. The 231-page book provides price and volume data for all the 4,706 Nasdaq National Market and regular Nasdaq securities traded during 1990 as well as overall data and information on market makers in Nasdaq securities. For each of the 4,132 Nasdaq companies, the book provides the full company name, its Nasdaq symbol, the company's standard industrial classification code, the contact person for media and investor relations with title and phone number, and the company's address. Copies of the book cost $15 each and may be obtained by sending the order form on the inside front cover of this issue of Notices to Members, together with a check or money order payable to the National Association of Securities Dealers, Inc., to NASD, Book Order Department, P.O. Box 9403, Gaithersburg, MD 20898-9403.

      First Saturday Paper and Pencil Exams Dropped in El Paso

      The First Saturday paper and pencil qualification examinations in El Paso, Texas, have been discontinued. The decision resulted from several factors. In the past seven months, for example, only two candidates scheduled tests in El Paso. In addition, the recent loss of the NASD's proctor and test site prompted a review of member use of this center.

      PLATO Phone Numbers Change in Edina, Houston; Address Changes in Houston

      Effective immediately, the telephone number for the Edina, Minnesota, PLATO Development Center is (612) 835-9420. The address has not changed. Also effective immediately, the Houston, Texas, PLATO Development Center is relocating to 10333 Richmond Avenue, Sixth Floor, Houston, TX 77042. The new telephone number is (713) 952-5005.

      SEC Adopts Amendments to Rule 15c2-11 That Take Effect June 1

      On April 17, 1991, the SEC adopted amendments to Securities Exchange Act Rule 15c2-11 that become effective June 1, 1991. Rule 15c2-11 governs a broker-dealer's submission and publication of quotations for certain over-the-counter securities in a quotation medium (e.g., the OTC Bulletin Board service or the Pink Sheets™ publication). Generally, the rule specifies certain documents or information that a broker-dealer must have prior to publishing a quotation for a covered security.

      As amended, Rule 15c2-11 establishes an affirmative obligation for a broker-dealer to review the requisite information and form a reasonable basis for believing that such information is accurate in all material respects and is obtained from a reliable source. Additionally, the rule would require a broker-dealer to obtain and review a copy of any SEC order or release announcing a trading suspension in a covered security during the preceding 12 months.

      More detailed information about these and other changes to Rule 15c2-11 will be published in the June Notices to Members.

      PLATO Development Center Address in Los Angeles Changes

      Effective immediately, the Los Angeles, California, PLATO Development Center is relocating to 701 North Brand Boulevard, Suite 340, Glendale, CA 91203. The new telephone number is (818) 545-7383.

      North Dakota Increases Broker-Dealer and Agent Registration Fees

      Effective July 7, 1991, North Dakota will increase its broker-dealer and agent fees. The broker-dealer registration and renewal fee will rise from $175 to $200. Agent registration, transfer, and renewal fees will climb from $35 to $50.

      If you have questions regarding these changes, call NASD Information Services at (301) 590-6500.

      Joint NASD/MCI Program Gives Special Discounts, Services to Members

      Effective June 19, MCI Communications Corporation, through a new partnership with the NASD, began offering NASD members a full package of specially discounted telephone services — including long-distance calling and a customized calling card service — designed to meet telecommunications requirements of the securities industry.

      Among the cost-saving features included in the program are special discounts of between 20 and 35 percent on MCI products and services, and an additional 6 percent savings based on royalties paid by MCI to the NASD on members' total monthly discounted usage fees. The NASD, in turn, passes through these discounts to participating members. Among the MCI services available under the program are MCI Preferred, PRISM PLUS, PRISM 1, Vision, 800 numbers, Vnet, and data services.

      The package also provides members with a new calling card that combines long-distance calling services with 24-hour real-time stock quote and market information services. The card enables users to get overviews of the major indexes as well as real-time quotes on any stock listed on The Nasdaq Stock MarketSM and the major exchanges. It also allows users to build two personalized portfolios, with up to 30 stocks each, on which they can receive instant information on current prices, number of shares, and total market values.

      Publication Date of Notices to Members Shifts to 15th of Month

      Effective with the August issue, NASD Notices to Members will be published on the 15th of the month (or the first business day after that if the 15th is on a weekend or holiday) instead of the first business day of the month as it is now. The change will facilitate rapid dissemination of items stemming from NASD Board of Governors meetings.

      The publication date change will alter the "closing" dates for information in the Disciplinary Actions section of the newsletter as well as in the monthly notice on additions, changes, and deletions to listing on the Nasdaq National Market. The new dates will appear on those notices beginning with the August issue.

      NASD Reprints Editorial Demonstrating Responsiveness to Complaints

      In a recent guest editorial published in the Star Ledger, a major daily newspaper circulated in New Jersey, NASD Executive Vice President of Compliance John E. Pinto Jr., describes the many ways in which the NASD keeps the securities markets operating in the best interests of investors. With the permission of the newspaper, the NASD is reprinting the editorial on the back of this page.

      The Star Ledger

      BUSINESS FORUM

      Public can fake stock in NASD's integrity

      By JOHN E. PINTO JR.

      John E. Pinto Jr. is executive vice president for compliance of the National Association of Securities Dealers Inc.

      Just as investors are concerned with the integrity of the securities markets, so is the National Association of Securities Dealers Inc. (NASD), the largest self-regulatory organization of the industry, with 5,700 member firms and nearly 420,000 securities agents registered with it. Consider the facts and figures below.

      In 1990, the NASD received 3,725 customer complaints from among the 47 million individual investors in the U.S. By security type, the complaints broke down as follows:

      • Options trading produced 37 complaints. The premium value of options traded in the year was $79 billion.

      • There were 201 complaints in the municipal securities area. An estimate of municipal securities held in 1990 by households and funds, commercial banks, insurance companies and others puts their value at $840 billion.

      • The outstanding public and private Direct Participation Programs, often called tax shelters, have an estimated paid-in capital of $147 billion. Activity in them in 1990 generated 271 customer complaints.

      • The aggregate volume of mutual fund sales was $150 billion. Trans actions in this area led to 622 complaints.

      • In the Nasdaq Stock Market, the second-largest equity market in the U.S., broker-dealers belonging to the NASD in 1990 completed some 30 mil lion transactions for individual and institutional investors. There are 4,700 securities issued by 4,100 companies listed on Nasdaq. Their trading in 1990 totaled 33.4 billion shares, with a dollar value of $452 billion. It led to 376 complaints.

      • Trading in exchange-listed stocks and miscellaneous securities produced 653 complaints.

      • Five hundred sixty-seven complaints were not related to specific types of securities.

      • The biggest single block of customer complaints-998 of them-was registered in the penny stock area, where the dollar volume of trading was estimated at under $10 billion.

      Except for penny stocks, the ratio of complaints compared to the dollar amounts traded is insignificant. More on penny stocks later.

      Another way to measure how clean the securities markets is by the claims made by investors against securities firms and their associates in the arbitration forums which the NASD and the exchanges administer. The total amount claimed by investors in 1989 was $104 million. The aggregate dollar volume of trading only in the U.S. equity markets that year was $2.3 trillion. The $104 million was 45/100th of one percent of that.

      From the standpoint of a self-regulatory organization like the NASD, even the low complaint and arbitration statistics are not good enough. One of our key objectives is to get miscreant firms and individuals out of our industry-and fast.

      In 1990, the NASD filed 1,083 disciplinary actions against its member firms and registered persons. Of these, 365 ensued from customer complaints. The 818 others were the results of the NASD's broker-dealer surveillance, which included 3,856 on-site examinations of firms. These actions led to the expulsion of 92 mostly small firms from the NASD, the barring of 673 individuals from association with any member firm, the temporary suspension of 17 firms and 233 individuals, and the imposition of more than $30 million in fines.

      The NASD Market Surveillance Department performs computer-assisted monitoring of every quote change and transaction report in the Nasdaq Stock Market, to look for possible insider trading, market manipulation, and other violations. In 1990, the Market Surveillance Committee took 21 formal disciplinary actions, leading to four bars of individuals, 25 suspensions of firms or individuals, and the imposition of $3.2 million in fines.

      In the penny stock area, the NASD has brought more than 200 disciplinary actions in the last three years, and another 250 are in the pipeline. For example, in May 1990, the Stuart' James Company, the largest penny stock firm, was fined $2.1 million, and withdrew from the field; in July, J.W. Gant & Associates was fined $30,000, ordered to disgorge nearly $200,000, and required to restructure itself to prevent future violations.

      The teamwork of the SEC, the states, the Department of Justice, the FBI and the NASD has succeeded in reducing from 200 to less than 100 the number of firms doing a significant business in penny stocks, and in cutting penny stock volume from an estimated 80 million shares a day in 1989 to under 40 million in 1990. More than 40 percent of the complaints received by the NASD in 1989 concerned penny stocks; today it is 25 percent, and falling.

      Not only are the securities markets quite clean, but the clean-up continues with vigor.

      Reprinted by permission of The Star-Ledger, May 19, 1991. © 1991 Newark Morning Ledger Company.

      Colorado Cuts Registration Fees; Arkansas Changes CRD Phase II Participation

      Effective July 1, 1991, Colorado reduced its broker-dealer and agent fees. The broker-dealer registration and renewal fee fell from $130 to S100. Agent registration, transfer, and renewal fees declined from $25 to $20.

      Effective June 20, 1991, Arkansas ceased to allow its initial broker-dealer registration fee of $300 to be collected through the Central Registration Depository (CRD). Payment of the fee now should be submitted directly to the state.

      If you have questions regarding these changes, call NASD Information Services at (301) 590-6500.

      West Orange, New Jersey, and Charlotte, North Carolina, PLATO Centers Relocate

      Effective August 26, 1991, the West Orange, New Jersey, PLATO Professional Development Center will relocate to 101 Eisenhower Parkway, 4th Floor, Roseland, NJ 07068. The new phone number will be (201) 228-8777.

      The West Orange center will close at noon Thursday, August 22 and all day Friday, August 23.

      Effective September 16, 1991, the Charlotte, North Carolina, PLATO Professional Development Center will relocate to 5250 77 Center Drive, Suite 495, Charlotte, NC 28217.

      The Charlotte center will close at 1 p.m. Thursday, September 12 and all day Friday, September 13. The telephone number will remain the same.

      Maine Hikes Licensing and Filing Fees, Eases Use of "Blue Sky" Exemption

      The Maine Securities Division is increasing two categories of fees and easing use of the exemption from state registration for Nasdaq/NMS securities to make it a self-executing exemption that does not require a filing or a fee. All of the changes, which result from implementation of the Revised Maine Securities Act, are effective August 19, 1991.

      The fee for initial and renewal sales representative licensing applications will rise from $30 to $40. The filing fee for securities registration will go up from $300 to $400 for each security being offered, except for offerings in which the total amount raised (in and out of state) does not exceed $1 million. The fee for these smaller offerings will remain at $300.

      The new law continues to provide for an exemption from state "blue sky" registration for securities listed or approved for listing on Nasdaq/NMS and eliminates the previous requirement for those approved-for-listing securities that a notice filing and fee be sent to the Maine Securities Administrator. For additional information about the changes, contact the state securities division at (207) 582-8760.

      An Important Letter to Members

      NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
      1735 K STREET, NORTHWEST
      WASHINGTON, D.C. 20006

      September 16, 1991

      To All NASD Members:

      The recent disclosure of impropriety in the government securities market is yet another link in the chain of recent events that have shaken investor confidence and brought into question the credibility of the securities industry. Recovering from the highly publicized cases of insider trading, irregularities in the junk bond market, and the near collapse of the savings & loan industry, the financial markets have been dealt another blow.

      As might be expected, a number of serious questions are being asked: Are America's securities markets fair? Are greed, corruption, and rulebreaking commonplace? An important question, which we must ask ourselves, is whether self-regulation works. More to the point, self-regulation has been an integral part of the securities industry for more than 50 years — but is the commitment to it still strong?

      Lest we forget, self-regulation is not a right but a privilege. It is a responsibility that must be earned and re-earned. The compact forged between our industry, federal regulators, and lawmakers in the 1930s — which led to the formation in 1939 of the NASD — placed enormous trust in the ability of the securities industry to regulate itself. We must do everything in our power to sustain that trust.

      The starting point is for every NASD member to reaffirm its commitment to observing the highest standards of professional and ethical conduct and to following just and equitable principles of trade. Since the responsibility for compliance with rules and regulations begins with the securities firms themselves, every member should undertake a comprehensive review of its internal compliance programs to be absolutely certain they are effective. If deficiencies are detected, they must be corrected promptly. In addition, each of us should personally scrutinize our daily activities, making certain that self-interest or the interests of the firm do not stand in the way of our mandate to serve the investing public fairly. We must submit to rigorous and repeated self-examination.

      In spite of recent events, U.S. securities markets continue to be the fairest, most visible, and best regulated in the world. Self-regulation has helped make them so. The process works — but it can work better. We must demonstrate that self-regulation is effective at detecting and deterring wrongdoing. If we fail, we stand to lose the trust and confidence of our most valuable asset — the investor.

      Unquestionably, the overwhelming majority in the securities industry play by the rules. They are ethical. They are honest. They know that good compliance is good business. Through renewed commitment and the rededication of every market, every member, and every professional in our industry to the principles of self-regulation, it is within our power to restore investor confidence in the financial markets. Together we can make it happen.

      Sincerely,

      William B. Summers, Jr.
      Chairman

      Joseph R. Hardiman
      President and CEO

      Texas, Nebraska Increase Broker/Dealer, Agent Registration Fees

      Effective September 1, 1991, Texas boosted its broker/dealer and agent registration fees. The broker/dealer registration fee increased from $70 to $275, while the broker/dealer renewal fee rose from $35 to $240. The agent registration and transfer fees jumped from $30 to $235, while the agent renewal fee climbed from $15 to $220.

      Effective September 6, 1991, Nebraska increased its broker/dealer and agent fees. The broker/dealer registration and renewal fee each rose from $100 to $250. Agent registration, transfer, and renewal fees went from $15 to $40.

      If you have any questions regarding these changes, call NASD Information Services at (301) 590-6500.

      NASD Western Region Conference Slated for November 22-23

      Mark your calendar for the NASD's Western Region Securities Conference sponsored by Districts 1, 2, 3, 4, and 6 on November 22 and 23, 1991, at the Registry Resort in Scottsdale, Arizona. Registration information will be mailed to all main and branch offices of member firms in the sponsoring districts in late September. Members in other districts that are interested in additional information should contact Elisabeth Owen at (202) 728-8005.

      New Paper and Pencil Exam Site to Open in South Dakota

      Effective October 5, 1991, NASD paper and pencil qualification examinations will be administered at a new first-Saturday location in South Dakota. Appointments will be accepted for that session beginning in September. The center is located at Sioux Falls College, Science Center, Room 203, 1501 South Prairie, Sioux Falls, SD.

      NASD Hosts Securities Conference in Arizona Next Month

      NASD Districts 1, 2, 3, 4, and 6 will sponsor a securities conference at the Registry Resort in Scottsdale, Arizona on November 21-23. The program includes general sessions on the economic outlook for the securities industry, staying competitive, and media coverage of the markets. Workshop topics include advertising, arbitration, branch office compliance, compliance and supervision issues, District Business Conduct Committee issues, financial and operational concerns, financial planners and insurance broker/dealers, investment companies, markups, qualifications, and securities regulation. There will also be a special training session for NASD arbitrators.

      Speakers at the meeting include NASD President and Chief Executive Officer Joseph R. Hardiman, Securities Investor Protection Corporation President Theodore H. Focht, Assistant U.S. Treasury Secretary for Economic Policy Sidney Jones, SEC Assistant Director for Compliance and Financial Responsibilities Michael A. Macchiaroli, and McDonald & Company Securities President (and NASD Chairman) William B. Summers, Jr.

      Conference registration is limited and costs $295 per person. A 10 percent early registration discount is available through October 21. Registration for the arbitration session only is $90 per person. To request a conference brochure, please fax your name, firm, and address to Elisabeth Owen at (202) 728-6952. For additional information, call her at (202) 728-8005.

      Alaska, Puerto Rico Increase Broker/Dealer, Agent Registration Fees

      Effective September 8, 1991, Texas boosted its broker/dealer and agent fees. The broker/dealer renewal fee jumped from $75 to $200. The agent registration and transfer fees increased from $50 and $10, respectively, to $75 each, while the agent renewal fee rose from $30 to $75.

      Effective August 28, 1991, Puerto Rico increased its agent registration, transfer, and renewal fees from $25 to $150.

      If you have any questions regarding these changes, call NASD Information Services at (301)590-6500.

      Three PLATO Centers Relocate, New Center to Open in Emeryville, California

      Effective immediately, the Edina, Minnesota PLATO Professional Development Center has relocated to 8300 Norman Center Drive, Suite 850, Bloomington, MN 54437. The telephone number remains the same.

      Effective November 25, 1991, the Binningham, Alabama PLATO Professional Development Center will relocate to Lakeshore Park Plaza, 2204 Lakeshore Drive, Suite 305, Birmingham, AL 35209. The new telephone number will be (205) 870-9836. The current location will be closed on Thursday and Friday, November 21 and 22.

      Effective December 16, 1991, the Albuquerque, New Mexico PLATO Professional Development Center will relocate to 6400 Uptown Boulevard, NE, Suite 476-W. Anew telephone number has not been assigned yet.

      A new PLATO Professional Development Center will open in mid-December in the San Francisco/Berkeley area. The address will be 6425 Christie Avenue, Emeryville, CA 94608. The telephone number has not yet been assigned.

      Kansas, Illinois, Nevada Increase Agent Registration, Transfer, and Renewal Fees

      Effective October 7, 1991, Kansas increased its agent fees. Agent registration, transfer, and renewal fees all rose from $25 to $30. Broker/dealer registration and renewal fees remained at $100 each.

      Effective November 1, 1991, Illinois also boosted its agent fees. Agent registration, transfer, and renewal fees climbed from S40 to $50. Broker/dealer registration and renewal fees remained at $300 each.

      Effective October 1, 1991, Nevada increased its agent registration, transfer, and renewal fees from $50 to $55.

      If you have any questions regarding these changes, call NASD Information Services at (301) 590-6500.

      Correction to October 1991 "For Your Information"

      The October 1991 Notices to Members "For Your Information" article titled "Alaska, Puerto Rico Increase Broker/Dealer, Agent Registration Fees" erroneously referred to Texas instead of Alaska in the first sentence. The fees mentioned are for Alaska. The Texas fee change information was listed correctly in the "For Your Information" section of the September 1991 NASD Notices to Members.

      NASD Seeks Permission to Contact Brokers About Insurance Programs

      The NASD recently sent a letter to the Chief Executive Officer of each member firm requesting permission to contact its registered representatives directly about the Association's group insurance programs. The letters followed the approval of both the Members Group Insurance and the Membership Committees of the NASD to allow the use of the Association's data base for such direct contacts, but only with the consent of each member firm. The NASD will not make the information in the data base available for any other purpose.

      While the NASD has provided information on the programs (covering life, accidental death, disability, and major medical insurance) to member firms for many years, it never has contacted registered representatives directly about them.

      Beginning late this month, brochures describing the life insurance program will be sent to the homes of registered representatives of those firms granting permission. The registered representatives then may apply for whatever level of protection they elect. The NASD's group insurance administrators will forward an individual's application to the proper insurance carriers and then will begin servicing all phases of each account.

      New Hampshire Increases Agent Registration and Transfer Fees

      Effective January 1, 1992, New Hampshire will increase its agent fees. Agent registration and transfer fees each will rise from $65 to $130.

      If you have any questions regarding these changes, call NASD Information Services at (301) 590-6500.

      Alabama Withdraws from CRD Phase II Participation

      Effective January 1, 1992, Alabama will withdraw from participation in the Central Registration Depository (CRD) Phase II. Member firms will be required to submit Form BD, amendments to Form BD, and Form BDW directly to the state instead of to the NASD.

      The state will be sending a separate notification to all firms registered in Alabama that will outline the new filing procedures and requirements. If you have any questions, contact the Alabama Securities Commission at (205) 242-2984.

      PLATO Centers Change Phone Number in Albuquerque, Address in Waitham

      Effective December 16, 1991, the telephone number of the Albuquerque, New Mexico PLATO Development Center will change to (505) 884-6033.

      The PLATO Development Center in Waltham, Massachusetts will relocate effective January 13, 1991, to 1601 Trapelo Road, Waitham, MA 02154. The telephone number will remain the same. The center will be closed on Thursday and Friday, January 9 and 10.

    • 91-85 Nasdaq National Market Additions, Changes, and Deletions as of November 25, 1991

      SUGGESTED ROUTING:*

      Internal Audit
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      As of November 25, 1991, the following 57 issues joined the Nasdaq National Market, bringing the total number of issues to 2,645:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      ODFL

      Old Dominion Freight Line, Inc.

      10/24/91

      1000

      UWSI

      United Wisconsin Services, Inc.

      10/24/91

      1000

      CENF

      CENFED Financial Corporation

      10/25/91

      500

      GDYS

      Goody's Family Clothing, Inc.

      10/25/91

      1000

      IMRS

      IMRS Inc.

      10/25/91

      1000

      MYTK

      Mitek Surgical Products, Inc.

      10/25/91

      200

      SPLE

      Sports/Leisure, Inc.

      10/28/91

      500

      WCLBR

      Warehouse Club, Inc. (Rts)

      10/28/91

      1000

      ACAM

      Autocam Corporation

      10/29/91

      1000

      WCLWV

      Warehouse Club, Inc. (Wts) (WI)

      10/29/91

      1000

      CUTS

      Supercuts, Inc.

      10/30/91

      1000

      UFBI

      UF Bancorp, Inc.

      10/30/91

      500

      ALTN

      Alteon Inc.

      11/1/91

      1000

      MARQA

      Marquette Electronics, Inc. (Cl A)

      11/1/91

      1000

      DOSE

      Choice Drug Systems, Inc.

      11/5/91

      1000

      DOSEW

      Choice Drug Systems, Inc. (Wts)

      11/5/91

      500

      CLCDF

      Clearly Canadian Beverage Corp.

      11/5/91

      1000

      NVUE

      nVIEW Corporation

      11/5/91

      1000

      TOYH

      T•HQ, Inc.

      11/5/91

      1000

      LAIS

      Advanced Interventional Systems, Inc.

      11/6/91

      200

      CSTM

      Custom Chrome, Inc.

      11/6/91

      1000

      NRCT

      National Rehabilitation Centers, Inc.

      11/6/91

      1000

      ATHN

      Athena Neurosciences, Inc.

      11/7/91

      1000

      EMBX

      EMBREX, Inc.

      11/7/91

      500

      EMBXW

      EMBREX, Inc. (Wts)

      11/7/91

      500

      ENZWV

      Enzon, Inc. (Wts)(WI)

      11/7/91

      1000

      INNN

      Interactive Network, Inc.

      11/7/91

      1000

      SCAN

      Alliance Imaging, Inc.

      11/8/91

      1000

      DVCR

      Diversicare, Inc.

      11/8/91

      1000

      NUSA

      NAMIC U.S.A. Corporation

      11/8/91

      1000

      BGII

      Bally Gaming International, Inc.

      11/11/91

      500

      BTIX

      Biomagnetic Technologies, Inc.

      11/12/91

      1000

      PPSI

      Pacific Physician Services, Inc.

      11/12/91

      1000

      ATRX

      ATRIX Laboratories, Inc.

      11/14/91

      1000

      ATNI

      Atlantic Tele-Network, Inc.

      11/14/91

      1000

      MTCFD

      MTC Electronic Technologies Co. Ltd.

      11/14/91

      1000

      MLICV

      Manhattan Life Insurance Company (The) (WI)

      11/14/91

      500

      ARIS

      ARI Network Services, Inc.

      11/15/91

      1000

      CHKR

      Checkers Drive-In Restaurants, Inc.

      11/15/91

      1000

      NDCOP

      Noble Drilling Corporation (Pfd)

      11/15/91

      500

      FMSI

      Fidelity Medical, Inc.

      11/18/91

      1000

      BIOMF

      Biomira Inc.

      11/19/91

      500

      CYBE

      CyberOptics Corporation

      11/19/91

      500

      IMCL

      ImClone Systems Incorporated

      11/19/91

      1000

      SULC

      Sulcus Computer Corporation

      11/19/91

      1000

      SULCP

      Sulcus Computer Corporation (Pfd)

      11/19/91

      1000

      SULCW

      Sulcus Computer Corporation (Cl A Wts)

      11/19/91

      1000

      SULCZ

      Sulcus Computer Corporation (Cl B Wts)

      11/19/91

      1000

      GNCR

      GenCare Health Systems, Inc.

      11/20/91

      1000

      IAAI

      Insurance Auto Auctions, Inc.

      11/20/91

      1000

      ASGR

      America Service Group Inc.

      11/21/91

      200

      APSO

      Apple South, Inc.

      11/21/91

      1000

      INFO

      Information America, Inc.

      11/21/91

      1000

      PCNI

      Physician Computer Network, Inc.

      11/21/91

      1000

      STSA

      Sterling Savings Association

      11/21/91

      1000

      CYTL

      Cytel Corporation

      11/22/91

      1000

      HAMB

      Hamburger Hamlet Restaurants, Inc.

      11/22/91

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of the Nasdaq National Market securities occurred since October 23, 1991:

      New/Old Symbol

      Date of Change

      LSBX/TREX

      Lawrence Savings Bank/Intrex Financial Services, Inc.

      10/28/91

      SSIF/SSIF

      Southeastern Thrift and Bank Fund (The)/Southeastern Savings Institution Fund, Inc. (The)

      10/31/91

      INTK/ENTC

      INOTEK Technologies Corp./Entronics Corp.

      11/1/91

      TUES/TUES

      Tuesday Morning Corp./Tuesday Morning Inc.

      11/1/91

      UNTH/CETH

      United Thermal Corp./United Thermal Corp.

      11/1/91

      HMTB/HFGA

      HomeTrust Bank/Home Federal Savings Bank of Georgia

      11/7/91

      TELU/FARA

      Total-Tel USA Communications, Inc./Faradyne

       
       

      Electronics Corp.

      11/7/91

      TPOA/RDWI

      Travel Ports of America, Inc./Roadway Motor Plazas, Inc.

      11/12/91

      CMFB/CMFB

      Chemfab Corporation/Chemical Fabrics Corp.

      11/14/91

      AIRM/CELL

      Air Methods Corp./Cell Technology, Inc.

      11/22/91

      AIRMW/CELLW

      Air Methods Corp. (Wts)/Cell Technology, Inc. (Wts)

      11/22/91

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      MFSB

      Pinnacle Bancorp, Inc.

      10/28/91

      TIB I

      Image Bank, Inc. (The)

      10/29/91

      IEHC

      IEH Corp.

      10/30/91

      INSH

      International Shipholding Corporation

      10/30/91

      PTSI

      P.A.M. Transportation Services, Inc.

      10/30/91

      PAGH

      Pacific Agricultural Holdings, Inc.

      10/30/91

      TMTX

      Temtex Industries, Inc.

      10/30/91

      DBHI

      Dow B. Hickam, Inc.

      10/31/91

      CTCO

      Cross & Trecker Corporation

      11/1/91

      KASL

      Kasler Corporation

      11/1/91

      METC

      Metcalf & Eddy Companies Inc.

      11/1/91

      VBND

      VeloBind, Incorporated

      11/4/91

      AEGNY

      AEGON N.V.

      11/5/91

      AVAK

      Avantek, Inc.

      11/5/91

      STPL

      St. Paul Companies, Inc. (The)

      11/8/91

      SLTM

      Selecterm, Inc.

      11/11/91

      APPN

      Appian Technology, Inc.

      11/13/91

      CENQE

      Centuri, Inc.

      11/13/91

      CLFI

      Country Lake Foods, Inc.

      11/13/91

      HRLD

      Harold's Stores, Inc.

      11/13/91

      WCLBR

      Warehouse Club, Inc. (Rts)

      11/14/91

      HFSB

      Carolina Financial Corporation

      11/15/91

      DUCO

      Durham Corporation

      11/15/91

      CHHC

      C.H. Heist Corp.

      11/18/91

      ADMG

      Advanced Magnetics, Inc.

      11/20/91

      PTCO

      Petroleum Equipment Tools Co.

      11/20/91

      BANG

      Bangor Hydro-Electric Company

      11/21/91

      GKIE

      General Kinetics Incorporated

      11/21/91

      TTOY

      Tyco Toys, Inc.

      11/21/91

      TTOYW

      Tyco Toys, Inc. (Wts)

      11/21/91

      TCOMR

      Tele-Communications, Inc. (Rts)

      11/22/91

      Questions, regarding this notice should be directed to Kit Milholland, Senior Analyst, Market Listing Qualifications, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 91-84 Trade Date-Settlement Date Schedule for 1992

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      New Year's Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock MarketSM will be closed on Wednesday, January 1, 1992, in observance of New Year's Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date*

      Dec. 19

      27

      31

      20

      30

      Jan. 2, 1992

      23

      31

      3

      24

      Jan. 2, 1992

      6

      25

      Markets Closed

      -

      26

      3

      7

      27

      6

      8

      30

      7

      9

      31

      8

      10

      Jan. 1, 1992

      Markets Closed

      -

      2

      9

      13

      Martin Luther King, Jr., Day: Trade Date-Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Martin Luther King, Jr., Day, Monday, January 20, 1992. On January 20, securities exchanges and The Nasdaq Stock Market will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

      Trade Date

      Settlement Date

      Reg. T Date*

      Jan. 9

      16

      20

      10

      17

      21

      13

      21

      22

      14

      22

      23

      15

      23

      24

      16

      24

      27

      17

      27

      28

      20

      27

      29

      21

      28

      30

      Note: January 20, 1992, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on January 20 will be combined with transactions made on the previous business day, January 17, for settlement on January 27. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on January 20.

      *Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker/dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(1), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Reg. T. Date."

      Presidents' Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Monday, February 17, 1992, in observance of Presidents' Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date*

      Feb. 7

      14

      19

      10

      18

      20

      11

      19

      21

      12

      20

      24

      13

      21

      25

      14

      24

      26

      17

      Markets Closed

      -

      18

      25

      27

      Good Friday: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Good Friday, April 17, 1992. "Regular way" transactions made on the business days immediately preceding that day will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      April 9

      16

      21

      10

      20

      22

      13

      21

      23

      14

      22

      24

      15

      23

      27

      16

      24

      28

      17

      Markets Closed

      -

      20

      27

      29

      Memorial Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Monday, May 25, 1992, in observance of Memorial Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      May 15

      May 22

      May 27

      18

      26

      28

      19

      27

      29

      20

      28

      June 1

      21

      29

      2

      22

      June 1

      3

      25

      Markets Closed

      -

      26

      2

      4

      Independence Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Friday, July 3, 1992, in observance of Independence Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      June 25

      July 2

      July 7

      26

      6

      8

      29

      7

      9

      30

      8

      10

      July 1

      9

      13

      2

      10

      14

      3

      Markets Closed

      -

      6

      13

      15

      Labor Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Monday, September 7, 1992, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      August 28

      Sept. 4

      Sept. 9

      31

      8

      10

      Sept. 1

      9

      11

      2

      10

      14

      3

      11

      15

      4

      14

      16

      7

      Markets Closed

      -

      8

      15

      17

      Columbus Day: Trade Date-Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 12, 1992. On this day, securities exchanges and The Nasdaq Stock Market will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed.

      Trade Date

      Settlement Date

      Reg. T Date*

      October 1

      8

      12

      2

      9

      13

      5

      13

      14

      6

      14

      15

      7

      15

      16

      8

      16

      19

      9

      19

      20

      12

      19

      21

      13

      20

      22

      Note: October 12, 1992, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 12, will be combined with transactions made on the previous business day, October 9, for settlement on October 19. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 12.

      Veteran's Day and Thanksgiving Day: Trade Date-Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Veteran's Day, Wednesday, November 11, 1992, and Thanksgiving Day, Thursday, November 26, 1992. On Wednesday, November 11, securities exchanges and The Nasdaq Stock Market will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed in observance of Veteran's Day. All securities markets will be closed on Thursday, November 26, in observance of Thanksgiving Day.

      Trade Date

      Settlement Date

      Reg. T Date*

      Nov. 2

      Nov. 9

      Nov. 11

      3

      10

      12

      4

      12

      13

      5

      13

      16

      6

      16

      17

      9

      17

      18

      10

      18

      19

      11

      18

      20

      12

      19

      23

      18

      25

      30

      19

      27

      Dec. 1

      20

      30

      2

      23

      Dec. 1

      3

      24

      2

      4

      25

      3

      7

      26

      Markets Closed

      -

      27

      4

      8

      Note: November 11, 1992 is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on November 11 will be combined with transactions made on the previous business day, November 10, for settlement on November 18. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, buy-ins, and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.

      Christmas Day and New Year's Day: Trade Date-Settlement Date Schedule

      Securities exchanges and The Nasdaq Stock Market will be closed on Friday, December 25, 1992, Christmas Day, and Friday, January 1, 1993, New Year's Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg.T Date*

      Dec. 17

      Dec. 24

      Dec. 29

      18

      28

      30

      21

      29

      31

      22

      30

      Jan. 4, 1993

      23

      31

      5

      24

      Jan. 4, 1993

      6

      25

      Markets Closed

      -

      28

      5

      7

      Dec. 29

      Jan. 6, 1993

      8

      30

      7

      11

      31

      8

      12

      Jan. 1, 1993

      Markets Closed

      -

      4

      11

      13

      Brokers, dealers, and municipal securities dealers should use the foregoing settlement dates for purposes of clearing and settling transactions pursuant to the NASD Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at (212) 858-4341.

    • 91-83 NASD 1992 Holiday Schedule

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      The NASD will observe the following holiday schedule for 1992:

      January 1

      New Year's Day

      July 3

      Independence Day (Observed)

      February 17

      Presidents' Day

      September 7

      Labor Day

      April 17

      Good Friday

      November 26

      Thanksgiving Day

      May 25

      Memorial Day

      December 25

      Christmas Day

    • 91-82 Proposed Revision of NASD Manual

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD, on the recommendation of its Legal Advisory Board (LAB), has undertaken a reorganization of the NASD Manual in order to make the Manual easier to use. As a first step in the Manual revision project, the LAB proposed an outline of the Manual. The LAB contemplates that, ultimately, the text of the Manual will be reorganized to conform to the outline and that the text of the Manual will then be edited to eliminate redundancies and inconsistencies. Because the outline itself is useful in locating relevant provisions contained in the Manual, however, a copy follows this notice for the benefit of NASD members. The outline was distributed as part of the November 1991 supplement to the looseleaf edition of the Manual and will be included in the next paper-bound NASD Manual.

      BACKGROUND

      In 1988, the NASD's Board of Governors approved the creation of the LAB, a group of attorneys who are prominent members of the securities bar. The LAB offers guidance to the NASD's Board of Governors on legal and policy issues. In 1989, the LAB recommended a project to reorganize the NASD Manual. Members of the LAB were in general agreement that the NASD Manual is currently organized in an awkward manner that makes it difficult for users to locate provisions relevant to a given topic. The NASD proposes to follow a two-step process with respect to the reorganization of the Manual. As a part of step one, the LAB prepared an outline for a proposed reorganization of the Manual. The LAB contemplated that, following the completion of the outline, the NASD, after review by appropriate committees of the Board of Governors, would physically reorder the existing text of the Manual to conform to the outline. As step two, the LAB contemplated that the NASD would undertake a substantive review of the Manual so as to eliminate inconsistencies and redundancies that would become more apparent when the text of the Manual was reordered.

      To date, the LAB has completed its proposed outline for the revised Manual and has prepared a mock-up of the reordered text. Because the outline itself is useful in locating relevant sections of the Manual, the NASD has arranged to publish the outline along with the latest update to the Manual. Accordingly, the outline was included in a November 1991 mailing that transmitted updated pages to persons who subscribe to Commerce Clearing House's looseleaf version of the Manual. The outline will also be included in the next edition of the paper-bound Manual reprint. The outline, which is denominated as a "Guide to the Manual," is found on pages 21 through 24 of the looseleaf version of the Manual.

      The NASD also decided to publish the outline in this Notice to Members so as to allow the greatest possible number of Manual users to benefit from the outline. Page numbers reflected on the attached outline refer to pages contained in the loose-leaf version of the Manual, as of November 1991.

      The NASD and the LAB welcome any suggestions that users of the Manual may wish to offer with respect to improvements to the outline. Written comments or suggestions regarding the outline should be directed to Anne H. Wright, Senior Attorney, Office of General Counsel, National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, DC 20006-1506. Any comments that the staff receives regarding the outline will be relayed to the members of the LAB.

      NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OUTLINE OF THE MANUAL

         

      Pages

      ORGANIZATION

       

      Certificate of Incorporation

      1021

       

      By-Laws

      1045

       

      Schedule A — Assessments and Fees

      1501

       

      Schedule B — District Boundaries

      1521

       

      Schedule C — Applications for Membership, Registration of Principals and Representatives, etc

      1531

       

      Limitations Upon Use of Association Name (Resolution)

      1651

       

      NASD to Furnish Current List of Membership (Rules of Fair Practice, Article VI, first and last sentences)

      2219

       

      CONDUCT STANDARDS

       

      Adoption and Application (Rules of Fair Practice, Article I)

      2011

       

      Interpretations and Explanations (Resolution)

      1651

       

      Definitions (Rules of Fair Practice, Article II)

      2012

       

      Business Conduct (General)

      2014

       

      Standards of Honor and Principles of Trade (Rules of Fair Practice, Article III, § 1)

      2014

       

      Use of Manipulative, Deceptive, or Other Fraudulent Devices (Rules of Fair

       
       

      Practice, Article III, § 18)

      2079

       

      Treatment of Customers

       
       

      Advertisements and Sales Literature (Rules of Fair Practice, Article III, § 35)

      2156

       

      Communications

       
       

      Recommendations to Customers Suitability (Rules of Fair Practice, Article HI, §2)

      2051

       

      Recommending Speculative Low-Priced Securities (Policy)

      2052

       

      Recommending Purchases Beyond Customer Capability (Policy)

      2053

       

      Confirmations (Rules of Fair Practice, Article HI, § 12) "Third Market" Confirmations (Explanation)

      2069

       

      Disclosure of Control Relationship With Issuer (Rules of Fair Practice, Article III, § 13)

      2078

       

      Disclosure of Participation or Interest in Primary or Secondary Distribution (Rules of Fair Practice, Article III, § 14)

      2078

       

      Forwarding of Proxy Material, Annual Reports, etc. (Interpretation)

      2041

       

      Disclosure of Financial Condition to Customers (Rules of Fair Practice, Article HI, §22)

      2097

       

      Availability to Customers of Certificate, By-Laws, Rules, and Codes of Procedure (Rules of Fair Practice, Article IV, § 1)

      2203

       

      Special Accounts

       
       

      Discretionary Accounts (Rules of Fair Practice, Article III, § 15)

      2078

       

      Margin Accounts (Rules of Fair Practice, Article III, § 30, Appendix A)

      2114

       

      Options See Special Products, Below

      2116

       

      Transactions With Customers

       
       

      Fair Dealing With Customers (Policy)

      2052

       

      Excessive Trading Activity ("Churning" or "Overtrading")

      2052

       

      Trading in Mutual Fund Shares

      2052

       

      Transactions in Discretionary Accounts in Excess of or Without Actual Authority

      2053

       

      Unauthorized Transactions

      2053

       

      Other Fraudulent Activities

      2053

       

      Guaranteeing Customers Against Loss (Rules of Fair Practice, Article III, § 19(e))

      2083

       

      Sharing in Customers' Profits or Losses (Rules of Fair Practice, Article III, § 19(f))

      2083

       

      Best Execution and Interpositioning Execution of Retail Transactions in the Over-the-Counter Market (Interpretation)

      2038

       

      Commissions, Markups, and Charges

       
       

      Net Prices to Person Not in Investment Banking or Securities Business (Rules of Fair Practice, Article III, § 23)

      2097

       

      Dealing With Nonmembers

      2097

       

      Charges for Services Performed (Rules of Fair Practice, Article III, § 3)

      2055

       

      Fair Practice and Commissions (Rules of Fair Practice, Article III, § 4)

      2056

       

      Markups (Policy)

      2056

       

      Installment or Partial Payment Sales (Rules of Fair Practice, Article III, § 20)

      2094

       

      Customers' Securities and Funds

       
       

      Prompt Receipt and Delivery of Securities (Interpretation)

      2039

       

      Customers' Securities and Funds (See Books and Records and Financial Condition)

      2095

       

      Securities Distributions

       
       

      Review of Corporate Financing (Interpretation)

      2023

       

      Securities of Members and Affiliates (Schedule E)

      1611

       

      Free-Riding and Withholding (Interpretation)

      2043

       

      Fixed Price Offerings

       
       

      Securities Taken in Trade (Rules of Fair Practice, Article III, § 8 and Interpretation)

      2065

       

      Selling Concessions, Discounts and Other Allowances (Rules of Fair Practice, Article III, § 24 and Interpretation)

      2097

       

      Transactions With Related Persons (Rules of Fair Practice, Article III, § 36 and Interpretation)

      2177

       

      Offerings "At the Market" (Rules of Fair Practice, Article III, § 16)

      2079

       

      Contents of Selling Group Agreements (Rules of Fair Practice, Article III, § 7)

      2065

       

      Solicitation of Purchases on an Exchange to Facilitate a Distribution (Rules of Fair Practice, Article III, §17)

      2079

       

      Special Products

       
       

      Direct Participation Programs (Rules of Fair Practice, Article III, § 34)

       
       

      Appendix F

      2148

       

      Insurance Company Variable Contracts (Rules of Fair Practice, Article III, §29)

      2113

       

      Investment Company Securities (Rules of Fair Practice, Article HI, § 26)

      2105

       

      Options (Rules of Fair Practice, Article III, § 33)

      2127

       

      Appendix E

      2128

       

      Options-Related Communications

      2195

       

      Rules of Fair Practice, Article III, § 35(f)

      2172

       

      Government Securities

      2263

       

      Responsibilities to Other Brokers or Dealers

       
       

      Dealing With Nonmember Broker or Dealer (Rules of Fair Practice, Article III, § 25)

      2101

       

      Transactions Between Members and Nonmembers (Interpretation)

      2101

       

      Charges for Services Performed (Rules of Fair Practice, Article III, § 3)

      2055

       

      Disclosure of Financial Condition to Other Members (Resolution Under Rules of Fair Practice, Article III, § 22)..

      2097

       

      Responsibilities Relating to Associated Persons, Employees, and Others' Employees

       
       

      Supervision (Rules of Fair Practice, Article III, § 27)

      2177

       

      Fidelity Bonds (Rules of Fair Practice, Article III, § 32) Appendix C

      2124

       

      Employment of Disciplined Associated Persons (Interpretation Under Rules of Fair Practice, Article V, § 1)

      2215

       

      Associated Persons' Outside Business Activities (Rules of Fair Practice, Article III, §43)

      2191

       

      Associated Persons' Participation in Private Securities Transactions (Rules of Fair Practice, Article III, §40)

      2189

       

      Transactions for or by Associated Persons (Rules of Fair Practice, Article III, § 28)

      2178

       

      Notice of Disciplinary Action (Schedule C, Part V)

      1543

       

      Influencing or Rewarding Employees of Others (Rules of Fair Practice, Article III, § 10)

      2068

       

      Books and Records and Financial Condition

       
       

      Books and Records (Rules of Fair Practice, Article III, § 21)

      2095

       

      General

      2095

       

      Customer Order Tickers

      2095

       

      Accounts

      2095

       

      Written Complaints

      2095

       

      Predispute Arbitration Agreements With Customers

      2095

       

      Fictitious Accounts (Policy Fair Dealing With Customers)

      2052

       

      Use of Information as to Ownership of Securities Obtained in Fiduciary Capacity (Rules of Fair Practice, Article III, § 9)

      2068

       

      Customers' Securities or Funds (Rules of Fair Practice, Article III, § 19(a)-(d))

      2083

       

      Explanation of Segregation (Rules of Fair Practice, Article 111, § 19(a)-(d))

      2083

       

      Unauthorized Use or Borrowing of Customers' Funds (Policy Fair Dealing With Customers)

      2052

       

      Members Experiencing Financial and/or Operational Difficulties (Rules of Fair Practice, Article III, § 38 and Explanation)

      2179

       

      Change in Exempt Status Under Exchange Act Rule 15c3-3 (Rules of Fair Practice, Article III, § 39)

      2186

       

      Providing NASD Membership List to Offices and Associated Persons (Rules of Fair Practice, Article VI, second sentence)

      2219

       

      Settlements

       
       

      Uniform Practice Code

      3501

       

      Securities "Failed to Receive" and "Failed to Deliver" (Rules of Fair Practice, Article III, §31)

      2123

       

      Appendix B

      2123

       

      Trading (General)

       
       

      Publication of Transactions and Quotations (Rules of Fair Practice, Article III, § 5)

      2063

       

      Manipulative and Deceptive Quotations (Interpretation)

      2063

       

      Offers at Stated Prices (Rules of Fair Practice, Article III, § 6)

      2064

       

      Firmness of Quotations (Policy)

      2064

       

      Payments Designed to Influence Market Price (Rules of Fair Practice, Article III, § 11)

      2069

       

      Transactions During Trading Halt (Rules of Fair Practice, Article III, § 42)

      2190

       

      Short Positions — Recording and Reporting (Rules of Fair Practice, Article III, §41)

      2190

       

      Reporting Certain OTC Transactions to Consolidated Tape (Schedule G)

      1631

       

      Reporting Transactions in Certain Non-Nasdaq Securities (Schedule H)

      1653

       

      TRADING SYSTEMS

       

      Nasdaq (Schedule D)

      1561

       

      Member Requirements

      1580

       

      Issuer Requirements

      1564

       

      Small Order Execution System (SOES)

      2303

       

      Intermarket Trading System/Computer Assisted Execution System (ITS/CAES) (Rules of Fair Practice, Article III, § 37 and Rules of Practice and Procedure for ITS/CAES)

      2501

       

      PORTAL (Schedule I)

      1671

       

      Member Requirements

      1675

       

      Issuer Requirements

      1673

       

      OTC Bulletin Board (Schedule H)

      1653

       

      PROCEDURE

       

      Complaints (Rules of Fair Practice, Article IV, §§ 2-4)

      2203

       

      Investigation (Rules of Fair Practice, Article IV, § 5)

      .2205

       

      Suspension of Members for Failure to Furnish Information Duly Requested (Resolution)

      2205

       

      Sanctions (Rules of Fair Practice, Article V, §§ 1-3)

      2215

       

      Notice of Penalties (Resolution)

      2215

       

      Code of Procedure

      3001

       

      Code of Arbitration Procedure

      3701

    • 91-81 Reporting Information on Form BD

      SUGGESTED ROUTING:*

      Legal & Compliance
      Operations
      Registration
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      After several years of discussion, the Securities and Exchange Commission (SEC), NASD, and North American Securities Administrators Association (NASAA) have resolved their differing views regarding disclosure requirements relating to matters reportable on Form BD. This notice explains the background of the matter, as well as the approach that is now being developed to achieve a uniform standard of disclosure.

      BACKGROUND

      The Central Registration Depository (CRD) was expanded in 1989 to enable firms to file one Form BD for both NASD membership and state licensing requirements. In the operation of this CRD system, it became evident that states and the SEC and NASD differed in their disclosure requirements regarding the reporting of matters classified under the term "proceeding" found on Form BD, Item 7G. Since 1989, these differing interpretations have had a significant impact on members attempting to identify and to comply with a uniform filing standard. This issue was previously reported in Notice to Members 90-46, July 1990.

      The NASD has followed the SEC's interpretation of the term "proceeding," first stated by the SEC in release number 12078 (February 6, 1976) and restated in 1985. The SEC interpretation included proceedings brought by the Commission, regulators, and self-regulators and did not include investigations, arrests without convictions, and civil litigation not conducted by a regulatory or self-regulatory body.

      Many states had interpreted the term "proceeding" in a different way. In 1989 NASAA issued a resolution that stated the term "proceeding" included pending administrative and civil proceedings initiated by self-regulatory, regulatory, and governmental agencies as well as pending criminal charges and civil litigation.

      RESOLUTION OF ISSUE

      The SEC, NASD, and NASAA have been meeting since the winter of 1990 to reach agreement on the interpretation of the term "proceeding." The parties have recently agreed to a new interpretation of the term "proceeding" to include formal administrative and civil actions initiated by self-regulatory and governmental agencies and formal criminal charges, including felony indictments, felony criminal informations, and formal felony criminal charges equivalent to a criminal indictment or information, and any formal misdemeanor criminal information (or equivalent charge) involving matters listed in Item 7A(1) of Form BD. The interpretation does not include criminal arrests effected in the absence of a formal written charge, investigations, or civil litigation.

      This new interpretation differs from the SEC's 1976 release in that it includes formal criminal charges. The difference between the new interpretation and the NASAA resolution is that the new interpretation does not include private civil litigation, These changes will be reflected in upcoming revisions to Form BD. Questions regarding this notice should be directed to Ellen Badler, Assistant Director, Special Registration Review, at (301) 590-6743, or Craig Landauer, Office of General Counsel, at (202) 728-8291.

    • 91-80 Request for Comments on Proposed Amendments to Article III, Section 15 of the NASD Rules of Fair Practice Re: Exemption from the Rule for Negative Comment Letters Used in Certain Bulk Exchanges of Money Market Mutual Funds; Last Date For Comments

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Mutual Fund
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD requests comments on proposed amendments to Article III, Section 15 of the NASD Rules of Fair Practice. The amendments would exempt certain bulk exchanges of money market mutual funds utilizing negative response letters from the provisions of the rule. The text of the proposed amendments follows this notice.

      BACKGROUND

      The NASD Board of Governors, in Notice to Members 91-39, June 1991, reminded members that the use of negative response letters to facilitate the exchange of mutual fund shares may violate the provisions of Article III, Section 15 of the NASD Rules of Fair Practice.

      Such a violation would occur if a member executed an exchange automatically for a nonreplier to the letter without prior written authority from the shareholder giving the member discretion over the account.

      Following the distribution of the notice, the NASD received a number of comments requesting that an exemption from the rule be adopted for the bulk transfer of money market mutual funds using negative response letters in certain situations. Such instances would include mergers and acquisitions, changes of clearing members, and exchanges of money market mutual funds used in sweep accounts where investment performance is not the primary reason for the exchange.

      In these situations, it is often necessary to notify hundreds and, sometimes, several thousand money market mutual fund shareowners of an impending exchange. It would be an almost impossible task to contact each nonreplier to a negative response letter and solicit approval of the exchange, as well as cause considerable time delays and added cost in effecting the exchange.

      SUMMARY OF PROPOSED AMENDMENT

      The NASD is proposing to permit the use of negative response letters in the limited situations outlined above by adopting an exemption from the provisions of Article III, Section 15. Such an exemption would require that certain standards be adopted governing the use of negative response letters.

      The NASD is proposing to create an exemption for bulk exchanges of money market mutual funds utilizing negative response letters provided the following conditions are met: (1) that bulk exchanges be limited to mergers and acquisitions of funds, changes of clearing members, and exchanges of funds used in sweep accounts; (2) that the negative response letter includes a tabular comparison of the nature and amount of fees charged by each fund (e.g., management fees, fees under Rule 12(b)-l of the Investment Company Act of 1940, and similar fees); (3) that the negative response letter includes a comparative description of the investment objectives of each fund; and (4) that the negative response feature not be activated until at least 30 days after the date on which the letter was mailed. In addition, the NASD proposes that a prospectus of the fund to be purchased accompany the letter.

      REQUEST FOR COMMENTS

      The Board of Governors asks members and other interested persons to comment on the proposed amendments to Article III, Section 15 of the NASD Rules of Fair Practice. Comments should be directed to:

      Stephen D. Hickman Office of the Secretary National Association of Securities Dealers, Inc. 1735 K Street, NW Washington, DC 20006-1506.

      Comments must be received no later than January 15, 1992. Comments received by this date will be considered by the NASD Investment Companies Committee and the Board of Governors. Prior to becoming effective, the amendments must be adopted by the Board of Governors and the membership and then filed with the Securities and Exchange Commission for its approval.

      Questions concerning this notice should be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202)728-8328.

      AMENDMENTS TO ARTICLE III, SECTION 15 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New text is underlined.)

      Discretionary Accounts

      Sec. 15.

      Excessive transactions

      (a) No member shall effect with or for any customer's account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account.

      Authorization and acceptance of account

      (b) No member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Section 27 of these rules.

      Approval and review of transactions

      (c) The member or the person duly designated shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account.

      Exceptions

      (d)(1) This section shall not apply to discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed.
      (d)(2) This section shall not apply to bulk ex-changes of money market mutual funds ("funds") utilizing negative response letters provided:
      (i) The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts.
      (ii) The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund, (iii) The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased, (iv) The negative response feature will not be activated until at least 30 days after the date on which the letter was mailed.

    • 91-79 Request for Comments on Recision of the Guidelines Regarding Communications With the Public About Investment Companies and Variable Contracts (Guidelines) And Proposed Amendments to the NASD Rules of Fair Practice to Incorporate Items From the Gu

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Mutual Fund
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposal to rescind the Guidelines and to amend Article III, Section 35 of the Association's Rules of Fair Practice to include items that were contained in the Guidelines regarding disclosure about tax free/tax exempt returns, comparisons, and projections of performance. The text of the proposed amendments and a copy of the Guidelines follow this notice.

      BACKGROUND

      In 1979, the Securities and Exchange Commission (SEC) rescinded the Statement of Policy on Investment Company Sales Literature (SOP) that for many years had governed the content of advertising and sales literature used in the sale of investment company shares. To provide guidance to members in the preparation of such communications with the public, the NASD developed the Guidelines, which were adopted in 1982 and are included at ¶ 5286 of the NASD Manual. Since then, the SEC has amended Rule 482 under the Securities Act of 1933 and adopted Rule 34b-1 under the Investment Company Act of 1940 regarding the portrayal of investment company performance in communications with the public. This has rendered much of the content of the Guidelines obsolete.

      The remaining content, except for three areas, is covered by the standards already set forth in Article III, Section 35 of the Rules of Fair Practice. The NASD therefore proposes to rescind the Guidelines and to retain three sections (claims of tax free/tax exempt returns, comparisons, and prohibitions on projections of performance) that would become part of Article III, Section 35 of the Rules of Fair Practice, the NASD rule governing communications with the public.

      THE GUIDELINES

      The NASD Guidelines, published February 8, 1982, were primarily designed to assist NASD members in complying with the NASD rules governing communications with the public, especially in view of the withdrawal of the SOP. The Guidelines are divided into five sections:

      1. General Considerations
      2. Special Considerations in Presenting Investment Results
      3. Specific Considerations in Presenting Capital Results or Total Return Illustrations
      4. Specific Considerations in Presenting Yield Data or Illustrations
      5. Considerations Regarding Comparisons

      The Investment Companies and Insurance Affiliated Member Committees were asked to consider the status of the Guidelines in light of the 1988 amendments to SEC Rule 482 and adoption of SEC Rule 34b-1, and in light of standards already contained in Article III, Section 35. The SEC rules created new requirements governing the presentation of performance in investment company advertising and sales literature. The revisions have made many aspects of the Guidelines obsolete as they apply to open-end investment companies and variable annuities. The rule revisions do not apply to unit investment trusts, closed-end funds, or variable life insurance. The standards in Section 35 render the remaining portions of the Guidelines redundant and duplicative, as these standards overlap with the considerations set forth in the Guidelines.

      Analysis of the Guidelines

      Section 1. General Considerations

      This section sets forth general factors to be considered in determining whether a communication may be misleading. Those factors include:

      1. "Overall context in which statements are made," which urges balance in the treatment of risks and benefits;
      2. "Audience to which the communication is directed," which reminds members that the content should be appropriate for the readership; and
      3. "Overall clarity of the communication," which cautions against misleading the reader through overly technical or oversimplified information, or relegating material information to footnotes.

      Section 35(d)(1) requires that communications be based on principles of fair dealing and good faith. Such communications must provide a sound basis for evaluating the facts and must not mislead the reader by omitting material information. The section prohibits exaggerated, unwarranted, or misleading statements and requires that the risks inherent in any investment be considered in the preparation of a communication with the public.

      The considerations set forth in Section 1 of the Guidelines are covered by the standards currently set forth in Section 35 and, thus, it is not necessary to retain them.

      Section 2. Special Considerations in Presenting Investment Results

      This section sets forth basic principles designed to reduce the risk of a reader attributing unwarranted predictive value to data concerning investment results.

      • Investment Objectives and Policies as Related to Data Provided — This principle stresses the need for performance illustrations to show the relationship of such performance to investment objectives and cautions that material changes in objectives, policies, management, etc. during the time period illustrated should be described.

        SEC Rule 482, as amended, requires that performance be calculated in a specified manner, and if such changes have occurred, it requires the fund's performance to reflect such changes. Thus, the Guidelines are superseded by the requirements of the SEC rule.

      • Appropriateness and Fairness of Time Periods Illustrated — This principle addresses the need to show performance for appropriate time periods and sets forth recommendations of what those periods should be.

        SEC Rule 482, as amended, requires that performance be shown for one-, five-, and ten-year time periods. Thus, the Guidelines are superseded by the requirements of the SEC rule.

      • Adequacy of Information Concerning the Relevance of Results Illustrated to Probable Future Results — This principle stresses, "Investment results cannot be predicted or projected. . . " and it urges that long-term illustrations make clear that short-term fluctuations exist.

        The requirement that the risk of fluctuation be disclosed is covered by existing standards of Section 35. The prohibition on projections or predictions of investment management results is not and, therefore, it is proposed as a new standard to be incorporated into Section 35.

      • The Clarity of a Chart or Table Format — This principle addresses the need to present statistical data in a clear, complete, and not misleading format.

        Section 35 (d) prohibits misleading information or the omission of material facts. Thus, this principle is already addressed in the current standards.

      • The Adequacy of Summary Results and the Need for Supporting Data — This principle urges that summary results be accompanied by year-by-year supporting data.

        SEC Rule 482 requires summary results for one, five, and ten years and does not require supporting information. Thus, this section is rendered obsolete by the rule.

      • Inclusion of Relevant Charges and Expenses — This principle addresses the need to show performance results net of applicable charges and expenses.

        SEC Rule 482 requires that performance results be calculated by a standardized formula, which takes into account expenses. In addition, Section 35 prohibits the omission of material information. Therefore, performance calculations, whether pursuant to the restrictions of Rule 482 or to the standards of Section 35, are required to reflect expenses. Thus, this section is rendered both obsolete and redundant.

      Section 3. Specific Considerations in Presenting Capital Results in Total Return Illustrations

      This section sets forth specific guidelines for presenting total return information, including time periods illustrated, disclosures to accompany such illustrations, and recommended components of these illustrations.

      Rule 482 requires that total return information, calculated by standardized methods, be provided for specific time periods. It further sets forth specific disclosures regarding fund performance that must be included in every communication illustrating such performance. Since these disclosures satisfy the SEC, it would appear unnecessary to require any additional information as suggested by this section.

      Section 4. Specific Considerations in Presenting Yield Data or Illustrations

      This section sets forth principles governing income or yield illustrations. Included among these principles are disclosures concerning risk of fluctuation of income and capital value as well as information about the portfolio. The section recommends methods for calculating historic, current, and annualized yields. Finally, the section addresses the concern that yields or income should not be described as free or exempt from income taxes in situations where liability is postponed or deferred.

      The provisions of Rule 482 clearly restrict the methods by which current yields may be calculated, both for money market and non-money market funds. These restrictions are in direct contradiction to the considerations set forth in the Guidelines and, therefore, the latter should be rescinded.

      The principle regarding the need to disclose any relevant taxes when describing yields or income as tax-free or tax-exempt is not addressed by SEC rules. While the general standards of Section 35 prohibit the omission of material information or the inclusion of misleading standards, the recommendations set forth in this section are not clearly addressed. Therefore, the NASD proposes to incorporate this principle as a new standard in Section 35.

      Section 5. Considerations Regarding Comparisons

      This section of the Guidelines stresses the necessity that comparisons of investment products or services be complete, fair, and balanced, and that they clearly explain any material differences between the subjects in order to make the comparisons not misleading.

      While these recommendations concerning comparisons are supported by the general standards of Section 35, the Board believes that a section should be added to the rule that clearly explains specific points to be addressed when developing complete and fair comparisons.

      SUMMARY

      The Board of Governors believes that it is appropriate to withdraw the Guidelines altogether and amend Article III, Section 35 to incorporate standards addressing the three areas mentioned directly above. In addition to eliminating the inconsistencies and redundancies by rescinding the Guidelines, the incorporation of the three outstanding issues would consolidate the regulations under one rule. Also, the standards relating to tax free/lax exempt claims, comparisons, and predictions or projections would equally apply to all types of securities, not just to registered investment companies.

      The NASD encourages all members and other interested parties to comment on the proposal to rescind the Guidelines and to simultaneously amend Article III, Section 35 of the Rules of Fair Practice to include standards addressing these three concerns. The new standards would be included as Specific Standards under Section (d)(2) of Section 35, as (d)(2)(L), (d)(2)(M), and (d)(2)(N). Comments should be forwarded to:

      Stephen Hickman
      Office of the Secretary
      National Association of
      Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Comments should be received no later than January 20, 1992.

      Questions concerning this notice should be directed to R. Clark Hooper, Director, Advertising Department, at (202) 728-8330.

      GUIDELINES REGARDING COMMUNICATIONS WITH THE PUBLIC ABOUT INVESTMENT COMPANIES AND VARIABLE CONTRACTS

      (Note: The entire text of the Guidelines is proposed to be deleted.)

      1. General Considerations

      In judging whether a communication, or a particular element of a communication, may be misleading, several factors should be considered, including, but not limited to:

      The Overall Context in Which the Statement or Statements Are Made

      A statement made in one context may be misleading even though such a statement could be perfectly appropriate in another context. An essential test in this regard is the balance of treatment of risks and potential benefits.

      The Audience to Which the Communication is Directed

      Different levels of explanation or detail may be necessary depending on the audience to which a communication is directed, and the ability of the member, given the nature of the media used, to restrict the audience appropriately. If the statements made in a communication would be applicable only to a limited audience, or if additional information might be necessary for other audiences, it should be kept in mind that it is not always possible to restrict the readership of a particular communication.

      The Overall Clarity of the Communication

      A statement or disclosure made in an unclear manner obviously can result in a lack of understanding of the statement, or in a serious misunderstanding. A complex or overly technical explanation may be worse than too little information. Likewise, material disclosure relegated to legends or footnotes realistically may not enhance the reader's understanding of the communication.

      2. Special Considerations in Presenting Investment Results

      Presentations of investment results require special care to insure that they are not misleading. While it is not possible to prevent every reader of a communication which illustrates investment results from attributing unwarranted predictive value to the data, adequate consideration of certain basic principles can reduce this risk. Among these basic principles are:

      Investment Objectives and Policies as Related to Data Provided

      Generally speaking, illustrations of investment results should be designed to illustrate the relationship of investment performance to stated investment objectives over meaningful periods. If material changes in objectives, policies, management, or other characteristics have occurred during or since the time period illustrated, these changes should be described.

      Appropriateness and Fairness of the Time Periods Illustrated

      In general, the appropriate time periods for illustrations of results are those which are of sufficient duration that the relevance of the data to the investment objectives can be determined. Thus yield or performance data may cover a variety of different periods for different types of investments. The selection of a specific time period solely for the purpose of illustrating performance "at its best" is likely to mislead. Illustrations should generally include the last full calendar or fiscal year, or the last twelve months.

      Adequacy of Information Concerning the Relevance of Results Illustrated to Probable Future Results

      Investment results cannot be predicted or projected and historical illustrations should reflect this. Presentations of investment results should be made in a context that makes clear that within the longer periods illustrated there have been short term fluctuations, often counter to the overall trend of investment results, and that no single period of any length is to be taken as "typical" of what may be expected in future periods. This is a simple principle, and not one which should require a great deal of boiler plate language but rather a simple, straightforward explanation.

      The Clarity of a Chart or Table Format

      In selection of a format for illustration of investment results in either chart or table form, consideration should be given not only to the completeness and accuracy of the data, but also to the clarity and meaningfulness of the overall presentation. Careful consideration should be given to the overall visual impact of data presented in chart form, since the reader may not go beyond a scanning of the "trend" shown by a chart. It should be recognized that the reader who is confused by having been buried in masses of unclear, although statistically relevant, data may be misled just as badly as the reader who is given too little information.

      The Adequacy of Summary Results and the Need for Supporting Data

      While a summary of investments results is often necessary in order to make sales literature readable and understandable, it must be recognized that the reader may not look beyond the summary data presented. Consequently, the preparer of such illustrations should take into account that the summary data must be fair in all respects and not likely to mislead, either directly or by distracting the reader from other necessary information. Generally speaking, all summary data covering periods longer than one year should be supported by full year-by-year data over the same or longer periods and should include reference to that supporting data. If supporting data is not included in the same piece of sales literature, members should carefully consider supplying the data in another document.

      Inclusion of Relevant Charges and Expenses

      Illustrations of income and/or capital results should reflect the results which would have been achieved by the reader for whom the illustration is designed. Actual sales charges, account charges or deductions, and any other relevant expenses which would have been applicable should be taken into account in the illustration, unless such current charges are different, in which case the current charges should be described. Illustrations of gross investment results may be appropriate under certain limited circumstances, but such illustrations should normally be accompanied by an explanation of how such results would be affected by all applicable charges and expenses.

      3. Specific Considerations in Presenting Capital Results in Total Return Illustrations

      Application of the foregoing principles to illustrations involving capital results, either alone or as part of a "total return" illustration, results in the following specific considerations.

      Capital results illustrations, including "total return" data, should generally cover a period long enough to reflect variations in value through different market conditions. A period of ten years, or if shorter, the life of the company or account, is the recommended minimum illustration period, with periods longer than ten years being in five year increments. In illustrations of other periods, particularly shorter periods, members should consider whether to include with such illustration an explanation of the reason for selecting such period and whether data for the recommended ten year or life minimum period should be included with such illustration or in another specifically referenced document, such as a prospectus or shareholder report. Generally, data for full calendar or fiscal years should be reflected. A discussion of the general trends of relevant securities prices during the period may be desirable to lend proper perspective to such illustrations. Illustrations dealing solely with capital results should explain the relative significance of income.

      Illustrations of "total return" (i.e. illustrations which reflect the combined results of capital and income) should reflect dollar and/or percentage changes for each year covered by the illustration, as well as for the total period. The illustration should, except for variable contracts, show the breakdown of the income and capital components at least for the total period covered. Where such a breakdown for the total period would not adequately convey the significance of annual variations in the components, consideration should be given to including annual income and capital data. If dividends are assumed to have been reinvested, the illustration should reflect the actual frequency and results of such reinvestments during the period. Illustrations of performance results in chart form may be misleading because of the scale on which they are displayed. Generally, if an illustration of capital results or of total return is in chart form, a semi-log (ratio) format is recommended.

      4. Specific Considerations in Presenting Yield Data or Illustrations

      Application of the foregoing general principles to income or yield illustrations results in the following specific considerations.

      Any illustration or statement of yield should be accompanied by an explanation of how the yield is computed, along with any additional information necessary to fairly evaluate the yield, including a reference to such risks as may be involved in ownership of the security. Depending on the circumstances, one or more of the following may be appropriate:

      • a statement concerning the variability of income;

      • a statement of the variability of capital value, e.g., the net asset value at the beginning and end of the previous calendar or fiscal year, or during a recent market advance or decline;

      • information about the general characteristics of the portfolio and any material portfolio changes which are anticipated.

      Historic yields should be calculated by dividing the company's annual dividends from net investment income by the maximum offering price of the company's shares, using either the average price during the year or the price at the beginning or end of the year.

      Current yields should generally be calculated by dividing the company's dividend income for the previous twelve months by the current maximum offering price. However, annualized yields based on periods of less than one year may be appropriate in some cases, e.g., money market funds, funds with less than a full year's history, and funds where the current rate of dividend income varies significantly from the dividends paid in the previous twelve months. Such annualized yield should be based on the company's gross income less actual expenses for the period.

      Yields or income should not be characterized as tax sheltered or as free or exempt from income tax where tax liability is merely postponed or deferred. Unless income is free from all income taxes, references to tax exemption should indicate which taxes apply or specify which taxes do not apply. For example, if income from an investment company investing in municipal bonds may be subject to state or local income taxes, this should be stated, or the illustration should otherwise make it clear that income is free from federal income tax.

      5. Considerations Regarding Comparisons

      Comparisons of investment products or services may be, valuable or useful to investors but care must be taken to insure that comparisons are fair and balanced. Comparisons generally should include explanation of the purpose of the comparison and explanation of any material differences between the subjects of the comparison.

      Comparisons involving investment companies and variable contracts are often related to yield or performance, but may also relate to structure, fees, tax features and other matters. It is essential that a comparison be as complete as practicable and that no fact be omitted which, if disclosed, would likely alter materially the conclusions reasonably drawn or implied by the comparison. This point is particularly important with respect to selection of time periods for comparison of investment results. Data for each subject of the comparison should also be presented on the same basis, i.e., for the same period in terms of both aggregate and year by year data.

      Comparisons with alternative investment or savings vehicles should explain clearly any relevant differences in guarantees, fluctuation of principal and/or return, insurance, tax features, and any other factors necessary to make such comparisons fair and not misleading.

      A comparison of investment performance with a market index or average generally should, if appropriate in view of the nature of the comparison, include a clear indication of the purpose of the comparison and the reason or purpose for selection of the index or average, and a description of the index and the fact that it is unmanaged. The extent of the explanation necessary will vary, depending upon the degree of general recognition of the particular index. If there are material differences between the composition of the index and the composition of the portfolio, this should be pointed out. If the comparison is not on a total return basis, the relative impact of differences in income or capital changes, whichever is applicable, should also be explained.

      Unless the comparison clearly explains the material relevant differences, a comparison with an index, average, or group of investment companies or accounts should relate to an index, average, or group of investment companies or accounts with investment objectives similar to that of the company compared. Where possible, it is advisable to use an independently prepared and published index, average or group. The smaller or less widely recognized the group or category selected, the greater the importance of explaining the reason for the selection. Since overall investment company industry averages generally include diverse portfolios and objectives, comparisons with such averages should generally not be used.

      PROPOSED AMENDMENTS TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New text is underlined.)

      COMMUNICATIONS WITH THE PUBLIC

      Sec. 35

      * * *

      (d) Standards Applicable to Communications with the Public
      (1) General Standards
      * * *
      (2) Specific Standards

      In addition to the foregoing general standards, the following specific standards apply:

      * * *
      (L) Claims of Tax Free/Tax Exempt Returns: Income or investment returns may not be characterized as tax free or exempt from income tax where tax liability is merely postponed or deferred. If taxes are payable upon redemption, that fact must be disclosed. References to tax free/tax exempt current income must indicate which taxes apply and which do not unless income is free from all applicable taxes.
      (M) Comparisons: In making a comparison, either directly or indirectly, the member must make certain that the purpose of the comparison is clear and must provide a fair and balanced presentation, including any material differences between the subjects of comparison. Such differences include investment objectives, sales and management fees, liquidity, guarantees or insurance, fluctuation of principal and/or return, tax features, and any other factors necessary to make such comparisons fair and not misleading.
      (N) Predictions and Projections: Investment results cannot be predicted or projected. Investment performance illustrations may not imply that future gain or income realized in the past will be repeated in the future.

    • 91-78 Request for Comments on Member Participation in Partnership Rollups and Listing of Securities Resulting from Rollups on Nasdaq/NMS; Last Date for Comments: February 1, 1992

      SUGGESTED ROUTING:*

      Senior Management
      Corporate Finance
      Legal & Compliance
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD requests comments on proposed amendments to Appendix F under Article III, Section 34 of the Rules of Fair Practice and Schedule D to the NASD By-Laws. The amendments would restrict member participation in unfair rollup transactions and prohibit listing on the Nasdaq National Market System of any security resulting from an unfair rollup transaction. The text of the proposed amendments follows this notice.

      BACKGROUND

      The NASD has proposed amendments to Appendix F under Article III, Section 34 of the Rules of Fair Practice ("Appendix F") and Schedule D to the NASD By-Laws ("Schedule D") that would limit NASD member participation in unfair rollup transactions and restrict listing of the securities of entities resulting from unfair rollups on the Nasdaq National Market System (Nasdaq/NMS). The amendments respond to the legislative mandate in the proposed Limited Partnership Rollup Reform Act of 1991 (the "Rollup Reform Act"), which would impose on the NASD the responsibility for developing rules to protect limited partners in rollup transactions.

      The Rollup Reform Act is the legislative response to abuses that have occurred in recent rollup transactions. The bill requires the Securities and Exchange Commission (SEC) to amend its rules relating to the proxy process and disclosure to include provisions that benefit limited partners subject to a rollup. NASD rules required by the Rollup Reform Act relate to prohibiting members from participating in a rollup as well as prohibiting the surviving entity from listing its securities on Nasdaq/NMS if certain protections are not afforded limited partners. In particular, general partners or sponsors proposing a rollup must provide limited partners, as alternatives to participation in the rollup, with either the right to receive compensation based on an appraisal of partnership assets or the right to receive or retain a security with rights, privileges, and preferences similar to their partnership units. As elaborated on herein, if the NASD makes a finding that it is infeasible to provide these alternatives, then the general partner can propose other comparable rights designed to protect limited partners.

      The Rollup Reform Act also requires the NASD to adopt rules to preclude member participation in a rollup transaction and listing on Nasdaq/NMS under certain circumstances. Such action could occur if the terms of the transaction unfairly reduce or abridge the voting rights of investors, if investors are required to bear an unfair portion of the costs of the rollup transaction, or if there are not appropriate restrictions on the conversion of general partner or sponsor compensation resulting from the rollup.

      The Rollup Reform Act was approved by the House of Representatives November 5, 1991 and is currently awaiting action by the Senate. Although the bill has not yet become law, the NASD believes that it is appropriate to consider amendments to Appendix F and Schedule D prior to final adoption due to provisions in the bill that will effectively prohibit rollup transactions from occurring until all required rules are finalized. While the Rollup Reform Act provides the NASD with an 18-month period to enact rules, prompt action appears to be necessary so that sponsors and general partners considering rollup transactions will not be precluded from the market as a result of the absence of the rules mandated by the legislation.

      The proposed amendments to Appendix F and Schedule D will supplement the NASD's recent action prohibiting the receipt of differential compensation in rollup transactions. While the current amendments are being proposed in the context of the pending Rollup Reform Act, the NASD recognizes that additional regulations that are outside the scope of, but not necessarily inconsistent with, the provisions of the Rollup Reform Act may also be appropriate. Therefore, the NASD requests comments and suggestions for rulemaking on any aspect of a rollup transaction that falls within the scope of the NASD's jurisdiction.

      EXPLANATION

      The proposed amendments to Appendix F and Schedule D define the following terms: limited partner, limited partnership, rollup or rollup of a limited partnership, dissenting limited partner, cash flow, cash available for distribution, management fee, and solicitation expenses.

      A "limited partner" is a purchaser of an interest in a direct participation program that is a limited partnership. A "limited partnership" is defined as a direct participation program that is a limited partnership, including any entity determined to be a partnership pursuant to Section 14(h)(4)(B) of the Securities Exchange Act of 1934. The term "sponsor," also used in the proposed amendments, is defined in Article III, Section 34 of the Rules of Fair Practice as "a person who directly or indirectly provides management services for a direct participation program whether as a general partner, pursuant to contract or otherwise."

      The definition of "rollup or rollup of a limited partnership" is proposed to be modified from the current definition in Appendix F to reflect the definition of a rollup that is utilized in the Rollup Reform Act. The definition encompasses the combination or reorganization of one or more limited partnerships, directly or indirectly, whereby investors in the original partnership(s) receive new securities or securities in another entity in exchange for their partnership interests.

      A rollup, under the definition, would not include the combination of publicly traded entities; the combination of all private partnerships into a resulting private entity; the reorganization to corporate, trust, or association form or restructuring of a single partnership if there is no significant, adverse change in the voting rights, term of existence of the entity, management compensation, or investment objectives; a reorganization to corporate, trust, or association form or restructuring of a single partnership if each investor is provided an option to retain a security with substantially the same terms and conditions as the original security; or the reorganization to corporate, trust, or association form or restructuring of a partnership if the entity resulting from such reorganization or restructuring is not intended to be publicly traded following the transaction.

      "Dissenting limited partner" is defined as a limited partner who has cast a vote against a rollup transaction. If a partner does not vote "no," such partner will not be considered a dissenter. A dissenting limited partner may also be a person who has filed a dissent from the terms of a proposed exchange or tender offer with the party responsible for tabulating the votes or tenders. The "no" vote or the dissent must be received during the period in which the offer is outstanding.

      "Cash flow" is defined as cash provided from operations, including lease payments on net leases from builders and sellers, without deduction for depreciation, but after deducting cash funds used to pay all other expenses, debt payments, capital improvements, and replacements.

      "Cash available for distribution" is defined as cash flow less amounts set aside for restoration or creation of reserves.

      A "management fee" is a fee paid to a sponsor, general partner, its affiliates, or other persons for management and administration of a limited partnership.

      "Solicitation expenses" are defined as direct marketing expenses such as telephone calls, broker/dealer fact sheets, legal and other fees related to the solicitation, and direct solicitation compensation to members.

      The proposed rules would prohibit the participation of members and persons associated with members in a rollup transaction unless the transaction includes provisions designed to protect rights of limited partners. The rights of limited partners are presumed to be protected if dissenting limited partners are offered (1) the right to receive compensation for their partnership units based on an independent appraisal of partnership assets, (2) the right to receive or retain a security with substantially the same terms and conditions as the security originally held, or (3) other comparable rights.

      The first option, compensation based on appraisal, contemplates an appraisal performed by an independent appraiser unaffiliated with the sponsor or general partner of the program that values the assets as if sold in an orderly manner in a reasonable period of time, plus or minus other balance-sheet items, and less the cost of sale or refinancing. This is to ensure that the appraisal accurately reflects the current value of the assets. The NASD requests specific comment on whether additional standards regarding appraisals or the qualifications of persons performing appraisals should be considered.

      Forms of compensation that can be offered to dissenting limited partners are cash, secured debt instruments, unsecured debt instruments, or freely tradeable securities. Debt instruments must provide for a trustee and an indenture, provide the holders with a market rate of interest based on the federal funds rate, may have a term no greater than 10 years, and provide for prepayment with 80 percent of the net proceeds of any sale or refinancing of the assets of the entity. Unsecured debt instruments may be used only when the entity issuing the debt has a limitation on total leverage of 80 percent of the appraised value of its assets.

      Freely tradeable securities utilized as compensation must be issued by a company that has been publicly traded prior to the transaction. The number of freely tradeable securities offered in return for partnership interests would be determined by the appraisal of partnership assets in relation to the average last-sale price of the securities in the 20-day period following the transaction.

      The second option, to retain a security with substantially the same terms and conditions as the original issue, provides that limited partners must receive or retain a security with substantially the same rights, preferences, and priorities as their current security. There must be no material adverse change as to the business plan or the investment, distribution, and liquidation policies of the partnership.

      A general partner or sponsor proposing a rollup may avoid the requirement to offer dissenting limited partners compensation based on an appraisal or the right to retain a similar security only upon a demonstration to the NASD that it is infeasible to provide such protections. To the extent that a general partner or sponsor can make a showing of infeasibility, other comparable rights designed to protect limited partners may be utilized. However, the NASD believes that a clear, convincing, and objective showing of infeasibility must be made. Generalizations, forecasts, or assumptions that cannot be objectively supported will not be acceptable.

      Comparable rights may include review of the transaction by an independent committee or other comparable rights as may be proposed by the general partner or sponsor. The comparable rights provisions are intended to provide flexibility for sponsors and general partners to propose other protections for limited partners when the other alternatives are infeasible. If the NASD is unable to determine that the comparable rights offered by sponsors or general partners are sufficient to protect the interests of limited partners, the NASD will require that an independent committee composed of persons not affiliated with the general partner or sponsor be established to review the appropriateness of proposed comparable rights.

      The proposed amendments provide that an independent committee will be composed of at least three persons; will, if practicable, contain representation from each entity subject to the rollup, the majority of whom represent the largest equity holders in the partnerships subject to the rollup and the minority of whom may be recommended by the general partner or sponsor; will have the authority to negotiate the proposed transaction with the general partner or sponsor on behalf of the limited partners, but not the authority to approve the transaction on behalf of the limited partners; will be ruled by unanimous decision; will deliberate for a period no longer than 60 days unless unanimously extended; will be compensated by the partnerships subject to the rollup and will have the ability to retain independent counsel and financial advisors; and will be entitled to indemnification to the maximum extent permitted by law from the general partners, sponsors, limited partnerships, and rolled-up entities from claims, causes of action, or lawsuits resulting from their decisions. The NASD requests specific comment on the make-up and functioning of an independent committee.

      The premise that underlies many of the objections to rollups is that a simple majority of limited partners voting for a rollup can deprive other limited partners of the business and financial opportunities they bargained for when they originally invested. However, this objection may be obviated to some extent if limited partners owning three-fourths of the partnership interests take affirmative action to approve the rollup transaction. Therefore, another comparable right that may be provided is supermajority approval of the rollup. In situations where the sponsors or general partners reasonably believe that a supermajority of 75 percent of the outstanding units of each of the participating partnerships in a rollup will vote to approve the transaction, the provisions of the proposed rules would not be applicable.

      The NASD believes that such an overwhelming approval of the transaction is an accurate indication of the fairness and beneficial nature of the rollup, and that such approval would constitute an "other comparable right" within the terms of the proposed legislation. If the 75 percent supermajority is not ultimately reached, however, the rollup would be considered rejected. Should the sponsor or general partner still wish to pursue the rollup, the proposed transaction would then have to be amended to provide the protections to limited partners provided for in the rules.

      The proposed amendments to Appendix F and Schedule D also address elements of rollup transactions that are potentially unfair to limited partners. These elements include the conversion and valuation of general partner interests in a rollup, voting rights, the allocation of transaction costs of a rejected rollup, and the payment of fees in connection with rollup transactions. The proposed rules create a series of presumptions under which these elements are considered unfair if they fail to protect the rights of limited partners.

      The proposed amendments establish a presumption that it is unfair and unreasonable for general partners, when determining their interest in the new entity resulting from a rollup, to (1) convert an equity interest in partnerships subject to a rollup into a voting interest in the new entity if consideration had not been paid for such equity interest, (2) fail to follow the valuation methods indicated in the partnership agreements when valuing their partnership interests, or (3) utilize a projected future value of their equity interest rather than the appraised current value of their equity interest when determining their interest in the new entity.

      Voting rights will be presumed unfair unless the general partner or sponsor proposes to generally maintain the original voting rights of the partnerships participating in the rollup. However, the NASD recognizes that certain changes to voting rights may be necessary to conform disparate rights that may exist among participating partnerships. Material changes may be effected only if the NASD determines that such changes are not unfair or if an independent committee approves such changes.

      The proposed amendments provide that a majority of the interests in an entity resulting from a rollup may vote to amend the limited partnership agreement, articles of incorporation or bylaws, or indenture; dissolve the entity; remove management and elect new management; and approve or disapprove the sale of substantially all the assets of the entity.

      The proposed amendments would also require a sponsor or general partner proposing a rollup to clearly delineate the instructions and procedures of voting against or dissenting from a proposed rollup transaction. The general partner or sponsor must utilize an independent third party to receive and tabulate all votes and dissents, and must also undertake to make the tabulation available to the general partner and any limited partner on request at any time during and after voting occurs.

      The proposed amendments seek to prevent limited partners from bearing an unfair portion of the transaction costs of a rejected rollup transaction. The allocation of transaction costs in a rejected rollup is presumed fair if the costs are apportioned between general and limited partners according to the final vote on the proposed transaction. The general partner or sponsor would bear costs in proportion to the number of votes to reject the transaction and limited partners would bear costs in proportion to number of votes to approve the transaction. The NASD believes that this allocation of costs is fair to both the general and the limited partners. In the case of a rollup transaction that is approved, the amendments indicate that any partnership(s) that votes not to join the transaction would not have any costs allocated to it.

      Finally, the proposed amendments presume that limited partners are not protected if general partners propose to receive or convert unearned management fees discounted to a present value while also proposing to receive new asset-based fees. A similar presumption applies if property management fees and other fees are not appropriate, not reasonable, and not greater than those that would be paid to third parties for performing similar services. Substantial and adverse changes in fees are presumed unreasonable if not submitted to and approved by an independent committee.

      REQUEST FOR COMMENTS

      The NASD Board of Governors encourages comment from all members and other interested persons. Comments should be forwarded to:

      Stephen D. Hickman Office of the Secretary National Association of Securities Dealers, Inc. 1735 K Street, NW Washington, DC 20006-1506.

      Comments must be received no later than February 1, 1992. Comments received by this date will be considered by the Direct Participation Programs/Real Estate Committee and the NASD Board of Governors. If the Committee and the Board approve the amendments to Appendix F and Schedule D, they must be filed with and approved by the SEC before becoming effective.

      Questions concerning this notice may be directed to Charles L. Bennett, Director, or Richard J. Fortwengler, Associate Director, NASD Corporate Financing Department, at (202) 728-8258.

      AMENDMENTS TO APPENDIX F TO ARTICLE III, SECTION 34 OF THE RULES OF FAIR PRACTICE AND SCHEDULE D TO THE BY-LAWS

      (Note: Language is in the form of an amendment to Appendix F. Language will be conformed to Part III of Schedule D to the By-Laws. New language is underlined; deleted language is in brackets.)

      Sec. 1.

      No member or person associated with a member shall participate in a public offering of a direct participation program or a rollup of a direct participation program that is a limited partnership except in accordance with this Appendix.

      Sec. 2

      Definitions

      * * * * *

      (b) The following terms shall have the stated meaning when used in this Appendix: * * * * *
      (2) Limited Partner — the purchaser of an interest in a direct participation program that is a limited partnership.
      (3) Limited Partnership — a direct participation program that is a limited partnership, including any entity determined to be a "partnership" pursuant to Section 14(h)(4)(B) of the Securities Exchange Act of 1934, as amended.
      [(3)] (5) Organization and Offering Expenses — (no change)
      [(4)] (6) Participant — the purchaser of an interest in a direct participation program.
      [(5)] (7) Person — (no change)
      [(6)] (8) Registration Statement — (no change)
      [(7)] (9) Rollup or Rollup of a [Direct Participation Program] Limited Partnership -— [a transaction involving an acquisition, merger or consolidation of at least one direct participation program, not currently listed on a registered national securities exchange or the Nasdaq System, into another public direct participation program or a public corporation or a public trust] the combination or reorganization of one or more limited partnerships, either directly or indirectly, whereby investors in the original limited partnership(s) receive new securities or securities of another public entity in exchange for their existing interests. This term shall not include a transaction:
      (i) involving one or more limited partnerships all of the securities of which are, prior to the transaction, securities for which transactions are re-ported under a transaction reporting plan declared effective before January 1, 1991, by the Securities and Exchange Commission under Section 11A of the Securities Exchange Act of 1934;
      (ii) involving only those issuers not required to register or report under Section 12 of the Securities Exchange Act of 1934 where the resulting issuer is also not required to register or report under Section 12; or
      (iii) involving the reorganization to corporate, trust, or association form or restructuring of a single limited partnership if, as a consequence of the proposed transaction there will be no significant, adverse change in any of the following: voting rights, the term of existence of the entity, management compensation, or investment objectives;
      (iv) involving the reorganization to corporate, trust, or association form or restructuring of a single limited partnership if each investor is provided an option to retain a security under substantially the same terms and conditions as the original issue; or
      (v) involving the reorganization to corporate, trust, or association form or restructuring of a single limited partnership if transactions in the security issued as a result of the reorganization or restructuring are not reported under a transaction reporting plan declared effective before January 1, 1991, by the Securities and Exchange Commission under section 11A of the Securities Exchange Act of 1934.
      (10) Dissenting Limited Partner — a holder of a beneficial interest in a limited partnership that is the subject of a rollup transaction who casts a vote against the rollup transaction, except that for purposes of an exchange or tender offer such term means any person who files a dissent from the terms of the transaction with the party responsible for tabulating the votes or tenders, to be received in connection with the transaction during the period in which the offer is outstanding.
      (11) Cash Flow — program cash funds provided from operations, including lease payments on net leases from builders and sellers, without deduction for depreciation, but after deducting cash funds used to pay all other expenses, debt payments, capital improvements and replacements.
      (12) Cash Available For Distribution — cash flow less amount set aside for restoration or creation of reserves.
      (13) Management Fee — a fee paid to the sponsor, general partner(s), their affiliates, or other persons for management and administration of the limited partnership.
      (14) Solicitation Expenses — direct marketing expenses such as telephone calls, broker/dealer fact sheets, legal and other fees related to the solicitation, as well as direct solicitation compensation to members.

      * * * * *

      Sec. 6 Participation In Rollup

      (a) No member shall receive compensation for soliciting votes or tenders from [participants] limited partners in connection with a rollup of a [direct participation program or programs] limited partnership or limited partnerships, irrespective of the form of the entity resulting from the rollup transaction (i.e., a partnership, real estate investment trust or corporation), unless such compensation:
      (1) is payable and equal in amount regardless of whether the [participant] limited partner votes affirmatively or negatively in the proposed rollup;
      (2) in the aggregate, does not exceed 2% of the exchange value of the newly-created securities; and
      (3) is paid regardless of whether the [participants] limited partners reject the proposed rollup transaction.
      (b) No member or person associated with a member shall participate in the solicitation of votes or tenders in connection with the rollup of a [direct participation program] limited partnership unless the general partner(s) or sponsor(s) proposing the rollup agrees to pay all solicitation expenses related to the rollup, including all preparatory work related thereto, in the event the rollup transaction is not approved.
      (c) No member or person associated with a member shall participate in any rollup transaction unless the transaction includes provisions designed to protect the rights of limited partners.
      (1) The rights of limited partners will be presumed to be protected if the rollup transaction provides for the right of dissenting limited partners:
      (i) to receive compensation for their limited partnership units based on an appraisal of the limited partnership assets performed by an independent appraiser unaffiliated with the sponsor or general partner of the program and which value the assets as if sold in an orderly manner in a reasonable period of time, plus or minus other balance sheet items, and less the cost of sale or refinancing-Compensation to dissenting limited partners of rollup transactions may be cash, secured debt instruments, unsecured debt instruments, or freely-tradeable securities; provided, however, that:
      (A) rollups which utilize debt instruments as compensation provide for a trustee and an indenture to protect the rights of the debt holders and provide a market rate of interest based upon the federal funds rate;
      (B) rollups which utilize unsecured debt instruments as compensation, in addition to the requirements of subparagraph (A), limit total leverage to 80% of the appraised value of the assets;
      (C) all debt securities have a term no greater than 10 years and provide for prepayment with 80% of the net proceeds of any sale or refinancing of the assets of the entity or any part thereof; and
      (D) freely-tradeable securities utilized as compensation to dissenting limited partners must be issued by a company listed on a national securities exchange or the Nasdaq National Market System prior to the transaction, and the number of securities to be received in return for limited partnership interests must be determined by an appraisal of limited partnership assets, conducted in a manner consistent with subparagraph (c)(1)(i) hereof, in relation to the average last sale price of the freely-tradeable securities in the 20-day period following the transaction.
      (ii) to receive or retain a security with substantially the same terms and conditions as the security originally held. Securities received or retained will be considered to have the same terms and conditions as the security originally held if:
      (A) there is no material adverse change to dissenting limited partners' rights with respect to the business plan or the investment, distribution and liquidation policies of the limited partnership, and
      (B) the dissenting limited partners receive substantially the same rights, preferences and priorities as they had pursuant to the security originally held.
      (iii) to receive, upon an acceptable demonstration to the NASD that the provisions of subparagraphs (i) and (ii) hereof are infeasible, other comparable rights. Comparable rights may include, but are not limited to:
      (A) review of the rollup transaction by an independent committee of persons not affiliated with the general partner(s) or sponsor. If deemed necessary for the protection of the rights of limited partners, the NASD may require that such a committee be established. Whenever utilized, the independent committee:
      a. shall be approved by the NASD; shall be composed of at least three persons; shall, if practicable, contain representation from each entity subject to the rollup, the majority of whom represent the largest equity holders in the limited partnerships subject to the rollup and the minority of whom may be recommended by the general partner or sponsor; and all of its determinations shall be unanimous;
      b. shall have the authority to negotiate the proposed transaction with the general partner or sponsor on behalf of the limited partners, but not the authority to approve the transaction on behalf of the limited partners;
      c. shall not deliberate for a period longer than 60 days, although extensions will be permitted if unanimously agreed upon by the members of independent committee;
      d. shall be compensated by the limited partnerships subject to the rollup and shall have the ability to retain independent counsel and financial advisors to . represent all limited partners at the limited partnerships' expense provided the fees are reasonable; and
      e. shall be entitled to indemnification to the maximum extent permitted by law from the general partners, sponsors, limited partnerships and rolled up entities from claims, causes of action or lawsuits initiated by any party in interest, including any limited partnership or limited partner subject to the rollup or the rolled up entity for any action or decision made in furtherance of their responsibilities.
      (B) a rollup transaction where the sponsor or general partner(s) reasonably believes that 75% of the outstanding units of each of the participating limited partnerships will vote to approve the transaction. Failure to obtain approval of the transaction by 75% of the outstanding units shall result in rejection of the transaction and the rights of limited partners shall be presumed not to be protected. The third party appointed to tabulate votes and dissents pursuant to subparagraph (2)(ii)(D) shall submit the results of such tabulation to the NASD.
      (C) any other comparable rights proposed by general partners or sponsors, provided, however, that the general partner(s) or sponsor demonstrates to the satisfaction of the NASD or, if the NASD determines appropriate, to the satisfaction of an independent committee, that the rights proposed are comparable.
      (2) The rights of limited partners shall be presumed not to be protected:
      (i) if the general partner(s):
      (A) converts an equity interest in the limited partnerships subject to a rollup for which consideration was not paid and which was not otherwise provided for in the limited partnership agreement and disclosed to limited partners, into a voting interest in the new entity (provided, however, an interest originally obtained in order to comply with the provisions of Internal Revenue Service Revenue Proclamation 89-12 may be converted);
      (B) fails to follow the valuation provisions in the limited partnership agreements of the subject limited partnerships when valuing their limited partnership interests; or
      (C) utilizes a future value of their equity interest rather than the current value of their equity interest, as determined by an appraisal conducted in a manner consistent with paragraph (c)(1)(i) hereof, when determining their interest in the new entity.
      (ii) as to voting rights, if:
      (A) the voting rights in the entity resulting from a rollup do not generally follow the original voting rights of the limited partnerships participating in the rollup transaction; provided, however, that changes to voting rights may be effected if the NASD determines that such changes are not unfair or if the changes are approved by an independent committee;
      (B) a majority of the interests in an entity resulting from a rollup transaction may not, without concurrence by the sponsor, general partner(s), board of directors or trustee, depending on the form of entity, vote to:
      a. amend the limited partnership agreement, articles of incorporation or by laws, or indenture;
      b. dissolve the entity;
      c. remove management and elect new management; and
      d. approve or disapprove the sale of substantially all of the assets of the entity.
      (C) the general partner(s) or sponsor(s) proposing a rollup is not required to provide each person whose equity interest is subject to the rollup transaction with a document which instructs the person on the proper procedure for voting against or dissenting from the rollup transaction;
      (D) the general partner(s) or sponsor(s) does not utilize an independent third party to receive and tabulate all votes and dissents, and require that the third party make the tabulation available to the general partner and any limited partner upon request at any time during and after voting occurs.
      (iii) as to transaction costs:
      (A) if limited partners bear an unfair portion of the transaction costs of a proposed rollup transaction that is rejected. For purposes of this provision, transaction costs are defined as the costs of printing and mailing the proxy, prospectus or other documents; legal fees not related to the solicitation of votes or tenders; financial advisory fees; investment banking fees; appraisal fees; accounting fees; independent committee expenses; travel expenses; and all other fees related to the preparatory work of the transaction, but not including costs that would have otherwise been incurred by the subject limited partnerships in the ordinary course of business, or solicitation expenses.
      (B) if transaction costs of a rejected rollup transaction are not apportioned between general and limited partners of the subject limited partnerships according to the final vote on the proposed transaction as follows:
      a. the general partner(s) or sponsor(s) bears all rollup transaction costs in proportion to the number of votes to reject the rollup transaction; and
      b. limited partners bear transaction costs in proportion to the number of votes to approve the rollup transaction.
      (C) if dissenting limited partnership(s) is required to pay any of the costs of the rollup transaction and the general partner or sponsor is not required to pay the rollup transaction costs on behalf of the dissenting limited partnerships in a rollup in which one or more limited partnerships determines not to approve the transaction, but where the rollup transaction is consummated with respect to one or more approving limited partnerships.
      (iv) as to fees of general partners, if:
      (A) general partners are not prevented from receiving both unearned management fees discounted to a present value (if such fees were not previously provided for in the limited partnership agreement and disclosed to limited partners) and new asset-based fees,
      (B) property management fees and other general partner fees are not appropriate, not reasonable and not greater than what would be paid to third parties for performing similar services, and
      (C) changes in fees which are substantial and adverse to limited partners are not approved by an independent committee according to the facts and circumstances of each transaction.

    • 91-77 Nasdaq National Market Additions, Changes, and Deletions as of October 23, 1991

      SUGGESTED ROUTING:*

      Internal Audit
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      As of October 23, 1991, the following 24 issues listed on the Nasdaq National Market, bringing the total number of issues to 2,618:

      Symbol

      Company

      SOES Entry Date

      Execution Level

      DTLN

      Data Transmission Network Corporation

      10/1/91

      1000

      LTCO

      Lawyers Title Corporation

      10/1/91

      1000

      TCNL

      Tecnol Medical Products, Inc.

      10/1/91

      1000

      USAS

      USA Waste Services, Inc.

      10/1/91

      1000

      PAGE

      Paging Network, Inc.

      10/2/91

      1000

      MPRS

      MicroProse, Inc.

      10/3/91

      1000

      GRND

      Grand Casinos, Inc.

      10/9/91

      1000

      MEDA

      Medaphis Corporation

      10/9/91

      1000

      AFFC

      AmeriFed Financial Corp.

      10/10/91

      1000

      ANRG

      Anergen, Inc.

      10/10/91

      200

      MEGX

      Megacards, Inc.

      10/10/91

      200

      SALT

      Salton/Maxim Housewares, Inc.

      10/10/91

      1000

      STEI

      Stewart Enterprises, Inc. (Cl A)

      10/10/91

      1000

      BDRM

      Body Drama, Inc.

      10/11/91

      1000

      CGRM

      Centigram Communications Corporation

      10/11/91

      1000

      RTST

      Right Start, Inc. (The)

      10/11/91

      1000

      SWST

      Southwest Securities Group, Inc.

      10/11/91

      1000

      USRX

      U.S. Robotics, Inc.

      10/11/91

      500

      SUPRP

      Super Rite Corporation (Pfd)

      10/15/91

      500

      WTNY

      Whitney Holding Corporation

      10/15/91

      500

      LANTF

      Lannet Data Communications Ltd.

      10/17/91

      1000

      RDRT

      Read-Rite Corporation

      10/18/91

      500

      BARE

      Barefoot Inc.

      10/23/91

      1000

      IFSC

      Interferon Sciences, Inc.

      10/23/91

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since September 25, 1991:

      New/Old Symbol

      New/Old Security

      Date of Change

      ERTS/ERTS

      Electronic Arts, Inc./Electronic Arts

      9/27/91

      SRAM/SMTK

      Simtek Corporation/Simtek Corporation

      9/30/91

      SRAMW/SMTKW

      Simtek Corporation (Wts)/Simtek Corporation (Wts)

      10/1/91

      KVLM/KVLM

      Kevlin Corp./Kevlin Microwave Corporation

      10/2/91

      SYSM/NWPH

      Systemed, Inc./Newport Pharmaceuticals International, Inc.

      10/2/91

      MPTBS/SETBS

      Meridian Point Realty Trust 83/Sierra Real Estate Equity Trust 83

      10/15/91

      SAFE/SNCO

      Safetytek Corp./Sensor Control Corp.

      10/15/91

      SISKF/SISK

      Siskon Gold Corporation/Siskon Gold Corporation (Cl A)

      10/17/91

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      CARN

      Carrington Laboratories, Inc.

      9/30/91

      FAHSP

      Farm & Home Financial Corporation (Pfd)

      9/30/91

      HCSB

      Home and City Savings Bank

      9/30/91

      IGLWF

      Insituform Group Limited (Wts)

      9/30/91

      FNWB

      FNW Bancorp, Inc.

      10/1/91

      JETSE

      Jetborne International, Inc.

      10/4/91

      CDGI

      Courier Dispatch Group, Inc.

      10/7/91

      SNAT

      Southern National Corporation

      10/8/91

      BLAK

      Black Industries, Inc.

      10/10/91

      UNIH

      United HealthCare Corporation

      10/10/91

      TATE

      Ashton-Tate Corporation

      10/14/91

      ABCV

      Affiliated Bane Corporation

      10/15/91

      JLUB

      Jiffy Lube International, Inc.

      10/17/91

      ALNTC

      Alliant Computer Systems

      10/18/91

      CESHW

      CE Software Holdings, Inc. (Wts)

      10/21/91

      HCEN

      Home Centers, Inc.

      10/21/91

      NVCR

      NovaCare, Inc.

      10/21/91

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, Market Listing Qualifications, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 91-76 Christmas Day and New Year's Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      Securities exchanges and The Nasdaq Stock MarketSM will be closed on Wednesday, December 25, 1991, Christmas Day, and Wednesday, January 1, 1992, New Year's Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date*

      Dec. 17

      Dec. 24

      Dec. 27

      18

      26

      30

      19

      27

      31

      20

      30

      Jan. 2, 1992

      23

      31

      3

      24

      Jan. 2, 1992

      6

      25

      Markets Closed

      -

      26

      3

      7

      27

      6

      8

      30

      7

      9

      31

      8

      10

      Jan.1, 1992

      Markets Closed

      -

      2

      9

      13

      Brokers, dealers, and municipal securities dealers should use these settlement dates for purposes of clearing and settling transactions pursuant to the NASD Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at (212) 858-4341.

      * Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker/dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)m, make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Reg. T Date."

    • 91-75 Appointment of SIPC Trustee for Three Firms

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Municipal
      Operations
      Systems
      *These are suggested departments only. Others may be appropriate for your firm.

      On September 12, 1991, the United States District Court for the Eastern District of Texas (Tyler) appointed a Securities Investor Protection Corporation (SIPC) trustee for:

      Affiliated Security Brokers, Inc.
      115 East Erwin Street
      Tyler, TX 75702.

      Questions regarding the firm should be directed to SIPC trustee:

      Wayne M. Secore, Esquire
      DeHay & Blanchard 2500 S. Tower (L.B. 201)
      600 N. Pearl Street
      Plaza of the Americas
      Dallas, TX 75201.

      On September 13, 1991, SIPC began a direct payment proceeding for:

      Cooper-Daher Securities, Inc.
      657 Mission Street, Suite 601
      San Francisco, CA 94105.

      Questions regarding the firm should be directed to:

      Securities Investor Protection Corporation
      805 15th Street, NW, Suite 800
      Washington, DC 20005-2207.

      On October 8, 1991, the United States District Court for the Northern District of Texas appointed an SIPC trustee for:

      T.L. Reed Securities, Inc.
      300 E. Carpenter Freeway 1400
      Irving, TX 75062.

      Questions regarding the firm should be directed to SIPC trustee:

      Jack Kinzie, Esquire
      Baker & Botts 800 Trammell Crow Center
      2001 Ross Avenue Dallas, TX 75201-2916.

      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.

    • 91-74 Replacement of Certificates of Deposit by Bond Mutual Funds

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Mutual Fund
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      At the present time, many certificates of deposit held by individuals are expiring. There has been an intensive marketing effort by some mutual funds and many NASD members to persuade such individuals to invest in bond mutual funds, because of the higher yields that may be realized, rather than renew their certificates of deposit.

      There is nothing inherently wrong with persuading a customer to exchange one investment vehicle for another provided that there is full and fair disclosure of the differences between the products.

      One specific feature of such an exchange that must be disclosed to the customer is the greater degree of risk to capital that the customer may experience. The fact that higher yields may be realized from the bond fund must be balanced by disclosure that the customer's capital is exposed to a risk not present in ownership of a certificate of deposit.

      Currently, with interest rates at their lowest level in 20 years, there is a distinct possibility that when interest rates rise, as they are likely to based on past patterns, at some time in the future the capital value of bonds purchased today will fall.

      This must be explained to customers when they are solicited to make such an exchange. Failure to do so may violate NASD Rules of Fair Practice as well as expose members and their salespersons in the future to the complaints of disgruntled customers, who may claim that they were never told that their invested capital could fluctuate in value.

    • 91-73 Revised Forms U-4 and U-5 Go into Effect

      SUGGESTED ROUTING:*

      Legal & Compliance
      Registration
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The SEC has approved changes to the Uniform Application for Securities Industry Registration or Transfer (Form U-4) and the Uniform Termination Notice for Securities Industry Registration (Form U-5). The changes to Form U-4 include the addition of new questions on page 3, as well as the inclusion of references to actions taken by foreign financial regulatory authorities. This change also occurs on Form U-5. In addition, both forms now contain a question regarding certification of reportable disciplinary information. Members should begin filing the new forms immediately.

      BACKGROUND

      The NASD, New York Stock Exchange, and North American Securities Administrators Association periodically review the registration and termination forms with the idea of streamlining the registration process or addressing areas that may have caused concerns for regulators and/or members and their associated persons. A recent review resulted in changes to Forms U-4 and U-5 to reflect new securities laws and to adopt a new program of certification of disciplinary information.

      These proposed changes have now been approved by the SEC, and the newest versions of these filings are ready for use by industry. This notice contains the changes made to these filings and their impact or purpose.

      CHANGES TO REFLECT AMENDMENTS TO SECURITIES LAWS

      The Securities Acts Amendments of 1990 expanded the SEC's administrative authority and civil enforcement powers to include the ability to issue cease-and-desist orders and to impose monetary sanctions. To allow for disclosure of such sanctions, Item 22D5 has been added to page 3 of Form U-4.

      The amendments also clarified that certain types of actions taken by foreign financial regulatory authorities are being deemed a Statutory Disqualification. To ensure full disclosure of these matters, "foreign financial regulatory authority" has been defined on page 3, and several of the questions on page 3 have been modified to include the notation of "foreign financial regulatory authority." You will note that this definition and clarification has also been added to Form U-5.

      CERTIFICATION CAPABILITY

      The registration process has always required the submission of full details for all reportable items relating to Item 22 of Form U-4. Over the years, this has led to multiple, repetitious disclosures of information that are all maintained in the Central Registration Depository (CRD) data base.

      To streamline the registration process and eliminate duplicative filings, Item 220 has been added to allow certification of previously reported information. The question allows the individual to certify that all information in the CRD record relating to Item 22 is complete, accurate, and has been previously submitted on a Disclosure Reporting Page (DRP) format. If that is the case, the appropriate questions in Item 22 should be answered, but no new details need be submitted. Refer to Item 220 and the new instructions on the inside cover of Form U-4 for additional details to determine if this question can be utilized in effecting transfer of registration.

      The ability to certify that all information relating to Items 13-15 on Form U-5 has been previously reported and that no new information needs to be filed has been added as Item 16. If the certification question is utilized, the appropriate answers to Items 13-15 should be provided, but no details will need to be provided on a DRP-5. Refer to Item 16 and the instructions on Form U-5 for additional information relating to this modification.

      MINOR CHANGES TO FORM U-4

      On page 1 of Form U-4, Item 11 has been updated to reflect the fact that Series 3 (Commodity Futures) and Series 5 (Interest Rate Options) are examinations only and do not correspond to classifications of registration. To clarify these requests, the word "Examination" has been added. Members should remember that checking either of these boxes (as well as the Series 63 and 65 examinations) will schedule a new examination, even if the exam has already been taken and passed. When transferring an associated person's registration, these boxes should not be checked unless you are intentionally requesting the exams.

      Page 4 of the form has been modified to delete the statement that once required members to verify five years of employment for commodity registration. This deletion was based on the Commodity Futures Trading Commission's recent amendment to its rules that now requires only three years of employment verification.

      As noted above, the changes to page 3 of Form U-4 and to Form U-5 contain new language required by law. Therefore, you should begin using these forms immediately and disregard prior versions. Effective February 1, 1992, only the current form will be acceptable. Copies of the new forms are included separately with this mailing for your convenience.

      Questions about this notice should be addressed to Ellen Badler, Assistant Director, Special Registration Review, at (301) 590-6743. Additional copies of these forms may be requested by contacting NASD Member and Market Data Services at (301) 590-6500.

    • 91-72 Enhancements to the Firm Access Query System (FAQS)

      SUGGESTED ROUTING:*

      Legal & Compliance
      Operations
      Registration
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On November 12, 1991, the NASD activated enhancements to the Firm Access Query System (FAQS) that will enable subscribers to more efficiently process Forms U-5 and access certain registration information about their active and pending representatives. For those subscribers that electronically file Form U-5, the ability to recall, display, and print the filing through the Central Registration Depository system will be available. Firms no longer will have to retain a hard copy of the electronically filed U-5. Through the enhanced query prompt, specific information about an agent's status and exam records can be viewed without the user having to review the individual's entire record.

      These enhancements represent the first phase of system revisions designed to make the electronic processing of forms more cost effective and to improve the efficiency of the registration process.

      BACKGROUND

      The Firm Access Query System (FAQS) enables subscriber NASD member firms to review the registration and examination data, maintained on the Central Registration Depository (CRD), relating to their pending and registered individuals. Through FAQS, subscribers also may elect to schedule exams, review accounting transactions and balances, and file select Form U-4 amendments and U-5s electronically.

      During the past year, the NASD set out to develop system enhancements that will promote increased utilization of the electronic filing process, streamline the access to certain key registration data elements, and provide a means for subscribers to efficiently reconcile filing deficiencies.

      SYSTEM ENHANCEMENTS

      With the support of present subscribers and the North American Securities Administrators Association (NASAA), the NASD has designed system enhancements to FAQS. The most significant of these will result in a streamlined electronic form filing program no longer requiring retention of the hard copy filing. Using the new program, an electronically submitted U-5 form can be displayed and printed on demand. The firm, as well as all regulators, will have the ability to view and screenprint the filing summary. NASAA has agreed to accept this system-generated form display in lieu of the hard-copy form.

      Firms that file electronically will benefit further as similar enhancements are scheduled in the near future. The updated version for page 1 and page 2 amendments to Form U-4 is slated to be activated by the end of 1991.

      This most recent software revision will also provide more focused prompts within the Query command of CRD that will enable display of records by a specific affiliation/position and exam type. This new process will result in more efficient identification of relevant data without costly and time-consuming review of an agent's entire CRD display.

      Questions about this notice, subscriber inquiries, and requests for access to FAQS should be directed to Ilene Taylor or Shirley Suggs in Member Services at (301) 590-6862.

    • 91-71 Subject: Broker/Dealer and Agent Renewals for 1991-92

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Operations
      Registration
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The 1991-92 NASD broker/dealer and agent registration renewal cycle begins in early November. This program simplifies the renewal process through the payment of one invoice amount that will include fees for NASD personnel assessments, NASD branch-office fees, New York Stock Exchange, American Stock Exchange, and Chicago Board Options Exchange maintenance fees, state agent renewal fees, and state broker/dealer renewal fees. Members should read this notice and the instruction materials included in the invoice package to ensure continued eligibility to do business in the states effective January 1, 1992.

      INITIAL RENEWAL INVOICES

      On or around November 12, 1991, initial renewal invoices were mailed to all member firms. The invoices included fees for NASD personnel assessments, NASD branch-office fees, New York Stock Exchange (NYSE), American Stock Exchange (Amex), and Chicago Board Options Exchange (CBOE) maintenance fees, state agent renewal fees, and state broker/dealer renewal fees. The NASD must receive full payment of the November invoice no later than December 18, 1991.

      NASD personnel assessments for 1992 will be based on the number of registered persons with an approved NASD license as of December 31, 1991. That personnel assessment is $10 per person. NASD branch-office assessments will be based on the number of active branches as of December 31, 1991. This branch-office assessment is $50 per branch.

      Agent renewal fees for NYSE, Amex, CBOE, and state affiliations are listed in a table enclosed with each invoice. The table includes a list of broker/dealer renewal fees for states that are participating in this year's broker/dealer renewal program. NYSE, Amex, and CBOE maintenance fees — collected by the NASD for firms that are registered with NYSE/Amex/CBOE as well as the NASD — are based on the number of NYSE-, Amex-, and/or CBOE-registered personnel employed by the member.

      If a state is not participating in this year's broker/dealer renewal program, members registered in that state must contact the state directly to assure compliance with renewal requirements. In addition, some participating states may require steps beyond the payment of renewal fees to complete the broker/dealer renewal process. Members should contact states directly for further information on state renewal requirements.

      Payment of the initial invoice should be in the form of a check made payable to the National Association of Securities Dealers, Inc. The check should be drawn on the member firm's account, with the firm Central Registration Depository (CRD) number included on the check. Submit the check along with the top portion of the invoice and mail them in the return envelope provided with the invoice. To ensure prompt processing, the renewal invoice payment should not be included with other forms or fee submissions. Members should be aware that failure to return payment to the NASD by the December 18, 1991 deadline will mean a loss of eligibility to do business in the states effective January 1, 1992.

      FILING FORM U-5

      Members may wish to avoid unwanted renewals by filing Form U-5 for agent terminations in one or more jurisdiction affiliations. Because of the increased convenience and flexibility reported by members that used predated Form U-5 for renewals in previous years, the NASD will again process predated agent terminations this year. From November 1 to December 18, the NASD will accept and process Forms U-5 (both partial and full terminations) with predated dates of termination. Under this procedure, if the U-5 indicates a termination date of December 31, 1991, an agent may continue doing business in a jurisdiction until the end of the calendar year without being assessed renewal fees for that jurisdiction. Please ensure that Forms U-5 are filed by the renewal deadline date of December 18, 1991. Also, predated U-5s cannot be processed if the date of termination indicated is January 1, 1992 or thereafter.

      Members should exercise care when submitting predated Forms U-5. The NASD will process these forms as they are received but cannot withdraw a predated termination once processed. To withdraw a predated termination, a member would have to file a new Form U-4 after the termination date.

      The NASD encourages members having access to the Firm Access Query System (FAQS) to utilize electronic filings for the submission of all Forms U-5 and page Is of Form U-4. FAQS offers several advantages to firms in this regard, including the ability to immediately process terminations, ensure in-house control over agent registrations, and reduce normal and express mailing costs as well as long-distance telephone calls. It also allows members to quickly and efficiently handle the large filing volumes that typically occur at this time every year. Because of that, the NASD will provide an additional service to FAQS users by expanding the on-line user hours for November and December 1991. The system will be operational from 7 a.m. to 11 p.m., Eastern Time (ET) Mondays through Fridays and also will be available on Saturdays from 8 a.m. to 6 p.m., ET during those months.

      FILING FORMS BDW

      The CRD Phase II program, now in its third year, allows firms requesting terminations (either full or state only) to file their Forms BDW with the CRD to avoid the assessment of renewal fees in those jurisdictions that are designated on the Form BDW, provided that the jurisdiction is a CRD Phase II participant. Currently, there are six jurisdictions that are not participating in Phase II. They are:

      Michigan
      New Jersey
      Puerto Rico
      American Stock Exchange
      Chicago Board Options Exchange
      New York Stock Exchange

      Firms requesting termination in any of the above-listed jurisdictions must submit a Form BDW directly to the jurisdiction.

      The deadline for receipt of Forms BDW by the CRD for firms desiring to terminate an affiliation before year-end 1991 is December 18, 1991. This same date applies to the filing of Forms BDW with the jurisdictions that are not participating in Phase II. Predated Forms BDW filed with the CRD will be accepted and processed in the same manner as predated Forms U-5.

      REMOVING OPEN REGISTRATIONS

      For the fifth year, the NASD will include in the initial invoice package a roster of firm agents whose NASD registration is either terminated or purged because of the existence of a deficient condition for more than 180 days but who have approved registrations with states. This roster should aid in the reconciliation of personnel registrations prior to year's end. Firms may terminate obsolete state registrations through the submission of a Form U-5 or reinstate NASD licenses through the filing of a page 1 of Form U-4. No roster will be included if a firm does not have agents within this category.

      BILLING CODE BREAKDOWN

      This year's final invoice package will again include a breakdown of fees assessed by billing code for firms that use billing codes in the registration process. This breakdown will aid firms in their internal research and allocation of fees.

      FINAL ADJUSTED INVOICES

      On or about January 13, 1992, the NASD will mail final adjusted invoices to members. These invoices will reflect the final status of firm and agent registrations as of December 31, 1991. Any adjustments in fees owed as a result of registration terminations or approvals subsequent to the initial invoice mailing will be made in this final reconciled invoice. If a member has more agents registered at year's end than it did on the November invoice date, additional fees will be assessed. If a member has fewer registered personnel at year's end than it did in November, a credit will be issued.

      Included with this adjusted invoice will be the member renewal rosters, which will list all renewed personnel registered with the NASD, NYSE, Amex, and each state. Persons whose registration is approved in any of these jurisdictions during November and December will automatically be included in this roster, while registrations that are pending approval or are deficient at year's end will not be included in the renewal process. Firms also will receive an NASD branch-office roster that lists all branches for which they have been assessed.

      Firms then will have a two-month period in which to reconcile any discrepancies on the rosters. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the final adjusted invoice package will appear in the January 1992 issue of the Notices to Members, as well as on the inside cover of the renewal roster.

      Questions concerning this notice may be directed to NASD Information Services at (301) 590-6500.

    • 91-70 SEC Approval and Startup of Nasdaq InternationalSM Service

      SUGGESTED ROUTING:*

      Senior Management
      Institutional
      Legal & Compliance
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission approved on October 10 the establishment of Nasdaq InternationalSM service for a two-year pilot period. All Nasdaq National Market issues, American Depositary Receipts on regular Nasdaq, and equity securities listed on U.S. exchanges qualify for inclusion in Nasdaq International. The startup of Nasdaq International is scheduled for early January 1992. The service will support a European trading session from 3:30 a.m. to 9 a.m., Eastern Time, tracking the initial business hours of the London financial markets, to accommodate international trading of U.S. securities by investors in the U.S.. United Kingdom (U.K.), and other parts of Europe. Nasdaq Workstation devices will support maker-maker participation from the U.S. or U.K.

      BACKGROUND

      In June 1990, the NASD filed a proposed rule change with the Securities and Exchange Commission (SEC) to extend electronic market facilities to a cross-border session that would run from 3:30 a.m. to 9 a.m., Eastern Time (ET) on each U.S. business day. This period overlaps the business hours of the London securities markets. The service is designed primarily to accommodate international trading by investors in the U.S., United Kingdom (U.K.), and other parts of Europe.

      This service will mark the first instance that a U.S. securities market has operated across continents in a time period that had been used exclusively by foreign exchanges. Nasdaq International will offer the potential for European trading to many U.S. securities firms that don't operate there now. The service will enable domestic firms to participate in order flow in U.S. stocks that now is directed to foreign markets.

      Market makers in the U.K. will be linked to London-based Nasdaq computers already in place that provide the same functions as do Nasdaq computers in the United States. A transatlantic cable connects the London facility to the NASD central computer complex in the U.S.

      On October 10, 1991, the SEC approved the service and specialized NASD rules (International Rules) that will govern broker/dealer participation. The NASD expects to launch the service in early January 1992.

      In approving the two-year service pilot, the SEC noted that this development advances the statutory goals of improving the efficiency of market operations, broadening the distribution of market information, enhancing opportunities to achieve best execution and promote competition among market participants, and linking all clearance and settlement facilities in a way that reduces costs.

      FEATURES OF NASDAQ INTERNATIONAL

      The Nasdaq International service will offer the basic Nasdaq automated services, except for the Small Order Execution System (SOES), now provided during the domestic session to support market making by NASD members. These include the SelectNet service, which allows trades to be negotiated entirely via computer, as well as the Automated Confirmation Transaction (ACT) service, which facilitates efficient clearance and settlement. Access to market-making services during the cross-border session will be provided exclusively through Nasdaq Workstation devices.

      Bid and ask quotations from each market maker will be available on Nasdaq terminals throughout the European session. These quotations also will be disseminated to domestic and international vendors of market information.

      To be eligible, market makers must be NASD members or approved U.K. affiliates of NASD members. A U.S. firm with no U.K. branch may participate by staffing its U.S. trading desk during the European session. Market makers must disseminate quotations throughout the European session.

      Broker/dealers that are not NASD members but that are authorized to carry on an investment business in the U.K. and have a "control relationship" with an NASD member may participate in the service as the member's agent.1 All transactions effected by the affiliate will be captured on the books and records of the sponsoring NASD member. To participate in this fashion, the sponsor and its affiliate must enter into a specialized compliance agreement with the NASD.

      The agreement also would provide that (1) only registered representatives of the sponsoring member may enter quotations into the service from the affiliate's premises in the U.K., (2) a registered principal of the sponsoring member must be designated to supervise those registered personnel, and (3) the sponsoring member must develop and have approved by the NASD adequate supervisory procedures covering the affiliate's participation before the affiliate begins to quote markets in the service. The registered principal responsible for supervising the affiliate's personnel must be assigned to the foreign affiliate's office within nine months of the affiliate's initial approval.

      In addition, the sponsoring member must agree to assume full responsibility for the affiliate's compliance with all provisions of the service rules as well as other applicable NASD rules. The sponsor also must commit to ensure that all NASD regulatory data requests are satisfied and that the NASD can obtain access to original books and records located in the U.S. or U.K. that relate to the affiliate's participation in the service.

      These procedures, the SEC noted in its approval order, are intended to place the same requirements on the sponsoring member that would pertain if it were to participate directly in the service.

      Two classifications of market makers are authorized for the service — European only and International. European-only market makers must quote firm, two-sided markets in the qualified securities in which they have registered to trade during the cross-border session. International market makers will have identical obligations during the cross-border session and also will have to function as market makers in their respective registered securities during the domestic session. During the latter period, International market makers will assume the full range of obligations that now apply to member firms registered as Nasdaq or Consolidated Quotation Service (CQS) market makers. Approved U.K. affiliates will be limited to participating as European-only market makers.

      To provide maximum flexibility, market-maker classifications will be assigned on an individual security and terminal basis, not on a firm-wide basis. Thus, a participating firm could use a Nasdaq Workstation terminal located in the U.S. to enter quotations as a European-only market maker in 10 qualified issues, an International market maker in 20 additional issues, and a U.S.-only market maker in another 15 issues.

      A market maker's classification is set at the time of initial registration (or reregistration). Excused withdrawals and voluntary terminations of market-maker registration will be handled in essentially the same manner as they are today for Nasdaq's domestic session. Nasdaq personnel will be on duty throughout the cross-border session to handle operational matters.

      One major difference between the domestic and cross-border sessions is in the application of the 20-day waiting period for reregistration in a Nasdaq security. Since SOES will not be available in the cross-border session, the 20-day waiting period will not apply, thereby adding greater flexibility for market-maker participants.

      During the initial phase of Nasdaq International, all qualified issues will be quoted and traded exclusively in U.S. dollars. The ranking of market-maker quotes in an eligible security will continue to be based on price and by time within price. In addition, closed quotes will appear below all open positions.

      REQUIREMENTS FOR MARKET MAKERS

      Market makers participating in the cross-border session will be subject to most of the operational requirements that currently apply to broker/ dealers registered in Nasdaq or CQS issues. These requirements are summarized as follows:

      1. Registration on a security-by-security basis by individual member firms is a prerequisite for market-maker participation.
      2. Registered market makers must either be self-clearing or have a clearing arrangement with a firm that is a member of a registered clearing agency.
      3. Participation in the Automated Confirmation Transaction (ACT) service and the Trade Acceptance and Reconciliation Service (TARS) will be mandatory for all participating firms, thereby providing immediate comparison as well as trade reporting for regulatory purposes.
      4. All trades classified as international transactions must be cleared and settled through a registered clearing agency using a continuous net settlement system. A settlement cycle of five business days will apply to all "regular way" transactions.
      5. Market-maker participants in the service must maintain firm, two-sided quotes throughout the European session in each qualified security in which they have registered as a European-only or International market maker.

      QUALIFIED SECURITIES

      Securities that qualify for quotation in the Nasdaq International service are:

      • Nasdaq National Market (Nasdaq/NMS) securities.

      • Foreign equities (excluding Canadian is sues) and American Depositary Receipts (ADRs) in regular Nasdaq.

      • Equity securities listed on U.S. exchanges. These securities will be included in Nasdaq

      International at the request of any Nasdaq International or European market maker.

      TRADE AND VOLUME REPORTING AND DISSEMINATION

      A significant distinction between the domestic and European session concerns entry of trade reports. During the domestic session, transactions in Nasdaq/NMS or listed securities must be reported to the NASD within 90 seconds of execution through the ACT facility. For the cross-border session, the requirement will be three minutes, the prevailing standard for market makers in the U.K. The data elements to be reported, however, will be identical to those now required during the NASD's domestic market session.

      While domestic transactions in reportable securities are disseminated instantly, individual transaction reports on Nasdaq/NMS and exchange-listed securities in the European session will not be disseminated to vendors, except for those securities that have such trade-by-trade information disseminated by the London Stock Exchange. With that exception, all other trade data will be gathered by the NASD for regulatory purposes only.

      At the close of the European session, the NASD will furnish information on the high, low, and closing transaction prices and aggregate volume for securities with at least two market makers in the service. Data from the European session will not be consolidated with trade information from the domestic session. While this information is less than that provided for domestic Nasdaq/NMS transactions, it will mark the first time that any aggregate volume or trading-range information for U.S. securities has been publicly disseminated during U.K. trading hours.

      The NASD expects that securities information vendors will disseminate the closing price and volume information.

      For additional information about the service described in this notice, contact Gary Guinn, Director of Nasdaq International, at (202) 728-8087. For compliance-related questions, call Michael Kulczak, Associate General Counsel, at (202) 728-8811.


      1 For this purpose, "control relationship" means hat the member controls, is controlled by, or is under common control with an NASD member.

    • 91-69 Application of NASD Rules, Interpretations, By-Laws, and Federal Securities Laws to the Secondary Market in Direct Participation Program Interests

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD recently completed a study of secondary market trading in direct participation program (DPP) securities. As a result, this notice is being issued to emphasize the applicability and relevance of certain NASD rules, Interpretations, By-laws, and federal securities laws for those members and associated persons participating in the growing secondary market for DPP securities.

      The study uncovered many cases of unawareness of pertinent rules or inappropriate application of the rules. Therefore, members are reminded of their responsibilities to ensure compliance with relevant regulatory requirements when engaging in this secondary market. Furthermore, members must take steps to modify existing practices where necessary in a manner consistent with this Notice to Members and the applicable laws and rules. Among others, existing NASD rules involving markups, suitability of recommendations, and best execution are and have long been applicable to secondary market transactions with customers in DPP securities.

      The NASD is committed to ensuring a fair and credible secondary market for all participants, including broker/dealers and investors. To achieve this result, strict adherence to all rules and regulations is necessary and expected. The NASD intends to closely surveil this market with that goal in mind.

      BACKGROUND

      In October 1990, the NASD through its Direct Participation Programs/Real Estate Committee (the "DPP Committee") initiated a study of the nature and functioning of the secondary market for public partnership securities. There were several factors that led the DPP Committee to conclude such a study was necessary. Concern was expressed about the growth in secondary markets for DPP securities, a relatively recent phenomenon brought about in large part by the Tax Reform Act of 1986, the inability of partnerships to liquidate their portfolios and distribute the proceeds, and the subsequent decline in oil and gas and real estate prices.

      Also, during examinations of various members, examiners had found questionable practices involving DPP securities that raised concerns as to possible violations of NASD rules. In some cases, the violations appeared serious enough to warrant disciplinary action. Given the seriousness of these matters, the NASD continued to pursue its regulatory investigations of apparent abusive practices, while the DPP Committee conducted a parallel but distinctly separate review of industry practices in this evolving and growing market.

      Data gathered during the study indicated that approximately $90 billion was invested in public DPP securities in the 1970s and 1980s by more than 10 million investors. The programs were organized to invest in a variety of industries including, but not limited to, real estate, oil and gas, cable television, commodities, and equipment leasing. Although these securities were generally not intended to be liquid and tradable, a secondary market in DPP securities nevertheless has developed.

      The study also found that approximately two dozen participants (both NASD members and non-members) act as principal or agent for customers in a fragmented secondary market that, in the aggregate, transfers ownership of an estimated $250 to $300 million worth of public partnership securities annually. The primary concern of the study was to determine how the market currently operates, whether it functions efficiently, and whether members are in compliance with applicable securities laws and rules, including NASD rules.

      The DPP Committee, through a subcommittee appointed specifically for this study, met with representatives from 10 NASD members and nonmembers that are engaged in secondary market transactions in DPP securities. In addition, the subcommittee solicited and received written submissions from other market participants. Each was asked to provide information as to how it conducted its business and for any insights or recommendations that it believed would be helpful to the Committee.

      The NASD study, as well as the routine examinations conducted by NASD examiners, noted widespread differences in the manner in which DPP secondary trading is conducted by members and found that certain practices were at variance with applicable guidelines and regulations. The DPP Committee study was intentionally separated from the investigations and routine examinations being conducted by NASD examiners. Thus, the NASD Board of Governors has decided to issue this Notice to Members to: emphasize to members the applicability of existing rules to this business, apprise the membership of the general conclusions of its study, inform members of the apparent violative practices noted by examinations, and discuss various issues that may require further study and possible rulemaking.

      Specifically, applicability of rules relating to markups, filing of advertising and sales literature, determinations of suitability prior to a transaction, solicitation and tender offers, disclosure, Schedule H reporting requirements, transactions with non-members, quotation dissemination, and best execution as to price are emphasized. This notice also addresses problems relating to settlement and transfer, net capital, and escrow procedures.

      NASD RULES AND BY-LAWS

      Markups and Markdowns

      NASD disciplinary cases and the DPP secondary market study have shown that many members engaged in secondary market activities may not be complying with the NASD Mark-Up Policy ("Policy") as set forth in an Interpretation of the Board of Governors under Article III, Section 4 of the NASD Rules of Fair Practice. The "Mark-Up Policy" specifies that for a markup or markdown in a principal transaction with a customer in equity transactions to be fair, it should generally not exceed 5 percent of the prevailing market price. This longstanding "5% Policy" is based on the obligations of a broker/dealer to deal fairly with its customers, particularly the obligation to charge customers only prices that are reasonably and fairly related to the prevailing market price at the time of the transaction.

      The 5% Policy applies to customer purchases and sales of all securities traded in the Nasdaq and over-the-counter markets, including DPP securities. Since the Policy acts as a general guide, not a rule, a markup or markdown of more than the 5 percent guideline could be considered fair or reasonable where the specific facts and circumstances of the transaction clearly justify that price. On the other hand, a markup of less than 5 percent could be considered unfair under the circumstances of a specific transaction.

      According to the 5% Policy, pricing considerations should take into account all relevant factors, including the type of security involved, the availability of the security, the price of the security, the services rendered, the amount of money involved in the transaction, and disclosure. If a dealer seeks to charge its customers more than a 5 percent markup or markdown, it should be fully prepared to justify its reasons for the higher markup or mark-down with adequate documentation.

      Markups or markdowns that exceed the prevailing market price by 10 percent or more may not only be deemed unfair under the Mark-Up Policy and a violation of Article III, Sections 1 and 4 of the NASD Rules of Fair Practice, but also could be viewed as fraudulent and a violation of Article III, Section 18 of the Rules. While a member firm may attempt to justify a markup or markdown greater than 10 percent, the current state of the law creates a presumption of a fraudulently excessive markup or markdown that will be very difficult to overcome or rebut.

      A markup or markdown compensates a dealer for its ordinary costs and risks associated with its handling of a transaction with a customer. The 5% Policy was designed to cover ordinary selling expenses, such as a normal commission to salespersons and the normal cost of processing a trade. Thus, such ordinary expenses cannot be charged again to customers in the form of increased markups or markdowns. In addition, excessive expenses cannot be used to justify a higher markup or markdown. The NASD has consistently held that its markup policy does not guarantee a dealer a net profit regardless of unreasonable expenses, such as excessive commissions to salespersons, excessive salaries to officers, and excessive telephone costs.

      The NASD study found that DPP secondary market transactions with customers often involved fixed expenses such as general partner fees, settlement charges, and state transfer charges. Where such expenses are required by the general partner or state law, they may be directly passed on to customers as a separate charge or expense provided they are fully documented, not shared in by the member, and are fully disclosed prior to the transaction. However, charges to a customer that seek to defray overhead or internal administrative charges of the member are clearly inappropriate and may not be passed on to the customer directly or indirectly, or used as a basis for justifying a markup or markdown in excess of 5 percent.

      The NASD study also indicates that, generally speaking, dealers in the DPP secondary market do not act as "market makers" as that term is defined in the Securities Exchange Act of 19341 and interpreted by case law. Also, the overwhelming number of transactions reviewed by the NASD through its field examinations and in conjunction with this study indicate that a dealer purchasing or selling for its own proprietary account is usually doing so to fill a customer order and, as a result, does not generally incur market risk.

      If a dealer is engaged in such a riskless transaction or is determined not to be a market maker with respect to a particular transaction, then the markup must be calculated by using the dealer's contemporaneous cost as the best evidence of the prevailing market price. Similarly, for markdowns, the dealer's most contemporaneous sales price to another dealer must be used. However, to the extent that a dealer actually functions as a market maker in an active, competitive market by placing its own capital at risk through buying and selling for its own account in the interdealer market, while providing and standing by its quotes in transactions with other dealers on a regular and continuous basis, the member may be able to use its actual contemporaneous sales prices (for markups) and contemporaneous purchase prices (for markdowns) with other broker/dealers as the best evidence of the prevailing market price at the time of its transactions with customers.

      Thus, the current NASD Mark-Up Policy is fully applicable and must be complied with by members when determining the markup or mark-down of DPP securities. The Policy provides comfort to members that a markup or markdown of 5 percent or less will be acceptable for the vast majority of DPP trades. If a member incurs reasonable additional time or costs in effecting a trade because of the limited availability of the DPP securities, the flexibility of the Policy may permit a markup or markdown of greater than 5 percent. In fact, the Policy acknowledges that markups in DPP securities may be higher than for sales of common stock. But, the member should be fully prepared to support the reasons for the higher markup or markdown with adequate documentation of each transaction.

      Advertising and Sales Literature

      Communications with the public, such as advertisements and sales literature concerning direct participation programs, are regulated under Article III, Section 35 of the Rules of Fair Practice. Secondary market advertising and sales literature, including research reports on public partnerships, must be filed within 10 days of first use with the NASD's Advertising Department for review, as required by Section 35(c).

      The filing requirement, in effect since 1986, applies to all public programs but does not distinguish between material used in an offering and that used in the secondary market. The rule language requires members to file both types of material. This determination was made by the DPP Committee in 1989.

      "Advertisement" and "sales literature" are specifically defined in Article III, Section 35(a). These definitions should be carefully reviewed to be certain that all pertinent material has been properly filed.

      Suitability of Recommendations

      NASD members and associated persons are required pursuant to Article III, Section 2 and Appendix F to Article III, Section 34 of the Rules of Fair Practice, when recommending to an investor the purchase, sale, or exchange of a DPP security, to have reasonable grounds to believe the recommendation is suitable for the customer based on the customer's investment objectives, other investments, financial situation and needs, tax status, and any other information known by the member or associated person. Additionally, the member and associated person must determine that the investor has the appropriate investment objectives, is in a position to fully understand the risks and benefits of the transaction, and has a net worth sufficient to sustain the risks involved in an investment in a DPP security.

      The requirement to make a suitability determination not only applies to any initial distribution of partnership securities but to secondary market transactions as well. This requirement also includes the obligation to make reasonable efforts to obtain the customer information necessary to make the suitability determination. In addition, members must consider the suitability standards that may be imposed by state law when making a finding of customer suitability.

      In making recommendations, members also must be aware of their fundamental responsibility of fair dealing with customers including determining whether a reasonable basis exists for engaging in the DPP transaction, considering any tax implications to the customer, and the fairness of the recommended price for the purchase or sale.

      Schedule H Reporting and Filing Requirements

      Schedule H of the NASD's By-Laws requires daily electronic price and volume reporting of all non-Nasdaq securities, which encompass any equity security not included in Nasdaq or traded on any national securities exchange. Secondary market transactions in DPP securities are therefore re-portable securities under Schedule H. As a result, members must report requisite price and volume information through the non-Nasdaq Reporting System for all secondary market trades in DPP securities that are executed on a principal basis.

      Additionally, members are required to make Schedule H filings with the NASD of other required information prior to disseminating quotations in non-Nasdaq securities to comply with SEC Rule 15c2-11. (See section on SEC Rule 15c2-11, infra.) This filing requirement aspect of Schedule H is also applicable to DPP securities.

      Although Schedule H reporting and filing requirements clearly apply to DPP securities, the NASD recognizes that, since these obligations may not have been specifically delineated in the past, many members may need additional time and guidance in order to implement the necessary procedures that will facilitate compliance with the rule. Therefore, in an upcoming Notice to Members, the NASD will provide additional information and directives regarding members' Schedule H compliance for DPP secondary market transactions.

      Best Execution of Customer Orders

      In any transaction for or with a customer, an NASD member is required to provide that customer with best execution as to price. To ensure fair dealing with customers, the Interpretation of the Board of Governors — Execution of Retail Transactions in the Over-the-Counter Market — under Article III, Section 1 of Rules of Fair Practice requires a member to obtain quotations from at least three dealers (or all dealers if three or less) to determine the best interdealer market price for a non-Nasdaq security. Article III, Section 21 of the Rules of Fair Practice requires that the quotes and dealers contacted be recorded on the member's books and records.

      Contrary to these requirements, some members have not obtained or recorded the required three quotes on order tickets nor obtained the best execution for their customers in the DPP secondary market. In addition, members holding themselves out as market makers have refused to quote prices when contacted by other members seeking quotes. NASD members are reminded that such conduct is inappropriate and may result in disciplinary action against the member. Thus, if a member holds itself out as a market maker, it is required to disseminate quote information to other members on request and stand by those quotes for execution purposes.

      Uniform Clearance and Settlement

      The NASD has found that one of the major problems in the secondary market for direct participation program securities is the inefficient and untimely transfer of limited partnership interests on the books of partnerships. Transfer problems can also lead to delays or mistakes in the allocation of cash distributions between buyers and sellers.

      Since transfer difficulties have caused unacceptable delays in settlement and proved to be costly for all participants in the secondary market, the NASD intends to study the feasibility of developing a uniform system of transfers and settlements. The Board of Governors has authorized the appointment of a special committee for this purpose.

      FEDERAL AND STATE SECURITIES LAW ISSUES

      Numerous federal and state securities laws apply to the distribution of and secondary market transactions in DPP securities. Certain of these laws and regulations are outlined below. Members are urged to consult with counsel to ensure that they are in compliance with these and other pertinent laws.

      Broker/Dealer Registration and Transactions With Nonmembers

      The NASD is concerned that certain firms and individuals are buying and selling securities on behalf of public customers without being registered as broker/dealers or becoming members of the NASD. Such firms and individuals may be in violation of federal securities laws requiring brokers and dealers to register with the Securities and Exchange Commission (SEC) and to become a member of a self-regulatory organization. The NASD urges its members to take great care in selecting the firms with which they do business and to report the actions of any market participants that they believe are nonregistered broker/dealers to the SEC or state securities regulators who have the authority to enforce requirements of registration, licensing, and other securities laws. Information concerning the activities of nonregistered broker/dealers supplied to the NASD will be referred to these agencies.

      Members are also reminded that Section 25 of the NASD Rules of Fair Practice regulates transactions with nonmember broker/dealers. It generally requires members to deal with any nonmember broker/dealer at the same prices, commissions, fees and terms as they accord the general public. Thus, NASD members that transact business with non-members in the same manner they would another NASD member are in violation of Section 25.

      Tender Offers Rules

      To the extent that members engage in blanket solicitations of all limited partners of a particular partnership, members should be certain that such solicitation activity is either not subject to the tender offer rules of the Securities Exchange Act of 1934, or is in full compliance if they are applicable. Under certain circumstances, offers to purchase partnership interests made to all limited partners may constitute an unconventional tender offer.

      Prospectus Disclosure Requirement

      NASD members affiliated with a sponsor or general partner that also operate an internal bulletin board (e.g., a matching service) to match persons who wish to buy and sell interests in affiliated programs may be in violation of the registration provisions of the Securities Act of 1933. The SEC has recently stated that attempts by the general partner or its broker/dealer affiliates to facilitate or create an alternative secondary market may require that an "evergreen prospectus" be maintained. An evergreen prospectus is a part of an SEC registration statement that is continuously amended and updated so that the registration statement is always current and effective. General partners or their affiliates involved in such matching services or crossing arrangements may cause the offer to be deemed a sale of securities by the partnership-issuer that requires registration.2

      Solicitation Under State Law

      The NASD also believes that members should be aware that the resale of limited partnership interests by DPP secondary market participants following the widespread solicitation of the limited partners of a partnership may also be inconsistent with the registration provisions of various state laws. Under the Uniform Securities Act of 1956,3 a registration statement for a class of outstanding securities is effective for only one year.4 If resales occur after one year, an exemption from the registration provisions of state law may not be available. If no exemption is available, then it may be necessary to file a special registration statement to permit a new distribution by the issuer.5

      Compliance With SEC Rule 15c2-11

      SEC Rule 15c2-11 governs the initiation and resumption of quotations in a non-Nasdaq "inter-dealer quotation medium" by a broker or dealer for over-the-counter securities, including DPP securities. An interdealer quotation medium is defined as a quotation system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers. The rule was designed to help prevent manipulative and fraudulent trading schemes by prohibiting brokers and dealers from furnishing such quotations in the absence of sufficient information about an issuer.

      A violation of Rule 15c2-11 may occur regardless of whether the broker/dealer is engaged in retail activity in the security, whether interdealer transactions have occurred, or whether the subject security is thinly traded. Indeed, the NASD has initiated disciplinary actions against members that have failed to comply with Rule 15c2-11.

      Unless a broker/dealer qualifies for an exemption from Rule 15c2-11, the rule's information maintenance requirements can be satisfied in one of only five ways. Should a member seek to quote a DPP security in any interdealer quotation system, excluding the Nasdaq system, one of the most common methods of complying with the rule would be to obtain a prospectus filed with the SEC that is less than 90 days old since the majority of DPP securities that trade in the secondary market were subject to a full registration statement.

      Once the funding operation is completed for a DPP, a substantial portion of these issuers have the minimum number of holders and total assets necessary to trigger periodic reporting requirements with the SEC. As a result, another manner of complying with Rule 15c2-11 would be for the broker/dealer to obtain the issuer's latest 10-K report, and all subsequent 10-Qs and 8-Ks. Other methods of complying with the Rule include obtaining and reviewing any recent Regulation A filing or certain other specified information about the issuer, such as recent financial statements.6

      Importantly, members that may decide to initiate or resume a quotation of a DPP security in an interdealer quotation medium must recognize duties that go beyond simply securing the referenced materials. The member must, for example, carefully review the Rule 15c2-11 information and documents and have a reasonable basis for believing that the information is accurate in all material respects. Additionally, an affirmative standard is imposed by the SEC that requires the broker/dealer to have a reasonable basis for concluding that the documents and information about the issuer are derived from a reliable source.

      Although the rule is applicable, to date the NASD has not found members disseminating quotations in DPP securities in a non-Nasdaq interdealer quotation medium that would subject them to Rule 15c2-11. Nevertheless, members are advised that the NASD found that some broker/dealers active in the DPP secondary market are doing little, if any, due diligence or research to support prices they charge or quotations they disseminate to the public and other broker/dealers on request. Since Rule 15c2-11 applies to DPP securities traded in the non-Nasdaq market, members are urged to consult the full text of the rule and relevant SEC releases regarding any intended quotations activities in order to be certain they are in full compliance.

      Although members should have been complying with Rule 15c2-11, the NASD recognizes that members engaged in secondary market DPP activities may not have clearly understood the applicability of the rule. Therefore, the follow-up Notice to Members referred to above in the discussion of Schedule H will provide further guidance and direction to members regarding compliance with this rule.

      Confirmation Disclosure Requirements

      SEC Rule 10b-10, the so-called "customer confirmation rule," is fully applicable to members' transactions with their customers in DPP securities. The Rule requires, before the completion of any transaction with a customer, that the member send written notification to the customer disclosing specific information about the transaction. Included in the required disclosure are: (1) the capacity in which the member is acting in the transaction (i.e., as agent for the customer or principal or otherwise); (2) the date of the transaction and the identity, price, and amount of the security purchased or sold by such customer; and (3) the amount of the markup or markdown charged the customer where the dealer has acted in a riskless principal or agent capacity.

      The study generally found that members active in the DPP secondary market generally do not meet the definition of a market maker and therefore are required to comply with the provisions of Rule 10b-10 as it applies to each transaction they engage in with customers.

      Net Capital

      The NASD reminds members that broker/dealers that engage in principal transactions in the DPP secondary market must adhere to a minimum net capital requirement of $25,000. Under SEC Rule 15c3-1 (the "Net Capital Rule"), only $25,000 net capital broker/dealers may handle customer funds or make markets in equity securities. However, a $5,000 broker/dealer may act as agent in the secondary market provided it either introduces all customer accounts on a fully disclosed basis through another broker/dealer or utilizes a bank escrow account (similar to that required by SEC Rule 15c2-4) to process and hold all customers' funds and/or securities.

      Members should also be aware that given the current lack of readily available price information and liquidity, the Net Capital Rule may require a 100 percent charge for such securities when held in inventory, as they will not generally meet the "ready market" test of the Net Capital Rule.

      CONCLUSION

      Market participants are urged to refocus their attention on the proper calculation of markups, markdowns, spreads, and expenses in the DPP securities market. Some firms make little effort to determine the investor's suitability to purchase DPP securities, have no knowledge as to the applicability of transaction reporting requirements, and violate NASD rules with predatory pricing practices, lack of best execution, and absence of due diligence on behalf of customers. In addition, some members are not making required filings of advertising and sales literature with the NASD and are improperly doing business with nonmember broker/dealers. Others are not properly disclosing expenses being charged in connection with a purchase or sale, conflicts of interest the broker/dealer may have with the customer, and the basis on which they are recommending the price at which the securities are being bought or sold.

      The NASD understands that some of the shortfalls and deficiencies noted by NASD examiners and identified in the DPP Committee's study may be caused by a lack of knowledge on the part of members as to the applicability and relevance of existing NASD rules and federal securities laws. Nevertheless, the regulations applicable to this market are quite explicit as to the obligations of members. Members, in turn, have a responsibility to be aware of those regulations and to adhere to them. Thus, the purpose of this notice is to alert members to the relevance of these regulations and to assist in complying with the various requirements applicable to the DPP secondary market.

      The NASD staff will continue to focus its regulatory efforts on DPP secondary market practices, and strict adherence to existing rules is expected. Members transacting business in the secondary market found to be in apparent violation of such rules may be subject to disciplinary action if such a determination is made by a District Business Conduct Committee. If members have questions as to the applicability of a given rule or law, or the bona fides of a course of conduct they are planning, they should not hesitate to contact their local NASD district office and seek clarification.

      Questions concerning this notice may be directed to Charles L. Bennett, Director; Richard J. Fortwengler, Associate Director; or Carl R. Sperapani, Assistant Director, Corporate Financing Department at (202) 728-8258 or Daniel M. Sibears, Director, Compliance Division at (202) 728-8959.


      1 See Section 3(a)(38) of the Securities Exchange Act of 1934, as amended.

      2 See Securities Act Release 33-6900, pages 36-38, June 17, 1991.

      3 The Uniform Securities Act of 1956 is a model act approved by the National Conference of Commissions on Uniform State Laws on August 25, 1956. It has been enacted into law by a majority of the states. Counsel should be consulted as to the provisions that may be applicable in the state or states involved.

      4 See Section 302(a)(2) Uniform Securities Act of 1956.

      5 See Section 305(i); and Note 9, NCCUSL Comment to Uniform Securities Act of 1956.

      6 See 17 CFR 240.15c2-11(a)(1) through (a)(5).

    • 91-68 Proposed Amendment to Article III, Sections 26 and 29 of the NASD Rules of Fair Practice Re: Cash and Noncash Compensation Received by Members in Connection With the Sale of Investment Company Securities and Variable Contracts; Last Voting Date:

      SUGGESTED ROUTING:*

      Senior Management
      Internal Audit
      Legal & Compliance
      Mutual Fund
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      MAIL VOTE

      EXECUTIVE SUMMARY

      The NASD invites members to vote on a proposed amendment to Article III, Sections 26 and 29 of the NASD Rules of Fair Practice. The amendment would revise, simplify, and add a recordkeeping requirement to subsection (1) of Section 26, the Investment Company rule, and create subsection (h) of Section 29 to add a similar provision to the Variable Contracts rule.

      BACKGROUND

      In Notice to Members 91-25 (May 1991), the Board of Governors requested comment on a proposed amendment to Article III, Section 26(1) (the Investment Company rule) and on a proposed new Section 29(h) (the Variable Contracts rule) of the NASD Rules of Fair Practice that would (1) require that members maintain records of all cash and noncash compensation received from offerors and the distribution of the compensation to its associated persons; (2) prohibit associated persons from receiving any such compensation from anyone other than the member with which the person is associated; (3) prohibit a member from receiving securities from an offeror; and (4) prohibit receipt by a member of any type of compensation from the offeror unless such is described in the current prospectus of the investment company or variable contract. Notwithstanding the foregoing, the proposal would permit associated persons to receive gifts with a value not exceeding $100 per annum and permit offerors to pay or reimburse members for training and educational meetings at a business location where the offeror or member has its office or in the vicinity of such an office. Exceptions are also provided for, among others, compensation arrangements between a member and its associated persons.*

      Twenty-one letters were received in response to the Notice to Members. Four commenters were opposed to members receiving noncash concessions from offerors for the sale of investment company shares. One commenter did not agree that compensation paid by a member to its own associated persons should be exempt from prospectus disclosure.

      Most of the remaining commenters were generally in favor of the proposed amendment if certain changes are made to it. To respond to these commenters, the proposal published in Notice to Members 91-25 is modified as follows:

      The $100 Gift Ceiling

      The commenters suggested that gifts of not more than $100 per annum by an offeror to a registered representative should not be subject to the recordkeeping requirements in paragraphs (1)(1) and (h)(1) of the respective rules. The Board of Governors agrees, and subsections (1)(1) and (h)(1) have been amended to reflect this exemption.

      One member suggested that the $100 maximum limit on gifts should be more flexible and related to any future increases in the Consumer Price Index. The proposal (subsections 5(a) in each rule) has been amended to give the authority to the Board of Governors to change the maximum amount in future years. This will be accomplished by use of a footnote to display the maximum gift allowance, which currently is $100.

      Exception for Training and Educational Meetings

      The current rule and the proposed amendment prohibit cash and noncash compensation from being received by members from offerors unless such is disclosed in the current prospectus of an investment company. Such disclosure would not be required when an offeror pays for a training or educational meeting attended by a member's associated persons where attendance is not conditioned on sales. In the amendment as proposed in Notice to Members 91-25, the location of such meetings would have been confined to places "where the offeror or the member has an office." Several members requested that the amendment be revised to eliminate this restriction. The Board of Governors does not agree that the restriction should be eliminated entirely, but it has broadened the language to include locations for such meetings that are in the vicinity of offices of a member or an offeror. Subsection (5)(b) in each rule has been amended.

      Exception for a Member's Associated Persons

      The current rule contains an exemption from the rules' provisions for compensation arrangements between a member and its own associated persons. Several commenters suggested that a non-member whose salespersons are registered representatives of a member that controls, is controlled by, or is under common control with that nonmember, should be afforded a similar exemption. The Board of Governors agrees, and a new paragraph (6)(d) has been added to each rule.

      SUMMARY

      The fundamental purpose of Article III, Sections 26(1) and 29(h) of the NASD Rules of Fair Practice is to require disclosure in prospectuses of cash and noncash compensation paid to members by offerors for the sale of investment company shares and variable contracts. The proposed amendment introduces a recordkeeping requirement that is designed to assist members in controlling the receipt of compensation, particularly noncash compensation, from offerors. The prohibition against associated persons receiving compensation directly from offerors without the knowledge and agreement of their member firms is retained.

      REQUEST FOR VOTE

      The NASD Board of Governors believes that this amendment to the two Rules of Fair Practice is necessary and appropriate and recommends that members vote their approval. Please mark the enclosed ballot according to your convictions and return it in the enclosed, stamped envelope to the Corporation Trust Company. Ballots must be postmarked no later than December 20, 1991.

      Questions concerning this notice may be directed to A. John Taylor, Vice President, Investment Companies Department, at (202) 728-8328.


      * Or a nonmember company and its sales personnel who are registered with an NASD member that controls, is controlled, or is under common control with the nonmember.


      PROPOSED AMENDMENT TO ARTICLE III, SECTION 26 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New text is underlined; deleted text is in brackets.)

      (a) Unchanged.

      Definitions

      (b)(1) — (6) Unchanged.
      [(7) "Associated person of an underwriter," as used in subsection (1) of this section, shall include an issuer for which an underwriter is the sponsor or a principal underwriter, any investment adviser to such issuer, or any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such underwriter, issuer, or investment adviser.]
      (7) The terms "offeror," "cash compensation," and "non-cash compensation" as used in subsection (1) of this section shall have the following meanings:

      "Offeror" shall mean an investment company, an adviser to an investment company, an under-writer and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities.

      "Cash compensation" shall mean compensation received by a member in cash, by check and by electronic means, and shall include loans and overrides.

      "Non-cash compensation" shall mean any form of compensation received by members that is not cash compensation, including but not limited to merchandise, gifts and prizes, and payment of travel expenses, meals and lodging.

      * * * * *

      (c) — (k) Unchanged.

      [Dealer concessions] Member Compensation
      [(1)(1) No underwriter or associated person of an underwriter shall offer, pay or arrange for the offer or payment to any other member in connection with retail sales or distribution of investment company securities, any discount, concession, fee or commission (hereinafter referred to as "concession") which:]
      [(A) is in the form of securities of any kind, including stock, warrants or options;]
      [(B) is in a form other than cash (e.g., merchandise or trips), unless the member earning the concession may elect to receive cash at the equivalent of no less than the underwriter's cost of providing the non-cash concession, or]
      [(C) is not disclosed in the prospectus of the investment company. If the concessions are not uniformly paid to all dealers purchasing the same dollar amounts of securities from the underwriter, the disclosure shall include a description of the circumstances of any general variations from the standard schedule of concessions. If special compensation arrangements have been made with individual dealers, which arrangements are not generally available to all dealers, the details of the arrangements, and the identities of the dealers, shall also be disclosed.]
      [(2) No underwriter or associated person of an underwriter shall offer or pay any concession to an associated person of another member, but shall make such payment only to the member.]
      [(3)
      (A) In connection with retail sales or distribution of investment company shares, no underwriter or associated person of an underwriter: shall offer or pay to any member or associated person, anything of material value, and no member or associated person shall solicit or accept anything of material value, in addition to the concessions disclosed in the prospectus.]
      [(B) For purposes of this paragraph (1)(3), items of material value shall include but not be limited to:]
      [(i) gifts amounting in value to more than $50 per person per year.] [(ii) gifts or payments of any kind which are conditioned on the sale of investment company securities.] [(iii) loans made or guaranteed to a non-controlled member or person associated with a member.]
      [(iv) wholesale overrides (commissions) granted to a member on its own retail sales unless the arrangement, as well as the identity of the member, is set forth in the prospectus of the investment company.]
      [(v) payment or reimbursement of travel expenses, including overnight lodging, in excess of $50 per person per year unless such payment or reimbursement is in connection with a business meeting, conference or seminar held by an underwriter for informational purposes relative to the fund or funds of its sponsorship and is not conditioned on sales of shares of an investment company. A meeting, conference or seminar shall not be deemed to be of a business nature unless: the person to whom payment or reimbursement is made is personally present at, or is en route to or from, such meeting in each of the days for which payment or reimbursement is made; the person on whose behalf payment or reimbursement is made is engaged in the securities business; and the location and facilities provided are appropriate to the purpose, which would ordinarily mean the sponsor's office.]
      [(C) For purposes of this paragraph (1)(3), items of material value shall not include:]
      [(i) an occasional dinner, a ticket to a sporting event or the theater, or comparable entertainment of one or more registered representatives which is not conditioned on sales of shares of an investment company and is neither so frequent nor so extensive as to raise any question of propriety.]
      [(ii) a breakfast, luncheon, dinner, reception or cocktail party given for a group of registered representatives in conjunction with a bona fide business or sales meeting, whether at the headquarters of a fund or its underwriter or in some other city.]
      [(iii) an unconditional gift of a typical item of reminder advertising such as a ballpoint pen with the name of the advertiser inscribed, a calendar pad, or other gifts amounting in value to not more than $50 per person per year.]
      [(4) The provisions of this subsection (1) shall not apply to:]
      [(A) Contracts between principal underwriters of the same security.]
      [(B) Contracts between the principal underwriter of a security and the sponsor of a unit investment trust which utilizes such security as its underlying investment.]
      [(C) Compensation arrangements of an underwriter or sponsor with its own sales personnel.]
      (1) In connection with the sale and distribution of investment company securities:
      (1) Except for gifts as described in paragraph (1)(5)(a), a member shall maintain records of all compensation, cash and non-cash, received from offerors and the distribution by the member of any such compensation to its associated persons. The records shall include the names of the offerors, the names of the associated persons and the amount and nature of the compensation received and distributed.
      (2) Except as described in paragraph (5), no associated person of a member shall accept any compensation, cash or non-cash, from anyone other than the member with which the person is associated.
      (3) No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind.
      (4) Except as described in paragraph (5), no member shall accept any compensation, cash or non-cash, from an offeror unless such is described in the current prospectus of the investment company. When special compensation arrangements are offered by an offeror to a member, which arrangements are not made available on the same terms to all members who distribute the investment company securities of the offeror, a member shall not enter into such arrangements unless the name of the member and the details of the arrangements are disclosed in the prospectus.
      (5) Notwithstanding the provisions of subsections (2) and (4) of this section, the following items of compensation may be accepted and are not required to be disclosed in a prospectus provided that they are not conditioned on sales or the promise of sales:
      (a) Gifts by an offeror to associated persons of members, with the approval of the member, that do not exceed an annual amount per person fixed periodically by the Board of Governors.1
      (b) Payment or reimbursement by offerors to members in connection with training or educational meetings where the location is appropriate to the purpose of the meeting. A location appropriate to the purpose of a meeting shall mean an office of the offeror or the member or a facility located in the vicinity of such an office.
      (6) The provisions of this Section (1) shall not apply to:
      (a) Compensation arrangements between principal underwriters of the same security.
      (b) Compensation arrangements between the principal underwriter of a security and the sponsor of a unit investment trust which utilizes such security as its underlying investment.
      (c) Compensation arrangements between a member and its own associated persons.
      (d) Compensation arrangements between a non-member company and its sales personnel who are registered representatives of an NASD member which, directly or indirectly controls, is controlled by, or is under common control with that non-member company.

      * * * * *


      1 The current annual amount fixed by the Board of Governors is $100.


      PROPOSED AMENDMENT TO ARTICLE III, SECTION 29 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New text is underlined.)

      (a) Unchanged.

      Definitions

      (b)
      (1) — (2) Unchanged.
      (3) The terms "offeror," "cash compensation" and "non-cash compensation" as used in subsection (h) of this Section shall have the following meanings:

      "Offeror" shall mean a separate account of an insurance company, an adviser to a separate ac-count of an insurance company, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities.

      "Cash compensation" shall mean compensation received by members in cash, by check and by electronic means and shall include loans and overrides.

      "Non-cash compensation" shall mean any form of compensation received by members that is not cash compensation, including but not limited to merchandise, gifts and prizes, and payment of travel expenses, meals and lodging.
      * * * * *
      (c) — (g) Unchanged.

      Member Compensation

      (h) In connection with the sale and distribution of variable contracts:
      (1) Except for gifts as described in paragraph (h)(5)(a), a member shall maintain records of all compensation, cash and non-cash, received from offerors and the distribution by the member of any such compensation to its associated persons. The records shall include the names of the offerors, the names of the associated persons and the amount and nature of the compensation received and distributed.
      (2) Except as described in paragraph (5), no associated person of a member shall accept any compensation, cash or non-cash, from anyone other than the member with which the person is associated. This requirement will not prohibit arrangements, agreed to by a member, where an insurance company maintains a commission account as a ministerial service for a member and, on behalf of the member, pays commission checks from such an account directly to associated persons of the member.
      (3) No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind.
      (4) Except as described in paragraph (5), no member shall accept any compensation, cash or non-cash, from an offeror unless such is described in the current prospectus of the variable contract. When special compensation arrangements are offered by an offeror to a member, which arrangements are not made available on the same terms to all members who distribute the variable contracts of the offeror, a member shall not enter into such arrangements unless the name of the member and the details of the arrangements are disclosed in the prospectus.
      (5) Notwithstanding the provisions of subsections (2) and (4) of this section, the following items of compensation may be accepted and are not required to be disclosed in a prospectus provided that they are not conditioned on sales or the promise of sales:
      (a) Gifts by an offeror to associated persons of members, with the approval of the member, that do not exceed an annual amount per person fixed periodically by the Board of Governors.1
      (b) Payment or reimbursement by offerors to members in connection with training or educational meetings where the location is appropriate to the purpose of the meeting. A location appropriate to the purpose of a meeting shall mean an office of the offeror or the member or a facility located in the vicinity of such an office.
      (6) The provisions of this Section (h) shall not apply to:
      (a) Compensation arrangements between principal underwriters of the same security.
      (b) Compensation arrangements between the principal underwriter of a security and the sponsor of a unit investment trust which utilizes such security as its underlying investment.
      (c) Compensation arrangements between a member and its own associated persons.
      (d) Compensation arrangements between a non-member company and its sales personnel who are registered representatives of an NASD member which, directly or in-directly, controls, is controlled by, or is under common control with that non-member company.

      * * * * *


      1 The current annual amount fixed by the Board of Governors is $100.

    • 91-67 SEC Approves Rules to Curb SOES Abuse

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Systems
      Trading
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On October 10, 1991, the Securities and Exchange Commission (SEC) unanimously approved four changes to the Small Order Execution System (SOES) operated by NASD Market Services, Inc. for Nasdaq securities. Currently, NASD rules prohibit members from using SOES to enter orders on behalf of a "professional trading account." Two new rules expand the definition of a professional trading account to include criteria such as excessive frequency of short-term trading and excessive short selling through SOES and also establish that executing either one or both sides of a day trade through SOES may be deemed professional use. These new rules are effective immediately.

      Additionally, the SEC approved two operating modifications to SOES; market makers will have approximately 15 seconds to update their quotations following an execution as well as the ability to accept preferencing on a firm-by-firm basis. These modifications are scheduled to be implemented November 18, 1991.

      OVERVIEW OF THE SYSTEM

      NASD Market Services, Inc., a subsidiary of the NASD, developed the Small Order Execution System (SOES) to assist order-entry firms and market makers in executing small retail customer orders for Nasdaq securities in an efficient, fast, and inexpensive manner by providing an automated, paperless execution and a locked-in trade for purposes of clearance and settlement. The system was designed to accommodate small-sized orders that were routinely executed at the Nasdaq best bid or offer and that did not require negotiation or special handling by traders. In recognition of the order-routing relationships in the market, the NASD also permitted preferencing of SOES orders to particular market makers, which have an obligation to execute the orders at the best price, regardless of the quote they may be displaying. Participation in SOES initially was voluntary.

      After the October 1987 market break, the NASD adopted rules to require dealers to participate in SOES if they were market makers in Nasdaq National Market System (Nasdaq/NMS) securities and penalized market makers that withdrew on an unexcused basis with a 20-day suspension from Nasdaq and SOES. Since 1988, market makers have been required to execute orders in sizes of 200, 500, or 1,000 shares, depending on the trading characteristics of the stocks, and have been required to execute up to five consecutive orders in SOES stocks at the designated tier size.

      SOES ABUSES

      SOES abuse has become a serious problem. In 1988, the SEC approved rules to prohibit NASD members from using SOES to enter orders on behalf of professional trading accounts because SOES was designed to accommodate small orders for investors, not professional traders. At that time, professionals were deemed to be "day traders" who used SOES to buy and sell stock the same day.

      Since the professional trading account rules were implemented, however, the NASD has become aware of other abuses of the system. They include rapid entry of SOES orders after news on a security has come out, but before the market has had an opportunity to absorb the news and reflect it in quotation changes; day trading using SOES for only one side of a trade to elude the application of SOES rules; consecutive immediate executions of orders usually all at the maximum size permitted in the system to a market maker remaining at the inside quotation after all or most of the other market makers have moved their quotes; or preferencing orders to disadvantage particular market makers because SOES executes preferenced orders at the inside Nasdaq quote regardless of the displayed quote of the preferenced market maker.

      NASD RULES TO CURB SOES ABUSE

      To eliminate these abuses, the NASD proposed and the SEC approved the following four changes to SOES. With these new rules, the NASD is attempting to eliminate the disparity in position between the investor and the professional trader. The SEC acknowledged that without professional trading account prohibitions, investors may be forced to wait in line behind professionals and agreed with the NASD that SOES is not intended to accommodate professionals. The first two changes take effect immediately; the last two are scheduled to be implemented November 18, 1991.

      1. Rules defining a professional trading account have expanded the criteria under which the NASD may designate an account as professional and prohibit SOES access for that account. The factors include: (1) excessive frequency of short-term trading; (2) excessive frequency of short-sale transactions; (3) trading of discretionary accounts; (4) direct or physical access to Nasdaq quotation screens or SOES terminals.
      2. The rule defining day trading clarifies that it includes one or both sides of a transaction occurring through SOES. For example, if a customer sold a stock through SOES and purchased it over the telephone, it would be considered a day trade for purposes of SOES rules.
      3. A market maker will have approximately 15 seconds after receipt of an execution report in SOES to update its quote before receiving another execution in the same stock.
      4. Market makers and order-entry firms will be permitted to enter preferencing relationships only when mutually agreeable. SOES will treat all preferenced orders not subject to an agreement between the parties as unpreferenced orders, to be executed through SOES in the usual manner, in rotation against any market maker at the inside quotation.

      COMPLIANCE WITH THE NEW RULES

      It is important to emphasize that the criteria set forth in the new rules in defining a professional trading account will not automatically be applied to all active accounts. On the contrary, the NASD's Market Surveillance Department will make determinations only after a pattern or practice of professional trading has been detected. These criteria are additional factors that will be taken into consideration when reviewing the activity in a particular account and do not necessarily mean that the existence of any single factor will cause an account to be designated a professional trading account.

      With regard to day trading, the SOES rules state that a professional trading pattern encompasses not only the inclusion of accounts executing five or more day trades each day, but also includes other activities such as (1) the existence of a pattern or practice of executing day trades; (2) the execution of a high volume of day trades in relation to the total transactions in the account; or (3) the execution of a high volume of day trades in relation to the amount and value of securities held in the account.

      Thus, a pattern of excessive short-term trading, including but not limited to day trading, could be deemed professional trading, and the account would be prohibited from using SOES. Such determinations could result, for example, if an account exhibits a pattern of consistently executing fewer than five day trades during a trading day because the frequency of day trades could constitute excessive short-term trading.

      Additionally, the Association in the past has interpreted the SOES rules to prohibit circumvention of the rules through entry of a group or series of transactions for one or more accounts that are related or controlled by a person associated with a member firm or by a customer (see Notice to Members 88-61). To assure that the limitations with respect to professional trading or day trading are not circumvented through the use of multiple related or controlled accounts, the Association intends to closely monitor patterns of trading in these accounts. Accordingly, day trades occurring in accounts that are related or under common control will be viewed by the NASD as occurring in a single account for purposes of the SOES rules. Likewise, the NASD will closely monitor related or controlled accounts for other indications of professional trading patterns including the practice of entering fewer than five day trades. An associated person or customer will be deemed to control an account if he or she exercises discretion over the account or has been granted a power of attorney to execute transactions in the account; if the account is his or her personal account; or if, in the case of an associated person, it is the account of a member of his or her immediate family, as that term is defined in the NASD Interpretation on Free-Riding and Withholding (see Notice to Members 88-61).

      The NASD will monitor members' SOES activity on a daily basis through automated regulatory systems in the Market Surveillance Department and will increase the intensity of its on-site field examinations of SOES trading patterns. Apparent violations of SOES rules will be reviewed by the Market Surveillance Committee for a determination as to whether disciplinary action is appropriate. When the NASD notifies a firm that accounts have been designated professional accounts, the SOES system is no longer available for purchases or sales from those accounts. Furthermore, members should instruct their associated persons not to knowingly accept orders for execution in SOES from accounts designated as professional trading accounts. Members or customers that feel aggrieved by such a designation may appeal the action by following procedures set forth in Article IX of the NASD's Code of Procedure. Questions on the SOES rules should be directed to James M. Cangiano, Vice President, Market Surveillance at (301) 590-6424 or Beth E. Weimer, Assistant General Counsel at (202) 728-6998. The complete text of the rules follows.

      RULES OF PRACTICE AND PROCEDURES FOR THE SMALL ORDER EXECUTION SYSTEM

      (Note: New language is underlined.)

      (a) Definitions

      * * * * *
      10. The term "professional trading account" shall mean
      (A) an account in which five or more day trades have been executed during any trading day; or
      (B) an account in which there has been a professional trading pattern as demonstrated by:
      (1) a pattern or practice of executing day trades;
      (2) executing a high volume of day trades in relation to the total transactions in the account;
      (3) executing a high volume of day trades in relation to the amount and value of securities held in the account;
      (4) excessive frequency of short-term trading;
      (5) excessive frequency of short sale transactions;
      (6) existence of discretion; or
      (7) direct or physical access to SOES execution capability, to Nasdaq Level 2 service, or to NQDS service.
      11. The term "day trade" or "day trading" shall mean the execution through SOES of either one or both sides of offsetting trades in the same security for generally the same size during the same trading day.
      * * * * *
      (c) Participation Obligations in SOES

      * * * * *
      2. Market Makers — (A) A SOES Market Maker shall commence participation in SOES by initially contacting the SOES Operation Center to obtain authorization for the trading of a particular SOES security and identifying those terminals on which the SOES information is to be displayed and thereafter by an appropriate keyboard entry which obligates the firm, so long as it remains a Market Maker in SOES, (i) for any security for which it is a SOES Market Maker, to execute individual orders in sizes equal to or smaller than the maximum order size; and (ii) for any Nasdaq/NMS security for which it is a Market Maker, to execute individual orders equal in the aggregate to the minimum exposure limit. Market Makers shall have a period of time following their receipt of an execution report in which to update their quotation in the security in question before being required to execute another transaction at the same bid or offer in the same security. This period of time shall initially be established as 15 seconds, but may be modified upon appropriate notification to SOES participants. All entries in SOES shall be made in accordance with the requirements set forth in the SOES User Guide.
      * * * * *
      3. SOES Order Entry Firms —
      (A) All entries in SOES shall be made in accordance with the procedures and requirements set forth in the SOES User Guide. Orders may be entered in SOES by the SOES Order Entry Firm through either its Nasdaq terminal or computer interface. The system will transmit to the firm on the terminal screen and printer, if requested, or through the computer interface, as applicable, an execution report generated immediately following the execution.
      (B) SOES will accept both market and limit orders for execution. Orders may be preferenced to a specific SOES Market Maker or may be unpreferenced, thereby resulting in execution in rotation against SOES Market Makers. A Market Maker may indicate order entry firms from which it agrees to accept preferenced orders. If an order is received by a Market Maker from an order entry firm from which it has not agreed to accept preferencing, the order will be executed at the inside market on an unpreferenced basis.
      * * * * *
      (E)(i) No member or person associated with a member shall enter any order for execution in SOES on behalf of a professional trading account. The Association shall take into account the factors enumerated in Section (a)(10) in determining whether an account will be designated as a professional trading account.
      * * * * *
      (F) Article IX of the Code of Procedure shall apply to Order Entry Firms and other persons seeking review of the restrictions imposed due to the designation of a professional trading account, pursuant to this Sub-section.

    • 91-66 Nasdaq National Market System (Nasdaq/NMS) Additions, Changes, and Deletions As of September 25, 1991

      SUGGESTED ROUTING:*

      Internal Audit
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      As of September 25, 1991, the following 29 issues joined Nasdaq/NMS, bringing the total number of issues to 2,611:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      VANS

      Vans, Inc.

      8/23/91

      1000

      EZPW

      EZCORP, Inc. (Cl A)

      8/27/91

      1000

      MGICF

      Magic Software Enterprises Ltd.

      8/28/91

      1000

      CESH

      CE Software Holdings, Inc.

      9/3/91

      1000

      CESHW

      CE Software Holdings, Inc. (Wts)

      9/3/91

      1000

      CGOL

      Charter Golf, Inc.

      9/3/91

      1000

      ENSA

      Environmental Services of America, Inc.

      9/3/91

      1000

      MIKE

      Michaels Stores, Inc.

      9/3/91

      1000

      MAIC

      Mutual Assurance, Inc.

      9/4/91

      1000

      CMNT

      Computer Network Technology Corporation

      9/11/91

      1000

      POPS

      National Beverage Corp.

      9/13/91

      500

      TRED

      Treadco, Inc.

      9/13/91

      1000

      AMRC

      American Recreation Centers, Inc.

      9/17/91

      1000

      ELMD

      Electromedics, Inc.

      9/17/91

      1000

      IDPH

      IDEC Pharmaceuticals Corporation

      9/17/91

      1000

      ZOOMF

      Zoom Telephonies, Inc.

      9/17/91

      1000

      ASFT

      Artisoft, Inc.

      9/20/91

      1000

      GTSI

      Government Technology Services, Inc.

      9/20/91

      1000

      HOLO

      HoloPak Technologies, Inc.

      9/20/91

      1000

      NPRS

      Newpark Resources, Inc.

      9/20/91

      1000

      SEPR

      Sepracor, Inc.

      9/20/91

      1000

      TSCC

      Technology Solutions Company

      9/20/91

      1000

      BONT

      Bon-Ton Stores, Inc. (The)

      9/24/91

      1000

      CPRO

      CellPro, Incorporated

      9/24/91

      1000

      GENIW

      Genetics Institute, Inc. (Wts)

      9/24/91

      200

      SCGN

      SciGenics, Inc.

      9/24/91

      200

      SUPR

      Super Rite Corporation

      9/24/91

      500

      DNAPP

      DNA Plant Technology Corporation (Pfd)

      9/25/91

      500

      MBLYA

      Mobley Environmental Services, Inc. (Cl A)

      9/25/91

      1000

      Nasdaq/NMS Symbol and/or Name Changes

      The following changes to the list of Nasdaq/NMS securities occurred since August 22, 1991:

      New/Old Symbol

      New/Old Security

      Date of Change

      WILM/WILM

      Wilmington Trust Corporation/Wilmington Trust Company

      8/23/91

      FSVB/FSVB

      Franklin Bank, National Association/Franklin Savings Bank, F.S.B.

      9/3/91

      FSVBP/FSVBP

      Franklin Bank, National Association (Pfd)/Franklin Savings Bank, F.S.B. (Pfd)

      9/3/91

      FSVBW/FSVBW

      Franklin Bank, National Association (Wts)/Franklin Savings Bank, F.S.B. (Wts)

      9/3/91

      RCHF/RCHFA

      Richfood Holdings, Inc./Richfood Holdings, Inc. (Cl A)

      9/4/91

      ELBTF/ELBTF

      Elbit Ltd./Elbit Computers Ltd.

      9/5/91

      Nasdaq/NMS Deletions

      Symbol

      Security

      Date

      CBCT

      Cenvest, Inc.

      8/23/91

      MRGOE

      Margo Nursery Farms, Inc.

      8/23/91

      WGHT

      Weigh-Tronix, Inc.

      8/23/91

      CEUMF

      Centurion Gold Ltd.

      8/26/91

      USPMF

      U.S. Precious Metals, Inc.

      8/26/91

      HMSD

      Homestead Holding Corporation

      8/28/91

      DMNG

      Damon Group Inc.

      8/29/91

      INVN

      Invitron Corporation

      9/3/91

      HILO

      Hi-Lo Automotive, Inc.

      9/9/91

      INTR

      Intermec Corporation

      9/10/91

      SFCP

      Suffield Financial Corporation

      9/11/91

      DETA

      Del Taco Restaurants, Inc.

      9/12/91

      TWEN

      20th Century Industries

      9/16/91

      GSCC

      Graphic Scanning Corp.

      9/18/91

      ECTL

      Elcotel, Inc.

      9/19/91

      LDMK

      Landmark Bank for Savings

      9/19/91

      ZEGL

      Ziegler Company, Inc. (The)

      9/20/91

      SCGNZ

      SciGenics, Inc. (Paired Cert.)

      9/24/91

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, Market Listing Qualifications, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 91-65 Veteran's Day and Thanksgiving Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Veteran's Day, Monday, November 11, 1991, and Thanksgiving Day, Thursday, November 28, 1991. On Monday, November 11, the Nasdaq system and the exchange markets will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed in observance of Veteran's Day. All securities markets will be closed on Thursday, November 28, in observance of Thanksgiving Day.

      Trade Date

      Settlement Date

      Reg.T Date*

      Oct. 31

      Nov. 7

      Nov. 11

      Nov. 1

      8

      12

      4

      12

      13

      5

      13

      14

      6

      14

      15

      7

      15

      18

      8

      18

      19

      11

      18

      20

      12

      19

      21

      20

      27

      Dec. 2

      21

      29

      3

      22

      Dec. 2

      4

      25

      3

      5

      26

      4

      6

      27

      5

      9

      28

      Markets Closed

      -

      29

      6

      10

      Note: November 11, 1991, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on November 11 will be combined with transactions made on the previous business day, November 8, for settlement on November 18. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.

      Brokers, dealers, and municipal securities dealers should use these settlement dates for purposes of clearing and settling transactions pursuant to the NASD Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at(212) 858-4341.

      * Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker/dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)m, make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Reg. T Date."

    • 91-64 SOES Tier Levels to Change for 487 Issues on October 31, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Internal Audit
      Operations
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      On June 30, 1988, the maximum Small Order Execution System (SOES) order size for all Nasdaq National Market System (Nasdaq/NMS) securities was established as follows:

      • A 1,000-share maximum order size was applied to those Nasdaq/NMS securities that had an average daily nonblock volume of 3,000 shares or more a day, a bid price that was less than or equal to $100, and three or more market makers.

      • A 500-share maximum order size was applied to those Nasdaq/NMS securities that had an average daily nonblock volume of 1,000 shares or more a day, a bid price that was less than or equal to $150, and two or more market makers.

      • A 200-share maximum order size was applied to those Nasdaq/NMS securities that had an average daily nonblock volume of less than 1,000 shares a day, a bid price that was less than or equal to $250, and less than two market makers.

      These order-size tiers were set by the NASD after extensive research and polling of all Nasdaq/NMS market makers. The purpose of establishing these tiers was to provide public investors with the most efficient means of handling their small orders while ensuring that market makers were not required to assume unrealistic risks under the new mandatory SOES participation rules.

      At the time of their establishment, the NASD Trading Committee and Board of Governors decided that the tier levels applicable to each security would be reviewed periodically to determine if the trading characteristics of the issue had changed so as to warrant a SOES tier-level move. Such a review was conducted as of June 28, 1991, using the aforementioned formula and second-quarter trading data. The results of this review were analyzed by the SOES Subcommittee and the NASD Trading Committee, which recommended that changes in SOES tier levels should be implemented per the formula calculation with the exception that an issue would not be permitted to move more than one level.

      To further explain, if an issue previously was categorized in the 200-share tier, it would not be permitted to move to the 1,000-share tier even if the formula calculated that such a move was warranted. The issue could move only one level to the 500-share tier as a result of any single review. Likewise, a security previously assigned to the 1,000-share tier could move only to 500 shares, regardless of the formula calculation. During the most recent review, 27 issues were affected by this change. In adopting this policy, the Committee was attempting to minimize market-maker exposure on issues for which the tier level increased and to maintain adequate public investor access on issues for which the tier level decreased.

      The committee also recognized that the formula used to assign the tier levels cannot always accurately reflect the trading characteristics for each issue. As such, market makers are reminded that the SOES Subcommittee will review on a case-by-case basis suggested tier-level changes if a significant number of market makers in that issue believe such a change is warranted. For more information regarding this process, please contact Nasdaq Market Listing Qualifications at (202) 728-8039.

      Following is a listing of the Nasdaq/NMS issues that will require a SOES tier-level change on October 31, 1991.

      NASDAQ/NMS SOES CHANGES

      All Issues in Alphabetical Order by Name

      Symbol

      Company Name

      Old Tier Level

      New Tier Level

             

      A

           

      ACMTA

      ACMATCORPCLA

      200

      500

      AEPI

      AEP INDS INC

      500

      1000

      ABRI

      ABRAMS INDS INC

      200

      500

      ACLE

      ACCEL INTL CORP

      500

      1000

      ADMG

      ADVANCED MAGNETICS

      500

      1000

      ABCV

      AFFILIATED BANC CORP

      1000

      500

      AORGB

      ALLEN ORGAN CO CL B

      200

      500

      ABGA

      ALLIED BANKSHARES

      500

      200

      ASFN

      ALLSTATE FINL CORP

      500

      1000

      AMBJ

      AMER CITY BUS JOURNALS

      1000

      500

      AMCE

      AMER CLAIMS EVAL

      500

      1000

      ACOL

      AMER COLLOID CO

      200

      500

      ANSY

      AMER NURSERY PRODUCT

      500

      1000

      AMPH

      AMER PHYSICIANS SVC

      500

      1000

      RICEE

      AMER RICE INC

      1000

      500

      AMWD

      AMER WOODMARK CORP

      200

      500

      ASBI

      AMERIANA BANCORP

      500

      1000

      AINVS

      AMERIBANC INVEST SBI

      1000

      500

      ATAXZ

      AMERICA FRST TX 2 LP

      500

      1000

      AMTA

      AMISTAR CORP

      500

      200

      AMOS

      AMOSKEAG CO

      500

      1000

      AMPI

      AMPLICON INC

      200

      500

      AATI

      ANALYSIS TECHNOLOGY

      500

      1000

      ARSD

      ARABIAN SHIELD DEV

      200

      500

      AGII

      ARGONAUT GROUP INC

      200

      500

      AFWY

      ARKANSAS FREIGHTWAYS

      500

      1000

      ARTW

      ART'S-WAY MFG CO INC

      200

      500

      ALOT

      ASTRO-MED INC NEW

      500

      1000

      ATKM

      ATEK METALS CENTER

      500

      200

      ATPC

      ATHEY PRODUCTS CORP

      1000

      500

      AAME

      ATLANTIC AMER CORP

      1000

      500

      ATTC

      AUTO-TROL TECH

      500

      200

      ADIE

      AUTODIE CORP

      500

      1000

             

      B

           

      BGSS

      BGS SYSTEMS INC

      500

      1000

      BHAGB

      BHA GROUP INC CL B

      1000

      500

      BMJF

      BMJ FINANCIAL CORP

      1000

      500

      BMRG

      BMR FIN GROUP INC

      500

      200

      BNHB

      BNH BNCSH INC

      1000

      500

      BTFC

      BT FINANCIAL CORP

      500

      200

      BPMI

      BADGER PAPER MILLS

      200

      500

      BAIB

      BAILEY CORP

      200

      500

      BLCC

      BALCHEM CORP

      200

      500

      BWINB

      BALDWIN LYONS CL B

      200

      500

      BPAO

      BALDWIN PIANO ORGAN

      500

      1000

      BTEK

      BALTEK CORP

      500

      200

      BCNJ

      BANCORP NEW JERSEY

      1000

      500

      BOSP

      BANK OF SAN PEDRO

      500

      200

      BOM A

      BANKS OF MID-AMER

      500

      1000

      VMLPZ

      BANYAN MTGE LP UTS

      1000

      500

      BPILF

      BASIC PET INTL LTD

      500

      1000

      BGAS

      BERKSHIRE GAS CO

      200

      500

      BINC

      BIOSPHERICS INC

      500

      1000

      BOSA

      BOSTON ACOUSTICS INC

      500

      1000

      BRCOA

      BRADYWHCOCLA

      500

      1000

      BTSB

      BRAINTREE SAV BANK THE

      500

      200

      BRDL

      BRENDLE'S INC

      1000

      500

      BRID

      BRIDGFORD FOODS CORP

      500

      200

      BFCP

      BROADWAY FIN

      500

      200

      BMTC

      BRYN MAWR BANK CORP

      200

      500

             

      C

           

      CBTF

      CB&T FINANCIAL CORP

      200

      500

      CCNC

      CCNB CORP

      500

      1000

      CERB

      CERBCOINC

      500

      1000

      CNBE

      CNB BANCSHARES INC

      1000

      500

      CPBI

      CPB INC

      1000

      500

      CPSL

      CSC INDS INC

      1000

      500

      CSPI

      CSP INC

      1000

      500

      CAMP

      CAL AMPLIFIER

      500

      1000

      CRBI

      CAL REP BANCORP INC

      500

      200

      CWTR

      CAL WATER SVC CO

      500

      1000

      CGNEP

      CALGENE INC PFD

      500

      1000

      CFHC

      CALIFORNIA FIN HLDG

      1000

      500

      CANX

      CANNON EXPRESS

      500

      1000

      CSWC

      CAPITAL SOUTHWEST CORP

      1000

      500

      CATA

      CAPITOL TRANS AMERICA

      200

      500

      CATY

      CATHAY BANCORP INC

      1000

      500

      CDRGW

      CEDAR GROUP WTS A

      200

      500

      CELLW

      CELL TECH INC WTS 92

      200

      500

      CNCR

      CENCORINC

      500

      200

      CEBC

      CENTENNIAL BANCORP

      200

      500

      CEBK

      CENTRAL CO-OP BANK

      500

      1000

      CJFC

      CENTRAL JERSEY FINL

      500

      200

      CSBC

      CENTRAL SOUTHERN HLD

      500

      200

      CNBKA

      CENTURY BANCORP CL A NV

      1000

      500

      CHCR

      CHANCELLOR CORP

      500

      200

      CHTT

      CHATTEM INC

      200

      500

      CHER

      CHERRY CORP

      500

      1000

      CINF

      CINCINNATI FINANCIAL

      1000

      500

      CPCI

      CIPRICO INC

      500

      1000

      CINS

      CIRCLE INCOME SHARES

      1000

      500

      CTRIS

      CLEVETRUST REALTY SBI

      500

      200

      CLDRP

      CLIFFS DRILLING PFD

      200

      500

      COBK

      CO-OP BANK CONCORD

      1000

      500

      COHO

      COHO RESOURCES INC

      1000

      500

      CFFS

      COLUMBIA FIRST BANK

      1000

      500

      CCOA

      COMCOAINC

      200

      500

      CBNB

      COMMERCEBANCORP

      500

      1000

      CBOCA

      COMMERCIAL BANCORP COLO

      500

      200

      CBNH

      COMMUNITY BANKSHARES

      500

      200

      CBSI

      COMMUNITY BANK SYSTEM

      500

      200

      CBPA

      COMMUNITY BANCORP INC

      200

      500

      CIDN

      COMPUTER IDENTICS CORP

      500

      1000

      CTLC

      CONS -TOMOKA LAND

      500

      200

      CFINP

      CONSUMERS FIN CORP PFD

      500

      200

      CMETS

      CONTL MORTGAGE EQUITY

      500

      1000

      CSTN

      CORNERSTONE FIN CORP

      1000

      500

      COSE

      COSMETIC CENTER,THE

      500

      1000

      CSTR

      COSTAR CORP

      200

      500

      CRRC

      COURIER CORP

      200

      500

      CRII

      CREST INDS INC

      500

      1000

      CMBK

      CUMBERLAND FED BANCORP

      1000

      500

      CUNB

      CUPERTINO NATL BANCORP

      500

      200

      CYGN

      CYGNUS THERAPEUTIC

      200

      500

             

      D

           

      DLFI

      DELPHI FINL GROUP CL A

      500

      200

      DGAS

      DELTA NATURAL GAS

      200

      500

      DCPI

      DICK CLARK PROD INC

      500

      1000

      DGIC

      DONEGAL GROUP INC

      500

      200

      DUCO

      DURHAM CORP

      500

      1000

      DRCO

      DYNAMICS RESEARCH CORP

      1000

      500

             

      E

           

      EACO

      EAENGRG SCI TECH

      500

      1000

      EROQ

      ENVIROQ CORP

      500

      1000

      ESBB

      ESB BANCORP INC

      500

      200

      EWAT

      E TOWN CORP

      500

      1000

      EDCO

      EDISON CONTROL CORP

      200

      500

      ELBTF

      ELBIT COMPUTERS LTD

      500

      1000

      ELCN

      ELCOINDSINC

      500

      1000

      ELRC

      ELECTRO RENT CORP

      500

      200

      ETCIA

      ELECTRONIC TELECOM CL A

      500

      1000

      EFSB

      ELMWOOD FED SAV BANK

      1000

      500

      EMPI

      EMPI INC

      500

      1000

      ECGI

      ENVIRONMNTL CONTROL

      1000

      500

      ERIE

      ERIE LACKAWANNA

      200

      500

      ERLYE

      ERLY INDUSTRIES INC

      500

      1000

      ESCA

      ESCALADE INC

      1000

      500

      ESEX

      ESSEX CORP

      500

      1000

      EVGN

      EVERGREEN BANCORP

      500

      1000

             

      F

           

      FMFS

      F AND M FINL SVC CORP

      200

      500

      FDPC

      FDP CORP

      500

      1000

      FFFG

      FFO FINL GROUP INC

      1000

      500

      FLSHP

      FLSHLDGSCLAPFD

      500

      200

      FMCO

      FMS FINANCIAL CORP

      500

      200

      FNBR

      FNB ROCHESTER CORP

      500

      1000

      FRPP

      FRP PROPERTIES INC

      200

      500

      FICI

      FAIR ISAAC AND CO

      200

      500

      FLOG

      FALCON OIL & GAS CO

      500

      200

      FMLY

      FAMILY BANCORP

      1000

      500

      FARA

      FARAD YNE ELECT CORP

      500

      1000

      FAHSP

      FARM AND HOME PFD CL A

      1000

      500

      FEDF

      FEDERATED BK S S B

      200

      500

      FSVA

      FIDELITY SAV BANK

      500

      200

      FITC

      FINANCIAL TRUST CORP

      500

      200

      FAMA

      FIRST AMARILLO BANCORP

      500

      200

      FAMRB

      FIRST AMER FIN CORP CL B

      500

      1000

      FAMRA

      FIRST AMER FINL CORP CL A

      500

      1000

      FBII

      FIRST BANC INDIANA

      500

      200

      FCHT

      FIRST CHATTANOOGA

      1000

      500

      FCNCA

      FIRST CITIZENS CL A

      200

      500

      FCIT

      FIRST CITIZENS FINL

      500

      200

      CITY

      FIRST CITY BANCORP INC

      500

      200

      FRFD

      FIRST COMM BANCORP IL

      200

      500

      FCLR

      FIRST COMMERCIAL L R

      500

      1000

      FSCB

      FIRST COMMERCIAL BNCSH

      200

      500

      FFMY

      FIRST FED S&L FT MYERS

      1000

      500

      FLAG

      FIRST FED SAV BANK LAG

      500

      200

      FFPR

      FIRST FED SAV BANK PR

      1000

      500

      FFUT

      FIRST FED SAV UTAH

      500

      1000

      FFBC

      FIRST FIN BANCORP OH

      1000

      500

      FFCH

      FIRST FIN HLDG

      1000

      500

      FIBI

      FIRST INTER BANCORP

      500

      1000

      FLFC

      FIRST LIBERTY FIN

      1000

      500

      FMSB

      FIRST MUTUAL SAV BANK

      500

      200

      MTCL

      FIRST NATL BANK CORP

      500

      200

      FNPC

      FIRST NATL PENN CORP

      1000

      500

      FNYB

      FIRST NY BUSINESS BANK

      1000

      500

      FOBBA

      FIRST OAK BROOK CL A

      200

      500

      FABKN

      FIRST OF AMER PFD E

      500

      1000

      FSKY

      FIRST SECURITY CORP KY

      500

      1000

      FSFI

      FIRST STATE FINL SVC

      1000

      500

      FBIC

      FIRSTBANK OF IL CO

      500

      1000

      FRST

      FIRSTIER FINL INC

      1000

      500

      FLGLA

      FLAGLER BANK CORP CL A

      200

      500

      FLAEF

      FLORIDA EMP INS CO

      200

      500

      FFPC

      FLORIDA FIRST FED

      1000

      500

      FOOT

      FOOTHILL INDEPENDENT

      1000

      500

      FKFD

      FRANKFORD CORP THE

      200

      500

      FSVB

      FRANKLIN SAV BANK FSB

      500

      1000

      FSVBW

      FRANKLIN SAV BANK WTS

      200

      500

      FRML

      FREYMILLER TRUCKING

      200

      500

             

      G

           

      GWCC

      GWC CORP

      500

      1000

      GNDR

      GANDER MOUNTAIN INC

      500

      1000

      GCCC

      GEN COMPUTER CORP

      500

      1000

      GCOR

      GENCOR INDSINC

      500

      200

      GENZW

      GENZYME CORP WTS 94

      500

      1000

      GEOX

      GEONEX CORP

      500

      1000

      GLDC

      GOLDEN ENTRPRS INC

      500

      1000

      GOOD

      GOODY PRODUCTS INC

      1000

      500

      GSBI

      GRANITE STATE BKSHS

      500

      200

      GBBS

      GREAT BAY BANKSHARES

      1000

      500

      GFGC

      GREAT FALLS GAS CO

      200

      500

      GSBC

      GREAT SOUTHERN BANCORP

      500

      1000

      GSOF

      GROUP 1 SOFTWARE INC

      500

      1000

      GRIT

      GRUBB & ELLIS REALTY

      1000

      500

      GULL

      GULL LABS INC

      500

      1000

             

      H

           

      HDRP

      HDR POWER SYS INC

      500

      200

      HAKO

      HAKO MINUTEMAN INC

      200

      500

      HALL

      HALL FIN GROUP INC

      1000

      500

      HBSI

      HAMPTONS BANCSHARES

      500

      200

      HTHR

      HAWTHORNE FINANCIAL

      1000

      500

      HTLD

      HEARTLAND EXPRESS

      500

      1000

      HCCO

      HECTOR COMMUN CORP

      500

      200

      HEKN

      HEEKIN CAN INC

      500

      1000

      HRLY

      HERLEYINDS INC

      500

      1000

      HSBK

      HIBERNIA SAV BANK THE

      500

      200

      HIWDF

      HIGHWOOD RESOURCES

      200

      500

      HFGA

      HOME FED SAV BANK GA

      200

      500

      HFET

      HOME FINANCIAL CORP

      1000

      500

      HPBC

      HOME PORT BANCORP INC

      1000

      500

      HTWN

      HOMETOWN BANCORP INC

      500

      200

      HRZB

      HORIZON BANK (WA)

      500

      1000

      FAXM

      HOTELECOPYINC

      1000

      500

      HUFK

      HUFFMAN KOOS INC

      500

      1000

      HYDE

      HYDE ATHLETIC INDS

      200

      500

             

      I

           

      IIVI

      II-VI INC

      1000

      500

      IMGE

      IMNET INC

      500

      1000

      INRD

      INRAD INC

      200

      500

      IWCR

      IWC RES CORP

      500

      1000

      ILIOW

      ILIO INC WTS 92

      1000

      500

      INFS

      IN FOCUS SYSTEMS INC

      500

      1000

      INAC

      INACOM CORP

      200

      500

      INDB

      INDEP BANK CORP MA

      1000

      500

      IBCP

      INDEP BANK CORP MI

      500

      1000

      INHO

      INDEPENDENCE HLDG CO

      1000

      500

      ITCC

      INDUSTRIAL TRAINING

      200

      500

      INSI

      INFO SCIENCES INC

      500

      200

      IGLWF

      INSITUFORM GROUP WTS 91

      500

      1000

      INSMA

      INSITUFORM MID-AMER CL A

      200

      500

      INTL

      INTER TEL INC

      500

      1000

      ICAR

      INTERCARGO CORP

      200

      500

      INPH

      INTERPHASE CORP

      500

      1000

      INTP

      INTERPOINT CORP

      500

      1000

      INVS

      INVESTORS SAVINGS CORP

      500

      1000

      INVN

      INVITRON CORP

      1000

      500

      ISKO

      ISCO INC

      500

      1000

      IYCOY

      ITO-YOKADO CO ADR

      500

      200

             

      L

           

      LECT

      LECTEC CORP

      500

      1000

      LSCO

      LESCO INC

      500

      1000

      LNDL

      LINDAL CEDAR HOMES

      500

      1000

      LIND

      LINDBERG CORP

      500

      1000

      LICF

      LONG ISLAND CITY FIN

      1000

      500

      LEIX

      LOWRANCE ELECTRONICS

      500

      200

      LUFK

      LUFKIN INDS INC

      200

      500

             

      M

           

      MKCO

      M KAMENSTEIN INC

      200

      500

      MMIM

      MMI MEDICAL INC

      200

      500

      MPSG

      MPSI SYSTEMS INC

      500

      1000

      MACD

      MACDERMID INC

      500

      200

      MGNL

      MAGNA BANCORP INC

      500

      1000

      MKTAY

      MAKITA CORP SPN ADR S2

      200

      500

      MANA

      MANATRON INC

      500

      200

      MRCS

      MARCUS CORP

      1000

      500

      MRCC

      MARK CONTROLS CORP NEW

      1000

      500

      MSAM

      MARSAM PHARM INC

      500

      1000

      MFLR

      MAYFLOWER CO-OP BANK

      500

      200

      MCFE

      MCFARLAND ENERGY INC

      1000

      500

      MTIX

      MECHANICAL TECH INC

      500

      200

      MDIN

      MEDALIST INDS

      1000

      500

      MDXR

      MEDAR INC

      500

      1000

      MDCI

      MEDICAL ACTION INDS

      500

      1000

      MDEV

      MEDICAL DEVICES

      500

      1000

      MIGI

      MERIDIAN INS GROUP INC

      500

      1000

      METS

      MET-COIL SYSTEMS CORP

      1000

      500

      MTRO

      METRO-TEL CORP

      200

      500

      MSEA

      METROPLTN FSL SEATTLE

      500

      1000

      MIDC

      MIDCONN BANK

      1000

      500

      SHOEZ

      MILLFELD TRADING WTS CL A

      500

      1000

      SHOEW

      MILLFELD TRADING WTS

      1000

      500

      MILW

      MILWAUKEE INS GROUP

      200

      500

      MITSY

      MITSUI AND CO ADR

      500

      200

      MMDI

      MOMENTUM DISTRIB

      500

      200

      MAHI

      MONARCH AVALONINC

      500

      200

      MORP

      MOORE PRODUCTS CO

      500

      200

      MORF

      MOR-FLO INDS INC

      500

      1000

      MTNR

      MOUNTAINEER BKSHS WV

      200

      500

      MUEL

      MUELLER PAUL CO

      200

      500

      LABL

      MULTI-COLOR CORP

      500

      1000

             

      J

           

      JGIN

      JG INDUSTRIES INC

      1000

      500

      JKHY

      JACK HENRY AND ASSOC

      500

      1000

      JBNK

      JEFFERSON BKSHS VA

      1000

      500

      JSBK

      JOHNSTOWN SAV BANK FSB

      500

      200

             

      K

           

      KCSG

      KCS GROUP INC

      200

      500

      KLLM

      KLLM TRANSPORT SV

      200

      500

      KSRI

      KAISER STEEL RESOURCES

      500

      1000

      KHGI

      KEYSTONE HERITAGE GROUP

      200

      500

      KOSS

      KOSS CORP

      500

      200

      KRUG

      KRUG INTL CORP

      1000

      500

             

      L

           

      LCSI

      LCS INDS INC

      500

      200

      LXBK

      LSB BANCSHARES NC

      500

      200

      LVMHY

      LVMH MOET ADR

      200

      500

      LDMK

      LANDMARK BANK FOR SAV

      200

      500

             

      N

           

      NSCB

      NBSC CORP

      200

      500

      NIPNY

      NEC CORP ADR

      1000

      500

      NFSF

      NFS FIN CORP

      1000

      500

      NSCC

      NSC CORPORATION

      1000

      500

      NWGI

      NW GROUP INC

      1000

      500

      NANO

      NANOMETRICS INC

      500

      200

      NSSC

      NAPCO SEC SYS INC

      1000

      500

      NCELW

      NATIONWIDE CELL WTS

      500

      200

      NBAK

      NATL BANCORP OF ALASKA

      500

      200

      NCBC

      NATL COMMERCE BANCORP

      500

      1000

      NHMO

      NATL HMO CORP

      500

      1000

      MBLA

      NATL MERCANTILE BANCORP

      1000

      500

      NPBC

      NATL PENN BCSHS INC

      200

      500

      NWLIA

      NATL WESTERN LIFE CL A

      500

      1000

      NAVG

      NAVIGATORS GROUP INC

      500

      1000

      NALR

      NAYLOR INDSINC

      500

      1000

      NHSL

      NEW HORIZONS S&L

      200

      500

      NMSB

      NEWMIL BANCORP

      1000

      500

      NEWE

      NEWPORT ELECTRONICS

      500

      200

      NNSL

      NEWPORT NEWS SAV BANK

      500

      200

      NIEX

      NIAGARA EXCHANGE CORP

      200

      500

      NOLD

      NOLAND CO

      500

      200

      NAMC

      NORTH AMER NATL CORP

      1000

      500

      CBRYA

      NORTHLAND CRANBERR CL A

      200

      500

      NWIB

      NORTHWEST IL BANCORP

      500

      200

      NOVXM

      NOVA PHARM CORP WTS C

      500

      1000

      NOVXL

      NOVA PHARM CORP WTS D

      500

      1000

      NUCM

      NUCLEAR METALS INC

      200

      500

      NUCOL

      NUCORP INC WTS BC 92

      200

      500

      NUCOW

      NUCORP INC WTS C 93

      200

      500

      NUVI

      NUVISION INC

      1000

      500

             

      O

           

      OGLE

      OGLEBAY NORTON CO

      500

      200

      OILC

      OIL-DRI CORP OF AMER

      500

      1000

      OLDB

      OLD NATL BANCORP

      1000

      500

      OSTNO

      OLD STONE PFD B 2.40

      200

      500

      OVWV

      ONE VALLEY BANCORP W VA

      500

      1000

      OPTX

      OPTEK TECH INC

      1000

      500

      OPTO

      OPTO MECHANIK INC

      500

      1000

      GOSHB

      OSHKOSH B'GOSH CL B

      200

      500

      OSHM

      OSHMAN'S SPORTING

      500

      200

      OCOMA

      OUTLET COMMUN CL A

      1000

      500

             

      P

           

      PCAI

      PCAINTL INC

      500

      1000

      PBSF

      PACIFIC BANK N A

      500

      200

      PISC

      PACIFIC INTL SVC CORP

      1000

      500

      PBCI

      PAMRAPO BANCORP INC

      1000

      500

      PNTC

      PANATECH RESCH DEVLP

      500

      1000

      PRLX

      PARLEX CORP

      500

      200

      PENT

      PENN ENTRPR INC

      500

      1000

      PTAC

      PENN TREATY AMER CORP

      1000

      500

      PNTAP

      PENTAIR INC PFD 87

      200

      500

      PFDC

      PEOPLES BANCORP

      200

      500

      PBKB

      PEOPLES SAV BANK BRKTN

      1000

      500

      PBNB

      PEOPLES SAV FINL CORP

      500

      200

      PTRO

      PETROMINERALS CORP

      1000

      500

      PETT

      PETTIBONE CORP

      500

      200

      PMSV

      PHARMACY MGMT SVC

      500

      1000

      PSBN

      PIONEER BANCORP INC

      1000

      500

      POEA

      POE AND ASSOC INC

      500

      1000

      PFLY

      POLIFLY FINL CORP

      1000

      500

      PNDR

      PONDER INDS INC

      500

      1000

      PSSP

      PRICE STERN SLOAN

      1000

      500

      PMBS

      PRIME BANCSHARES

      1000

      500

      PRCY

      PROCYTE CORP

      500

      1000

      PRFT

      PROFFITT'S INC

      200

      500

      PRGR

      PROGROUP INC

      200

      500

      PECN

      PUBLISHERS EQUIP CORP

      1000

      500

      PLTZ

      PULITZER PUBLISHING

      500

      1000

      PULS

      PULSE BANCORP INC

      500

      200

      PTNM

      PUTNAM TRUST CO

      500

      200

             

      R

           

      ROPS

      RASTEROPS

      500

      1000

      RATNY

      RATNERS GROUP ADR

      1000

      500

      RATNZ

      RATNERS GROUP PREF ADR

      500

      1000

      RDGCA

      READING CO CL A

      1000

      500

      RECP

      RECEPTECH CORP CALL

      1000

      500

      REED

      REEDS JEWELERS INC

      500

      200

      RFTN

      REFLECTONE INC

      500

      1000

      RGEQ

      REGENCY EQUITIES CORP

      500

      200

      RBNC

      REPUBLIC BANCORP INC

      1000

      500

      PREV

      REVERE FUND INC

      1000

      500

      RELL

      RICHARDSON ELECT LTD

      1000

      500

      RNRC

      RIVERSIDE NATL BANK

      200

      500

      ROBC

      ROBECINC

      1000

      500

      RMUC

      ROCKY MT UNDERGARMENT

      1000

      500

      ROPK

      ROPAK CORP

      500

      1000

      RPCH

      ROSPATCH CORP

      1000

      500

      RCDC

      ROSS COSMETICS DIST

      500

      1000

      ROTO

      ROTO-ROOTER INC

      200

      500

      RBCO

      RYAN BECK CO INC

      1000

      500

             

      S

           

      SCOM

      SCS/COMPUTE INC

      1000

      500

      SDNB

      SDNB FINANCIAL CORP

      500

      200

      SJNB

      SJNB FINANCIAL CORP

      500

      200

      SHRE

      SAHARA RESORTS

      500

      200

      SHEF

      SANDWICH CHEF INC

      500

      1000

      SWCB

      SANDWICH CO-OP BANK

      1000

      500

      SAVO

      SCHULTZ SAV-0 STORES

      200

      500

      SIDY

      SCIENCE DYNAMICS CORP

      500

      1000

      STIZ

      SCIENTIFIC TECH INC

      200

      500

      SCOT

      SCOTT AND STRINGFELLOW

      500

      200

      SHER

      SCOTTISH HERITABLE

      200

      500

      SBCFA

      SEACOAST BKG CORP FL CL A

      500

      1000

      SFBM

      SECURITY FED SAV BANK

      200

      500

      SFSL

      SECURITY FED SAV CLEV

      200

      500

      SFGI

      SECURITY FINL GROUP INC

      200

      500

      SSLN

      SECURITY INVESTMENT

      1000

      500

      SENE

      SENECA FOODS CORP

      500

      200

      SNCO

      SENSOR CONTROL CORP

      500

      200

      SHOP

      SHOPSMITH INC

      1000

      500

      SETBS

      SIERRA RLEST 83 SBI

      500

      200

      SETC

      SIERRA RLESTTR 84

      1000

      500

      SMET

      SIMETCO INC

      500

      1000

      SMTK

      SIMTEK CORP

      500

      1000

      SMTKW

      SIMTEK CORP WTS 96

      500

      1000

      SKYW

      SKYWEST INC

      500

      1000

      SMGS

      SOUTHEASTERN MI GAS

      500

      1000

      SWTR

      SOUTHERN C A WATER CO

      500

      1000

      SMIN

      SOUTHERN MINERAL CORP

      500

      200

      TXMX

      SOUTHWEST CAFES INC

      1000

      500

      SVRN

      SOVEREIGN BANCORP

      500

      1000

      SPAN

      SPAN-AMERICA MED SYS

      500

      1000

      SPEK

      SPEC'S MUSIC INC

      1000

      500

      SWVA

      STEEL WEST VIRGINIA

      500

      200

      STLG

      STERLING BANCSHARES

      1000

      500

      SISC

      STEWART INFO SVCS CORP

      1000

      500

      STUA

      STUART ENTERTAINMENT

      500

      1000

      SFCP

      SUFFIELD FIN CORP

      1000

      500

      SUBK

      SUFFOLK BANCORP

      500

      200

      SMMT

      SUMMIT SAVINGS BANK

      500

      1000

      SNRU

      SUNAIR ELECTRONICS

      500

      200

      SCSL

      SUNCOAST S&L ASSOC

      1000

      500

      SUPX

      SUPERTEX INC

      500

      1000

      SUSQ

      SUSQUEHANNA BCSHS

      500

      1000

      SYMX

      SYMIX SYSTEMS INC

      200

      500

             

      T

           

      TVXTF

      TVX GOLD INC

      1000

      500

      TDCX

      TECHNOLOGY DEV CORP

      500

      1000

      TCOMB

      TELE-COMMUN INC CL B

      200

      500

      TCOMR

      TELE-COMMUN INC RTS

      1000

      500

      TLMD

      TELEMUNDO GROUP INC

      1000

      500

      TMTX

      TEMTEX INDS INC

      500

      200

      TFLX

      TERMIFLEX CORP

      200

      500

      TCSFY

      THOMSON CSF ADR

      200

      500

      TAVI

      THORN APPLE VALLEY

      500

      1000

      TMBS

      TIMBERLINE SOFTWARE

      1000

      500

      TKIOY

      TOKIO MARINE ADR

      1000

      500

      TCTC

      TOMPKINS COUNTY TR

      500

      200

      TRGL

      TOREADOR ROYALTY CORP

      500

      1000

      TRNS

      TRANSMATION INC

      1000

      500

      TRST

      TRUSTCO BANK CORP NY

      200

      500

      TRMK

      TRUSTMARK CORP

      500

      1000

      TUCK

      TUCKER DRILLING CO

      500

      1000

      TUES

      TUESDAY MORNING INC

      500

      1000

             

      U

           

      UNRIW

      UNR INDS INC WTS

      500

      1000

      UNMAA

      UNI-MARTS INC CL A

      1000

      500

      UNAM

      UNICO AMERICAN CORP

      500

      1000

      UNFR

      UNIFORCE TEMP PERSNL

      500

      1000

      UBSI

      UNITED BKSHS INC

      1000

      500

      UFCS

      UNITED FIRE & CASUALTY

      200

      500

      BNKS

      UNITED NM FIN CORP

      500

      1000

      UNEWY

      UNITED NEWSPAPER ADR

      500

      200

      UBMT

      UNITED SAV BANK F A MT

      200

      500

      UTVI

      UNITED TELEVISION

      1000

      500

      UHCOW

      UNIV HLDG CORP WTS 93

      500

      200

      UHCO

      UNIV HOLDING CORP

      1000

      500

             

      V

           

      VALY

      VALLICORP HLDGS INC

      500

      1000

      VALU

      VALUE LINE INC

      200

      500

      VCRE

      VARI-CARE INC

      500

      1000

      VTEX

      VERTEX COMMUN CORP

      500

      1000

      VICR

      VICOR CORP

      500

      1000

      VICT

      VICTORIA BKSHS

      1000

      500

             

      W

           

      WLRF

      WLR FOODS INC

      500

      1000

      WSMP

      WSMP INC

      500

      200

      WALB

      WALBRO CORP

      500

      1000

      WALS

      WALSHIRE ASSURANCE

      200

      500

      WRNB

      WARREN BANCORP INC

      500

      1000

      WFSB

      WASHINGTON FED SAV VA

      500

      200

      WATFZ

      WATERFORD PLC ADR UTS

      1000

      500

      WHOO

      WATERHOUSE INVESTOR

      500

      1000

      WTRS

      WATERS INSTRUMENTS

      200

      500

      WAVR

      WAVERLYINC

      500

      1000

      WGNR

      WEGENER CORP

      1000

      500

      WLPI

      WELLINGTON LEISURE

      500

      200

      WSBC

      WESBANCOINC

      200

      500

      WSBK

      WESTERN BANK OREGON

      200

      500

      WSTM

      WESTERN MICRO TECH

      1000

      500

      WTPR

      WETTERAU PROPERTIES

      200

      500

      WMSI

      WILLIAMS INDS INC

      500

      1000

      WDHD

      WOODHEAD INDS INC

      500

      1000

      WCHI

      WORKINGMENS CAP HLDG

      1000

      500

      WRKB

      WORKMEN'S BANCORP

      500

      200

             

      Z

           

      ZEUS

      ZEUS COMPONENTS INC

      200

      500

      ZIGO

      ZYGO CORP

      200

      500

    • 91-63 SEC Approval of Amendments to the NASD Uniform Practice Code

      SUGGESTED ROUTING:*

      Operations
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On September 13, 1991, the Securities and Exchange Commission (SEC) approved amendments to the NASD's Uniform Practice Code (Code or UPC) to update and amend, where necessary, provisions that were obsolete or that did not conform to current industry standards and procedures. The amendments to the Code, among other things, consolidate redundant provisions, clarify certain provisions, and provide for the ultimate delivery of aged fails, such as non-transferable, bankrupt, worthless, and expired securities. The amendments will take effect on November 1, 1991. The text of the amendments follows this notice.

      SUMMARY OF PROPOSED AMENDMENTS

      Section 3 — Definitions

      Section 3 is amended by adding definitions of the terms "ex-date," "trade date," and "immediate return receipt." In addition, the amendments clarify the definitions of "written notices," "Committee," and "record date."

      The definition of the term "ex-date" is the date on which a security is traded without a specific dividend. The definition of the term "trade date" is the date on which the dealer in a later time zone accepts the trade, provided that dealer is accepting a bid or offer. The definition of "immediate return receipt" is being added to clarify the process for the transmittal of written notices and means the acknowledgement by the receiving member of a written notice. The return receipt must be made via the same media as the notice.

      The amendments to the definitions permit a written notice to be delivered by fax, in addition to the methods currently specified. The definition of "record date" will now include equity securities among the types of securities, and dividends or any other distribution among the types of distributions, for which a record date is fixed for a distribution.

      Section 4 Delivery Dates

      Subsections (a) through (d), relating to "cash," "regular way," "seller's option," and "buyer's option" delivery dates, respectively, are being deleted from Section 4 and added to Section 12. Subsections (e) and (f), relating to "when, as, and if issued/distributed" delivery dates, will be retained in Section 4 and renumbered as subsections (c) and (d).

      New subsections 4(a) and 4(b), relocated from Section 11, set forth the requirements for the contents of confirmations related to "when, as, and if issued/distributed" contracts. New Section 4, when published in the NASD Manual, will also include the sample form confirmations now located after Section 11.

      Section 5 — Transactions in Securities "Ex-Dividend," "Ex-Rights," or "Ex-Warrants"

      The NASD is adding language in subsection 5(b) to codify the current treatment of cash dividends or distributions, to reorganize subsection 5(b), and to eliminate current subsections 5(d)(1) and 5(d)(2) as redundant with language contained in renumbered subsections (b) and (c).

      Section 6 — Transactions "Ex-Interest" in Bonds Which Are Dealt in "Flat"

      The NASD is amending Section 6 to conform it to amended Section 5 and to renumber certain subsections.

      Section 7 — "Ex" Liquidating Payments

      The NASD is amending Section 7 to add a reference to Section 6 to the current reference to Section 5 to reflect that liquidating payments may be applied to both equity and debt.

      Section 11 Reserved

      Section 11 currently addresses confirmations on "when, as, and if issued/distributed" contracts. The changes move the language of Section 11 to Section 4 and reserve Section 11 for future amendments to the Code.

      Section 12 — Dates of Delivery

      The NASD is moving language from Section 4 relating to the time, place, and date of delivery for all types of transactions to Section 12. New subsections 12(e) through 12(g) relate to contracts due on holidays or Saturdays, delayed delivery, and prior to delivery date. The existing language of Section 12 relating to time and place of delivery is retained and renumbered as subsection 12(h).

      Under new subsection 12(e), contracts due on a nonbusiness day mature on the next business day. New subsection 12(f) provides that delayed delivery shall be at the office of the purchaser on the date agreed to at the time of the transaction. Finally, new subsection 12(g) provides that if a seller tenders delivery before the stated time, acceptance shall be at the buyer's election, and rejection of delivery will not prejudice the buyer's rights.

      Section 27 — Delivery of Securities Called for Redemption or Which Are Deemed Worthless

      The NASD is adding a new subsection 27(b) to provide an alternative method of resolving a fail-to-deliver where the security is deemed worthless. The new subsection 27(b) provides that where securities have no market value and there has been a public announcement to that effect, delivery may consist of the worthless securities or a Letter of Indemnity securing any rights and privileges that may accrue to the holders of the physical security. Such delivery will close out the contract and must be accompanied by documentation evidencing the worthlessness of the security.

      Section 29 — Assignments and Powers of Substitution; Delivery of Registered Securities

      The NASD is consolidating the provisions of Section 38 into new subsection 29(e) and renumbering, as necessary, the remaining subsections of Section 29.

      Sections 31, 32, 35, 36, 37, and 38 Elimination of Notorials and Miscellaneous Amendments

      The NASD is amending Section 31 to eliminate the requirement that notorials be attached to securities if the transfer books are closed indefinitely. A transfer indemnification may be used in lieu of a notorial. The NASD believes that the amendment will eliminate the need to attach large quantities of paper to securities and will allow the removal of such notorials where they are currently used. Under the amendments, the member will then assume liability for the correctness of the certificate. The NASD does not believe the member will be exposed to any significant liability, and that any additional exposure will be offset by the availability of timely settlement.

      Amendments to Section 32 eliminate reference to notorials and reference the transfer indemnification provision set forth in Section 31. The changes to Section 36 reflect the renumbering of Section 29.

      The provisions of Section 35, relating to certificates in the name of married women, are being deleted as obsolete, and the section reserved for use in later amendments. And finally, the provisions of Section 37 relating to certificates in joint tenancy are being eliminated as redundant of the provisions in Section 29, and the section reserved for use in later amendments.

      The provisions of Section 38 are being consolidated into Section 29 and the section reserved for later amendments.

      Section 56 — Irregular Delivery — Transfer Refused — Lost or Stolen or Confiscated Securities

      The NASD is adding the term "confiscated" to the category of irregular deliveries to accommodate situations in which government officials seize securities.

      Section 60 — "Selling Out"

      The NASD is properly identifying the Uniform Reclamation Form (Form) and providing for equivalent depository-generated advice in the absence of the Form. Subsection 60(b) relating to the proper notice of sell-out is being amended to conform to the recent amendments to Section 59 on buy-ins. Section 59 was amended pursuant to NASD rule filing SR-NASD-90-1, approved by the SEC on December 18, 1990.

      Section 61 — Rights and Warrants

      The NASD is providing for alternative methods of settling contracts when the securities have expired by their terms. The method may only be used more than 30 days after expiration. Deliveries under this method shall consist of the expired securities or a Letter of Indemnity, and, in the case of units in which some of the components have expired, the unexpired components.

      EFFECTIVENESS OF AMENDMENTS

      These amendments, which were approved by the SEC on September 13, 1991, will become effective on November 1, 1991.

      Questions regarding this rule filing may be directed to Elliott R. Curzon, General Counsel's Office, at (202) 728-8451, or to Dorothy Kennedy, Uniform Practice Department, at (212) 858-4340.

      TEXT OF AMENDMENTS TO THE UNIFORM PRACTICE CODE

      (Note: New language is underlined; deleted language is deleted.)

      * * * * *

      Definitions

      Sec. 3.

      * * * * *

      Written notices

      (b) The term "written notice," as used in this Code, shall include a notice delivered by hand, by letter, teletype, telegraph, TWX, FAX or other comparable media.

      Record date

      (d) As used in this Code the term "record date" means the date fixed by the trustee, registrar, paying agent or issuer for the purpose of determining the holders of equity securities, bonds, similar evidences of indebtedness or unit investment trust securities entitled to receive dividend, interest or principal payments or any other distributions.

      Ex-date

      (e) The term "ex-date" as used in this Code shall mean the date on and after which the security is traded without a specific dividend or distribution.

      Trade date

      (f) In a transaction between time zones where the bid or offer is accepted in a later time zone than that of the originator, the correct trade date shall be the day on which the dealer in the later time zone accepts the trade.

      Immediate return receipt

      (g) The term "immediate return receipt" as used in this Code, shall mean the acknowledgement by the receiving member of a written notice and which shall be issued, upon receipt, via the media in which such notice is received.

      Delivery Dates

      Sec. 4.

      [For "cash"

      (a) In connection with a transaction for "cash," delivery shall be made at the office of the purchaser on the day of the transaction.]

      ["Regular way"

      (b) In connection with a transaction "regular way," delivery shall be made at the office of the purchaser on, but not before, the fifth business day following the date of the transaction; except that if the seller tenders delivery before the fifth business day, acceptance shall be at the option of the purchaser, and rejection of such delivery by the purchaser shall be without prejudice to his rights.]

      ["Seller's option"

      (c) In connection with a transaction "seller's option," delivery shall be made at the office of the purchaser on the date on which the option expires; except that delivery may be made by the seller on any business day after the fifth business day following the date of transaction and prior to the expiration of the option, provided the seller delivers at the office of the purchaser, on a business day preceding the day of delivery, written notice of intention to deliver. Contracts maturing on a Saturday, half-holiday, or holiday shall carry over to the next business day.]

      ["Buyer's option"

      (d) In connection with a transaction "buyer's option," delivery shall be made at the office of the purchaser on the date on which the option expires; except that if the seller tenders delivery before that time, acceptance shall be at the election of the purchaser, and rejection of such delivery by the purchaser shall be without prejudice to his rights. Contracts maturing on a Saturday, half-holiday, or holiday shall carry over to the next business day.]

      Confirmations or comparisons

      (a) A confirmation covering a transaction in a security "when, as and if issued" shall adequately identify the security and the plan, if any, under which the security is proposed to be issued.
      (b) A confirmation covering a transaction in a security "when, as and if distributed" shall adequately identify the security and the plan, if any, under which the security is proposed to be distributed.

      "When, as and if issued"

      (c)[e] In connection with a transaction in a security "when, as and if issued," delivery shall be made at the office of the purchaser on the date declared by the Committee: except that if no delivery date shall be declared by the Committee, [(a)](1) delivery may be made by the seller on the business day following the day upon which the seller has delivered at the office of the purchaser written notice of intention to deliver, and [(b)](2) open market "when, as and if issued" contracts in securities currently being publicly offered through a syndicate or selling group shall be settled on the date such syndicate or selling group contracts are settled: provided, however, delivery of securities in accordance with this subsection shall be made during the normal delivery hours in the community where the buyer is located.

      "When, as and if distributed"

      (d)[f] In connection with a transaction in a security "when, as and if distributed," delivery shall be made at the office of the purchaser on the date declared by the Committee: except that if no delivery date shall be declared by the Committee, delivery may be made by the seller on the business day following the day upon which the seller has delivered at the office of the purchaser written notice of intention to deliver.

      Standard Form of "When, As and If Issued" or "When, As and If Distributed" Contract

      No change.

      Standard Form of "When, As and If Issued" or "When, As and If Distributed" Contract

      No change.

      Transactions in Securities "Ex-Dividend," "Ex-Rights" or "Ex-Warrants"

      Sec 5.

      * * * * *

      Normal ex-dividend, ex-warrants dates

      (b)(1) In respect to cash dividends or distributions, or stock dividends, and the issuance or distribution of warrants, which are less than 25% of the value of the subject security, [except as noted below,] if definitive information is received sufficiently in advance of the record date, the date designated as the "ex-dividend date" shall be the fourth business day preceding the record date if the record date falls on a business day, or the fifth business day preceding the record date if the record date falls on a day designated by the Committee as a non-delivery date.
      (2) In respect to cash dividends or distributions, stock dividends and/or splits, and the distribution of warrants, which are 25% or greater of the value of the subject security, the ex-dividend date shall be the first business day following the payable date.
      (3) In respect to stock dividends and/or splits relating to American Depository Receipts (ADR's) and foreign securities, the ex-dividend or ex-warrants date shall be designated by the Committee.

      Late information re ex-dividend, ex-warrants dates

      (c)[(2)] If definitive information is not received sufficiently in advance of the record date to permit designation of an ex-dividend or ex-warrants date in accordance with paragraph (b)(1) hereof, the date designated shall be the first business day which, in the opinion of the Committee, shall be practical having regard to the circumstances pertaining.

      Normal ex-rights dates

      (d)[(c)](1) In respect to transferable rights subscription offerings, if definitive information is received sufficiently in advance of the effective date of the registration statement, the date designated as the ex-rights date shall be the first business day after the effective date of the registration statement.

      Late information re ex-rights dates

      (2) If definitive information is not received sufficiently in advance of the effective date of the registration statement to permit designation of an ex-rights date in accordance with the paragraph (d)[(c)](1) hereof, the date designated shall be the first business day which in the opinion of the Committee shall be practical having regard to the circumstances pertaining.

      [Normal ex-warrants dates

      (d)(1) In respect to the issuance or distribution of warrants, if definitive information is received sufficiently in advance of the record date, the date designated as the ex-warrants date shall be the fourth business day preceding the record date if the record date falls on a business day, or the fifth business day preceding the record date if the record date falls on a day designated by the Committee as a non-delivery date.]

      [Late information re ex-warrants dates

      (2) If definitive information is not received sufficiently in advance of the record date to permit designation of an ex-warrants date in accordance with paragraph (d)(1) hereof, the date designated shall be the first business day which, in the opinion of the Committee, shall be practical having regard to the circumstances pertaining.]

      Transactions "Ex-Interest" in Bonds Which Are Dealt in "Flat" Sec. 6

      [Transactions except for cash] Normal ex-interest dates

      (a) All transactions, except "cash" transactions, in bonds or similar evidences of indebtedness which are traded "flat" shall be "ex-interest" as prescribed by the following provisions:
      (1) On the fourth business day preceding the record date if the record date falls on a business day.
      (2) On the fifth business preceding the record date if the record date falls on a day other than a business day.
      (3) On the fifth business day preceding the date on which an interest payment is to be made if no record date has been fixed.

      Late information re ex-interest dates

      (b)[(4)] If notice of payment of interest is not made public sufficiently in advance of the record date or the payment date, as the case may be, to permit the security to be dealt in "ex-interest" in accordance with [the foregoing provisions,] paragraph (a) hereof, such security shall be dealt in "ex-interest" on the first business day [following public notice of the record date or the payment date, as the case may be] which, in the opinion of the Committee, shall be practical having regard to the circumstances pertaining.

      "Ex" Liquidating Payments Sec. 7.

      All transactions except "cash" transactions in stocks, bonds or similar evidences of indebtedness shall be "ex" liquidating payments or payments on account of principal in accordance with the formula set forth in Sections 5 and 6 of this Code.

      * * * * *

      [Confirmations On "When, As And If Issued" and " When, As And If Distributed" Contracts]

      Sec. 11. RESERVED

      (The provisions in this section, including sample confirmations, have been moved to Section 4.)

      Delivery of Securities [Time and Place] Dates of Delivery

      Sec. 12.1

      For "cash"

      (a) In connection with a transaction for "cash," delivery shall be made at the office of the purchaser on the day of the transaction.

      "Regular way"

      (b) In connection with a transaction "regular way," delivery shall be made at the office of the purchaser on, but not before, the fifth business day following the date of the transaction.

      "Seller's option"

      (c) In connection with a transaction "seller's option," delivery shall be made at the office of the purchaser on the date on which the option expires; except that delivery may be made by the seller on any business day after the fifth business day following the date of transaction and prior to the expiration of the option, provided the seller delivers at the office of the purchaser, on a business day preceding the day of delivery, written notice of intention to deliver,

      "Buyer's option"

      (d) In connection with a transaction "buyer's option," delivery shall be made at the office of the purchaser on the date on which the option expires.

      Contracts due on holidays or Saturdays

      (e) Contracts due on a day other than a business day shall mature on the next business day.

      "Delayed-delivery"

      (f) In connection with a transaction made for "delayed-delivery" delivery shall be at the office of the purchaser on the date agreed upon at the time of the transaction.

      Prior to delivery date

      (g) If in contracts executed pursuant to subsections (b), (d) and (h) of this rule, the seller tenders delivery before the stated time, acceptance shall be at the election of the purchaser, and rejection of such delivery by the purchaser shall be without prejudice to his rights.

      Time and place of delivery

      (h)[(a)] Delivery shall be made at the office of the purchaser between the hours established by rule or practice in the community where such office is located. If the purchaser maintains more than one office, delivery shall be made at the office with which the transaction was effected, unless delivery instructions are provided at the time of the transaction.

      * * * * *

      Delivery of Securities Called for Redemption or Which are Deemed Worthless

      Sec. 27.

      Securities called for redemption

      (a) A certificate of stock or a bond shall cease to be a good delivery upon publication of notice of call for redemption, except when an entire issue is called for redemption and except against transactions in "called stock" or "called bonds" dealt in specifically as such.

      Securities deemed worthless

      (b)(1) In contracts for securities where a public announcement or publication of general circulation discloses that the securities have been deemed worthless, deliveries shall consist of (i) the worthless securities; or (ii) a Letter of Indemnity which shall grant the purchaser any rights and privileges which might accrue to the holders of the physical securities.
      (2) Deliveries effected pursuant to subsection (b)(1) shall operate to close-out the contract and must be accompanied by documentation evidencing that the security was deemed worthless after the original execution date of the contracts. Such contracts shall be settled at the existing contract price.
      (3) For purposes of this section, securities deemed worthless shall be those instruments which have no known market value.

      * * * * *

      Assignments and Powers of Substitution; Delivery of Registered Securities Sec. 29.

      (a)-(d) No change.

      * * * * *

      Two or more names

      (e) A certificate registered in the names of two or more individuals or firms shall be a good delivery only if signed by all the registered owners.

      (Subsections (e) through (i) are renumbered (f) through (j), respectively.)

      * * * * *

      [Acknowledgements and Sample Forms] Certificate of Company Whose Transfer Books Are Closed2

      Sec. 31.

      General requirements

      [(a) The assignment and each power of substitution pertaining to a certificate of a company whose transfer books are closed indefinitely for any reason shall be properly acknowledged before an officer having authority to take acknowledgements under the laws of the State in which such instruments are executed and shall bear the seal of the signing officer if required by statute. Any alternation or correction in an acknowledgement shall be properly noted by the signing officer.]
      (a) A certificate of a company whose transfer books are closed indefinitely for any reason shall be a good delivery only if the required ownership transfer indemnification is affixed to or recorded upon the certificate. The indemnification acknowledges the assignor(s)' ultimate responsibility for the ownership of the certificate as of the date of the indemnification and shall be affixed or recorded only once during the lifetime of the certificate. Certificates delivered pursuant to this section must conform with all the applicable delivery requirements set forth in Section 29 of this Code.

      [Executed by an individual

      (b) In an acknowledgement of an assignment or power of substitution executed by an individual, the officer before whom the acknowledgement is executed shall certify that he knows the person signing to be the person named in the certificate or in the power of substitution, and that the signer acknowledged his signature.

      Executed in name of firm

      (c) In an acknowledgement of an assignment or a power of substitution executed in the name of a firm, the officer before whom the acknowledgement is executed shall certify that he knows the person executing the acknowledgement and knows him to be, or to have been on the date of execution of the assignment or power of substitution, a member of the firm, or authorized to sign for the firm under a power of attorney, and that he acknowledged that he executed the assignment or power of substitution as the act or deed of the firm.]

      Sample Ownership Transfer

      Indemnification Stamp.

      Date: ...............

      The undersigned owner of this certificate (number) representing ............... shares of ............................................. hereby certifies the transfer of all ownership therewith to the bearer hereby. We acknowledge that the transfer books of the herein named corporation are closed and agree to accept responsibility in accordance with the provisions of Section 31 of the NASD's Uniform Practice Code.

      NAME OF MEMBER .............................................

      AUTHORIZED SIGNATURE .............................................

      Certificate in Name of Corporation, etc.3

      Sec. 32.

      Transfer books open.

      (a) No change.

      * * * * *

      Transfer books closed

      (b) Where a certificate, an assignment or a power of attorney is in the name of a corporation and the transfer books of the issuing company are closed indefinitely for any reason, the certificate shall [not] be a good delivery if [unless] the assignment or other instrument effecting transfer on the corporation's behalf is executed by an officer of such corporation, other than the secretary, and is accompanied by (1) a guarantee of such officer's signature executed by a person with the authority to make such a guarantee; [by a bank which is a member of the Federal Deposit Insurance Corporation, (2) an acknowledgement in proper form of such execution by such officer, (3)] (2) a copy of a corporate resolution and [in proper form authorizing such execution by such officer, certified by the secretary or other appropriate corporate officer to be in effect on the date of such execution, (4)] a completed and executed certificate of incumbency; [executed by the secretary or other appropriate corporate officer, certifying as to the office and signature of the executing officer as of the date of such execution, and (5) an acknowledgement in proper form of the certification of the resolution and the certificate of incumbency.] and (3) the ownership transfer indemnification, as provided in Section 31, affixed to or recorded on the certificate.

      SAMPLE CERTIFICATE AND AUTHORIZING RESOLUTION/CERTIFICATE OF INCUMBENCY

      I hereby certify that at a meeting of the Board of Directors of ............................................., a corporation organized under the laws of the State of ............................................., held the ............................................. day of ............................................., 19.........., at which a quorum was present and acting throughout, the following resolution was duly adopted and is now in full force and effect:

      RESOLVED, that any one of the following officers of this Corporation, viz: the President, Vice President, Treasurer or Secretary, be and is hereby fully authorized and empowered to sell, assign, transfer and deliver any and all shares of stock, bonds, debentures, notes, evidences of indebtedness, or other securities now or hereafter standing in the name of or owned by this Corporation, and to make, execute, and deliver, any and all written instruments necessary or proper to effectuate the authority hereby conferred.

      I further certify that the authority thereby conferred is not inconsistent with the Charter or By-Laws of this Corporation, and that the following is a true and correct list of the officers of this Corporation authorized to act.

      Signing Officers:

      In witness, whereof, I have hereunto set my hand and the seal of said Corporation this ............................................. day of ............................................., 19 ..........

      (Affix Corporate Seal)

      .............................................

      Secretary

      The foregoing certification and the assignment of the securities should be executed by different officers.

      * * * * *

      [Certificate in Name of Married Woman]

      Sec. 35.RESERVED

      (Entire section deleted)

      Certificate in Name of Deceased Person, Trustee, etc.4

      Sec. 36.

      * * * * *

      (a) No change.
      (b) A certificate shall be a good delivery with an assignment or a power of substitution executed by a: (1) domestic individual executor(s) or administrator(s); (2) domestic individual trustee(s) under an inter vivos or testamentary trust; or (3) domestic guardian(s) including committees, conservators and curators. These exceptions to paragraph (a) above are to cover transfer that will be effected by transfer agents without additional documentation. This paragraph (b) shall apply only to securities of a domestic issuer (organized under the laws of any state in the United States or District of Columbia) which are registered in the names(s) of (1), (2) or (3) of this paragraph (b). Certificates delivered pursuant to this paragraph (b) must be properly assigned, and the signature(s) to the assignment must be guaranteed pursuant to section 29[(g)](h).

      * * * * *

      [Joint Tenants, etc.]

      Sec. 37.RESERVED

      (Entire section deleted)

      [Two or More Names]

      Sec. 38. — RESERVED

      (Entire section deleted)

      * * * * *

      Irregular Delivery — Transfer Refused — Lost or Stolen or Confiscated Securities

      Sec. 56.

      * * * * *

      Lost or stolen or confiscated securities

      (c) Reclamation, by reason of the fact that a security is lost or stolen or confiscated shall be within 30 months after the settlement date of the contract.
      (d) The running of the 30-month period described in Section 56 shall not be deemed to foreclose a member's rights to pursue its claim via other open avenues, including but not limited to the Association's arbitration procedure.

      * * * * *

      "Selling Out" Sec. 60.

      Conditions permitting "sell-out"

      (a) Upon failure of the buyer to accept delivery in accordance with the terms of the contract, and lacking a properly executed Uniform Reclamation [or Rejection] Form or the equivalent depository generated advice for depository eligible securities [(Form #801)] meeting the requirements prescribed in Section 52 [[¶ 3552]] of this Code, the seller may, without notice, "sell-out" in the best available market and for the account and liability of the party in default all of any part of the securities due or deliverable under the contract.

      Notice of "sell-out"

      (b) The party executing a "sell-out" as prescribed above shall, as promptly as possible on the day of execution, but no later than the close of business, local time, where the buyer maintains his office, [via hand delivery, telegram, TWX, or other comparable written media,] notify the broker/dealer for whose account and risk such securities were sold of the quantity sold and the price received.[, and shall promptly mail or deliver] Such notification should be in written or electronic form having immediate receipt capabilities. A[a] formal confirmation of such sale[.] should be forwarded as promptly as possible after the execution of the "sell-out".

      Sec. 61.

      Rights and Warrants

      * * * * *

      Securities which have expired by their terms

      (e)(1) In contracts for warrants, rights or other securities which have expired by their terms, deliveries effected more than thirty (30) days after expiration shall consist of (i) the expired securities; or (ii) a Letter of Indemnity in lieu of the expired instrument.
      (2) In the case of units or other securities of which one or more of the integral parts of the instrument has expired by its terms, after expiration, the instrument shall cease to be a unit as originally contemplated in the contract. Deliveries effected after expiration shall consist of the unexpired security and (i) the expired instrument; or (ii) a Letter of Indemnity in lieu of the expired instrument.
      (3) Deliveries effected pursuant to subsections (e)(1) and (2) of this section shall be settled at the existing contract price.

      * * * * *

      SAMPLE LETTER OF INDEMNITY

      DATE _______________

      TO: _____________________________________________

      RE: (Quantity and Description) ______________________________

      CUSIP #: _______________

      For value received the undersigned hereby assigns, transfers and sets over to you all rights and privileges which may accrue on the above contract made on (Date of Contract) at (Contract Price) for settlement (Settlement Date).

      Upon acceptance of this delivery in lieu of physical certificates, we agree, for ourselves, our successors, assigns, heirs, executors and administrators, to at all times indemnify and hold harmless ______________________________ from and against any and all claims, liabilities, damages, taxes, charges and expense sustained or incurred by reason of this action. Acceptance of this delivery shall operate to close-out the above stated contract in accordance with the provisions of the NASD's Uniform Practice Code.

      .............................. (Member Firm)

      .............................. (Official Signature)

      at

      If any questions, please contact _______________ (Telephone Number) _______________.


      1 Subsections (a) through (d) have been relocated from Section 4. Subsections (e) through (g) are new provisions which incorporate portions of old Sections 4(b)-4(d).

      2 The Sample Ownership Transfer Indemnification Stamp following this section replaces all of the Sample Notorial Acknowledgements in the NASD Manual following Sections 31, 32, 35, 36, and 37.

      3 The Sample Notorial Acknowledgements, the Sample Certificate and Authorizing Resolution, and the Sample Certificate of Incumbency in the NASD Manual following Section 32 have been replaced with the Sample Ownership Transfer Indemnification Stamp following Section 31 and the Sample Certificate and Authorizing Resolution Certificate of Incumbency following this section.

      4 The Sample otorial Acknowledgements in the NASD Manual following Section 36 have been replaced by the Sample Ownership Transfer Indemnification Stamp following Section 31.

    • 91-62 SEC Approval of Amendments to the NASD Rules of Fair Practice Relating to Options Communications

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Options
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On September 13, 1991, the Securities and Exchange Commission (SEC) approved amendments to the NASD's Rules of Fair Practice creating a separate section relating to options communications with the public. The amendments delete all existing subsections of Article III, Section 35 relating to options communications and establishes a new Section 35A1 related exclusively to options communications. Members will be required to comply with new section 35A beginning November 1, 1991. The text of the amendments follows the discussion below.

      BACKGROUND

      Last year, the SEC examined various self-regulatory organizations' (SROs) regulatory programs relating to the review of member firm communications with the public. Specifically with respect to options communications, the SEC expressed to the NASD its concern that the NASD's options communications rules were not sufficiently consistent with those of other SROs. Since a majority of NASD members conducting options business are also members of other SROs, the SEC believes that the options regulations of the various SROs applicable to such members should be consistent.

      Representatives from several SROs — the NASD, New York Stock Exchange (NYSE), American Stock Exchange (Amex), Chicago Board Options Exchange (CBOE), Midwest Stock Exchange (MSE), Philadelphia Stock Exchange (PHLX) and Pacific Stock Exchange (PSE) — worked together in the Options Self-Regulatory Council ("Council") to develop options communications rules for each SRO that are consistent with one another. The Council's efforts resulted in a substantial revision of the Guidelines for Options Communications ("Guidelines"). The Guidelines, first published several years ago, are designed to provide a coordinated explanation of SRO rules and, along with the SEC's examination comments, form the basis for the NASD's proposed options communications rule.

      Accordingly, the SEC has now approved the NASD's proposed amendments to Article III of the Association's Rules of Fair Practice, submitted for member vote in Notice to Members 91-1 (January 1991), establishing new Section 35A relating exclusively to options communications, and amending Section 35 of the Rules of Fair Practice, the NASD's general communications rule, to delete all provisions related to options.2 New Section 35A addresses the concerns expressed by the SEC relating to the approval of options communications prior to use, suitability disclosure, educational communications, and communications containing comparisons and recommendations. The new rule also serves to make the NASD's options communications regulations consistent with those of other SROs.

      SUMMARY OF AMENDMENTS

      New Article III, Section 35A of the Rules of Fair Practice contains four subsections: subsection (a), which defines the terms "advertisement," "educational material," and "sales literature"; subsection (b), which requires advance approval of all options communications by a Compliance Registered Options Principal; subsection (c), which requires advance approval of options advertising and educational material by the Association's Advertising Department, as well as spot-check procedures and special review procedures for members that fail to adhere to the standards for options communications; and subsection (d), which sets forth the Association's standards for options communications with the public. The amendments delete comparable provisions relating to options communications, as well as all references to options communications, from Article III, Section 35 of the Rules of Fair Practice.

      Section 35A(a) — Definitions

      The new Section 35A(a) defines "advertisements," "educational material," and "sales literature." The definitions of advertising and sales literature in Section 35A(a) are similar to the existing definitions in Section 35; however, they are designed to more clearly reflect the NASD's intent to distinguish between material directed to customers through media of mass communication (advertisements) and material targeted to specific existing or potential customers (sales literature).

      Section 35A(a) also includes a definition of educational material not previously included in Section 35. This definition is designed to complement SEC Rule 134A (which defines options material not deemed to be a prospectus) and to capture advertisements and sales literature within its scope, along with other material that does not meet the definitions of advertisements or sales literature.

      Section 35A(b) — Approval by Compliance Registered Options Principal and Recordkeeping

      The new Section 35A(b) incorporates the requirements currently in Section 35(b) that a Compliance Registered Options Principal approve each item of advertising or sales literature related to options in advance. In addition, the new provision requires that the member retain copies of the material, along with records reflecting the persons who prepared and approved the material and the source of any recommendations contained in the material.

      Section 35A(c) — Association Approval Requirements and Review Procedures

      The new Section 35A(c) combines current Subsections 35(c)(2), 35(c)(5), 35(c)(6), and 35(c)(8) into a new section on approval and review of options communications. Subsection 35(c)(2) is deleted, and the remaining subsections of Section 35(c) are renumbered.

      Subsection 35A(c)(1) requires all options advertising and educational material to be submitted to the Association's Advertising Department for approval at least 10 days prior to use. The section applies only to advertising and educational material permitted to be used prior to the delivery of an options disclosure document (ODD). The section also prohibits the use of any material that has been disapproved or for which changes have been recommended by the NASD's Advertising Department until the material is resubmitted and approved, or changed, as required. The provisions of Subsection 35A(c)(1) represent a change from the requirements of Section 35 in that the NASD may disapprove the use of material submitted or may recommend changes, rather than comment on a filing as in Section 35.

      Subsection 35A(c)(2) permits any District Business Conduct Committee (DBCC) to require a member to submit options advertising, educational material, and sales literature to the Advertising Department and/or the DBCC for review at least 10 days prior to use if the DBCC, after reviewing the member's advertising, determines that the member may again depart from the standards of Section 35A. The review requirements in Subsection 35A(c)(2) are not limited to material used prior to the delivery of an ODD, but may include all material coming within the definitions, notwithstanding the timing of their use. Any prior submission requirement imposed under Subsection 35A(c)(2) cannot last more than one year, and a member has the right to ask for a hearing before the DBCC relating to the imposition of any prior submission requirement.

      Section 35A(d) — Standards Applicable to Communications With the Public

      The new Section 35A(d) replaces Section 35(f), which is deleted. Section 35A(d) sets forth both general and specific standards with respect to options communications, including, but not limited to, specific standards for advertisements, educational materials and sales literature.

      The general standards for options communications specified under Subsection 35A(d)(1) prohibit false or misleading statements; promises, claims, opinions, or forecasts that are unwarranted, exaggerated, or for which there is no reasonable basis; hedge clauses that are illegible or inconsistent with the communication, or that attempt to disclaim responsibility for the contents of the communication; or material that would constitute a prospectus unless it meets the requirements of a prospectus under the federal securities laws.

      The specific standards for options communications set forth in Subsection 35A(d)(2) comprise a detailed set of requirements and guidelines concerning risk disclosure, the use and content of advertisements, the use and content of educational material, the use and content of sales literature, availability of supporting documents for sales literature, and performance projections and statistics contained in sales literature.

      Subsection 35A(d)(2)(A) requires the special risks attendant to options transactions and investment strategies to be disclosed in options communications that discuss the uses or advantages of options. Any disclosure must present a balanced portrayal of opportunities and risks. In addition, statements suggesting that options are suitable for all investors or suggesting the certain availability of a secondary market for options are prohibited.

      Subsection 35A(d)(2)(B) requires options advertising to meet the requirements of SEC Rule 134 in that the advertisement must be limited to a general description of the security being offered and the name and address of the person from whom a current ODD can be obtained. In addition, an advertisement may briefly describe the options offered, the operation of any exchanges where the options are traded, and how options prices are determined. Statements required by state law or administrative agencies may be included in an advertisement, as well as designs and devices, provided they are not misleading. Recommendations and past or projected performance figures are not permitted in options advertisements, however.

      Subsection 35A(d)(2)(C) requires that options educational material must meet the requirements of SEC Rule 134A. As set forth in Subsection 35A(d)(2)(C), with respect to educational material, Rule 134A(1) requires an explanation of risks; (2) prohibits the use of performance figures, including annualized rates of return; (3) prohibits recommendations; (4) prohibits identifying specific securities, other than a security exempt from registration, an index option, or a foreign currency option; and (5) requires the name and address of the person from whom an ODD can be obtained.

      Subsection 35A(d)(2)(D) includes the following specific requirements for options sales literature.

      • Sales literature must state that supporting documentation for claims, comparisons, recommendations, statistics, or other technical data will be supplied upon request.

      • Projected performance figures, if included, cannot include a suggestion of certainty in future performance and must clearly establish parameters for performance figures, disclose costs, must be plausible, clearly identify all material assumptions, and disclose risks. They also must, for annualized rates of return, not be based on less than 60 days of experience, display any formulas used, and include a statement that returns cited might be achieved only if the parameters described can be duplicated and that there is no certainty of doing so.

      • Portrayals of performance or actual transactions must be balanced, and records and statistics must be isolated to a specific period covering at least the most recent 12 months, include detailed information about initial recommendations or transactions, disclose all relevant costs and material assumptions, describe general market conditions and use valid comparisons, state that results cannot be viewed as an indicator of future performance, and be reviewed and initialed by a Registered Options Principal for fair presentation of statistics or recommendations.

      • An options program must disclose the cumulative history or unproven nature of the program and its underlying assumptions.

      • Standard forms of options worksheets, if adopted, must be uniform within a member organization.

      • Communications portraying past performance must be easily accessible to the sales office for the accounts of the customers involved.

      While many of the specific provisions of Section 35A(d) are drawn from the current provisions of Section 35(f), the provisions described above will reorganize and clarify the applicable standards. The new provisions will also serve to eliminate any inconsistencies between the NASD's rules and the rules of other SROs, while at the same time respond to the specific concerns and recommendations of the SEC as expressed to the Options Self-Regulatory Council.

      Questions concerning this notice may be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.

      ARTICLE III3 OF THE NASD RULES OF FAIR PRACTICE

      * * * * *

      Communications With the Public

      Sec. 35.

      (a) Definitions

      * * * * *
      (2) Sales Literature — For purposes of this section and any interpretation thereof, "sales literature" means any written communication distributed or made generally available to customers or the public, which communication does not meet the foregoing definition of "advertisement." Sales literature includes, but is not limited to, circulars, research reports, market letters, performance reports or summaries, form letters, [standard forms of options worksheets,] seminar texts, and reprints or excerpts of any other advertisement, sales literature or published article.
      (b) Approval and Recordkeeping
      (1) Each item of advertising and sales literature shall be approved by signature or initial, prior to use, by a principal (or his designee) or the member. [In the case of advertising or sales literature pertaining to options, the approval must be by the Compliance Registered Options Principal or his designee.]
      * * * * *
      (c) Filing Requirements and Review Procedures

      * * * * *
      [(2) Advertisements pertaining to options, and other options-related communications to persons who have not received the appropriate current disclosure document(s), shall be submitted to the Association's Advertising Department for review at least ten days prior to use (or shorter period as the Department may allow in exceptional circumstances), unless such advertisement or communication is submitted to and approved by a registered securities exchange or other regulatory body having substantially the same standards with respect to options advertising as set forth in this Section. The Association shall, within the ten-day review period specified herein, in the absence of highly unusual circumstances, either notify the member of its views with respect to the material filed or indicate that its comments are being withheld pending further analysis or the receipt of additional information.]
      * * * * *

      Subsections (c)(3), (c)(4), (c)(5) and (c)(6) are renumbered (c)(2), (c)(3), (c)(4) and (c)(5), respectively. * * * * *
      ([7]6) The following types of material are excluded from the foregoing filing requirements and spot-check procedures:

      * * * * *
      (F) Advertisements prepared in accordance with Section 2(10)(b) of the Securities Act of 1933, as amended, or any rule thereunder, such as Rule 134, unless such advertisements are related to [options,] direct participation programs or securities issued by registered investment companies.
      ([8]7) Material which refers to investment company securities[, options] or direct participation programs solely as part of a listing of products and/or services offered by the member, is excluded from the requirements of paragraphs (c)(1) [,] and (c)(2) [and (c)(3)] of this section.
      (d) Standards Applicable to Communications with the Public
      (1) General Standards

      * * * * *
      (C) When sponsoring or participating in a seminar, forum, radio or television interview, or when otherwise engaged in public appearances or speaking activities which may not constitute advertisements, members and persons associated with members shall nevertheless follow the standards of subsections (d) and [(g)] (f) of this Section.
      (2) Specific Standards

      In addition to the foregoing general standards, the following specific standards apply:
      (A) Necessary Data: Advertisements and sales literature shall contain the name of the member, unless such advertisements and sales literature comply with subsection [(g)] (f) of this Section. Sales literature shall contain the name of the person or firm preparing the material, if other than the member, and the date on which it is first published, circulated or distributed. If the information in the material is not current, this fact should be stated.

      * * * * *

      [(f) Standards Applicable to Options-Related Communications]

      [In addition to the provisions of subsection (d) of this Section, members' public communications concerning options shall conform to the following provisions:]
      [(1) As there may be special risks attendant to some options transactions and certain options transactions involve complex investment strategies, these factors should be reflected in any communication which includes any discussion of the uses or advantages of options. Therefore, any statement referring to the opportunities or advantages presented by options should be balanced by a statement of the corresponding risks. The risk statement should reflect the same degree of specificity as the statement of opportunities, and broad generalities should be avoided. Thus, a statement such as, "by purchasing options, an investor has an opportunity to earn profits while limiting his risk of loss," should be balanced by a statement such as, "Of course, an options investor may lose the entire amount committed to options in a relatively short period of time."]
      [(2) It should not be suggested that speculative option strategies are suitable for most investors, or for small investors and statements suggesting the certain availability of a secondary market for options should not be made.]
      [(3)
      (A) Except as provided in subparagraph (B) below, no written material with respect to options issued by The Options Clearing Corporation ("OCC") may be sent to any person unless prior to or at the same time with the written material the appropriate current options disclosure document(s) is (are) sent to such person.]
      [(B) Advertisements and other options-related communications may only be used (and copies of the advertisements may only be sent to persons who have not received the appropriate disclosure document) if the material meets the requirements of Rules 134 or 134a under the Securities Act of 1933, as these Rules have been interpreted as applying to OCC options. Under rules 134 and 134a advertisements are limited to general descriptions of the security being offered and of its issuer and to descriptions regarding the general nature of standardized options markets or options strategies. Advertisements under this Rule shall state the name and address of the person from whom (a) current disclosure document(s) may be obtained (this would usually be the member sponsoring the advertisement). Such advertisements might have the following characteristics: (i) The text of the advertisement may contain a brief description of OCC options, including a statement that the issuer of every OCC option is The Options Clearing Corporation. The text may also contain a brief description of the general attributes and method of operation of The Options Clearing Corporation and/or a description of any of the options traded in different markets, including a discussion of how the price of an option is determined; (ii) The advertisement may include any statement or legend required by any state law or administrative authority; (iii) Advertising designs and devices including borders, scrolls, arrows, pointers, multiple and combined logos and unusual type faces and lettering as well as attention-getting headlines and photographs and other graphics may be used, provided such material is not misleading.]
      [(C) Advertisements and other written communications used prior to delivery of the appropriate disclosure document(s) shall not contain recommendations, or past or projected performance figures, including annualized rates of return.]
      [(4) Communications which contain comparisons, recommendations, statistics or other technical data, or claims made on behalf of options programs or the options expertise of sales persons, shall include, or offer to provide upon request, supporting documentation and shall refer to the current disclosure document(s) available upon request.]
      [(5) Communications concerning an options program (i.e., an investment plan employing the systematic use of one or more options strategies) shall disclose the cumulative history of the program or its unproven nature, and its underlying assumptions.]
      [(6) Standard forms of options worksheets, if adopted by a member for any particular options strategy, must, in addition to compliance with the other applicable provisions of this Section, be uniformly used by such member for that strategy.] [(7) Communications which contain projected performance figures or records of the performance of past recommendations or of actual transactions shall disclose all relevant costs, including commissions and interest charges (if applicable with regard to margin transactions) and copies of such communications shall be kept at a place easily accessible to the sales office for the accounts or customers involved.]
      [(8) Communications containing projected performance figures must also:]
      [(A) be plausible and intended as a source of reference or a comparative device to be used in the development of a recommendation;]
      [(B) discuss the risks involved in the proposed transactions and not suggest certainty of future performance;]
      [(C) identify all material assumptions made in such calculations (e.g., "assume options exercised", etc.);]
      [(D) clearly establish parameters relating to such performance figures (e.g., to indicate exercise price of option, purchase price of the underlying security and its market price, option premium, anticipated dividends, etc.);]
      [(E) if related to annualized rates of return, be based upon not less than a sixty-day experience, clearly display any formulas used in making the calculations, and include a statement to the effect that the annualized returns cited might be achieved only if the parameters described can be duplicated and there is no certainty of doing so.]
      [(9) Communications containing records or statistics relating to the performance of past recommendations or of actual transactions shall, in addition to complying with other applicable provisions of this section, state that the results presented should not and cannot be viewed as an indicator of future performance, and shall disclose all material assumptions used in the process of annualization if annualized rates of return are used. A Registered Options Principal shall determine that the record or statistics fairly present the status of the recommendations or transactions reported upon and shall initial the report.]

      * * * * *

      [(g)](f) Standards Applicable to the Use and Disclosure of the NASD Member's Name
      (1) In addition to the provisions of subsection (d) of this Section, members' public communications shall conform to the following provisions concerning the use and disclosure of member names. The term "communication" as used herein shall include any item defined as either "advertising" or "sales literature" in subsection (a) of this Section. The term "communication" shall also include, among other things, business cards and letterhead.
      (2) General Standards
      (A) Any communication used in the promotion of a member's securities business must clearly and prominently set forth the name of the NASD member. This requirement shall not apply to so-called "blind" advertisements used for recruiting personnel or to those communications meeting the provisions of subsection [(g)](f)(3) of this Section.
      (B) If a nonmember entity is named in a communication in addition to the member, the relation ship, or lack of relationship, between the member and the entity shall be clear.
      (C) If a nonmember entity is named in a communication in addition to the member, and products or services are identified, no confusion shall be created as to which entity is offering which products and services. Securities products and services shall be clearly identified as being offered by the member.
      (D) If an individual is named in a communication containing the names of the member and a non-member entity, the nature of the affiliation or relationship of the individual with the member shall be clear.
      (E) Communications that refer to individuals may not include, with respect to such individuals, references to nonexistent or self-conferred degrees or designations, nor may such communications make reference to bona fide degrees or designations in a misleading manner.
      (F) If a communication identifies a single company, the communication shall not be used in a manner which implies the offering of a product or service not available from the company named.
      (G) The positioning of disclosure can create confusion even if the disclosures or references are entirely accurate. To avoid confusion, a reference to an affiliation (e.g., registered representative) shall not be placed in proximity to the wrong entity.
      (H) Any reference to memberships (e.g., NASD, SIPC, etc.) shall be clearly identified as belonging to the entity that is the actual member of the organization.
      (3) Specific Standards

      The foregoing standards set forth in subsections [(g)](f)(1) and [(g)](f)(2) shall apply to all communications unless at least one of the following special circumstances exists, in which case the standards set forth herein would supersede the standards in subsections [(g)](f)(1) and [(g)](f)(2).

      * * * * *

      Options Communications with the Public

      Sec. 35A.

      (a) Definitions — For purposes of this section and any interpretation thereof,
      (1) "Advertisement" shall include any material that reaches a mass audience through public media such as newspapers, periodicals, magazines, radio, television, telephone recording, motion picture, audio or video device, telecommunications device, billboards, signs or through written sales communications to customers or the public that are not required to be accompanied or preceded by one or more current options disclosure documents.
      (2) "Educational material" shall include any explanatory material distributed or made generally available to customers or the public that is limited to information describing the general nature of the standardized options markets or one or more strategies.
      (3) "Sales literature" shall include any written communication (not defined as an "advertisement" or as "educational material") distributed or made generally available to customers or the public that contains any analysis, performance report, projection or recommendation with respect to options, underlying securities or market conditions, any standard forms of worksheets, or any seminar text which pertains to options and which is communicated to customers or the public at seminars, lectures or similar such events.
      (b) Approval by Compliance Registered Options Principal and Recordkeeping

      All advertisements, sales literature (except completed worksheets), and educational material issued by a member or member organization pertaining to options shall be approved in advance by the Compliance Registered Options Principal or designee. Copies thereof, together with the names of the persons who prepared the material, the names of the persons who approved the material and, in the case of sales literature, the source of any recommendations contained therein, shall be retained by the member or member organization and be kept at an easily accessible place for examination by the Association for a period of three
      (c) Association Approval Requirements and Re-view Procedures
      (1) In addition to the approval required by paragraph (b) of this Rule, every advertisement and all educational material of a member or member organization pertaining to options shall be submitted to the Advertising Department of the Association at least ten days prior to use (or such shorter period as the Department may allow in particular instances) for approval and, if changed or expressly disapproved by the Association, shall be withheld from circulation until any changes specified by the Association have been made or, in the event of disapproval, until the advertisement or educational material has been resubmitted for, and has received, Association approval.
      (2) Notwithstanding the foregoing provision, any District Business Conduct Committee of the Association, upon review of a member's options advertisements, educational material and/or sales literature, and after determining that the member will again depart from the standards of this section, may require that such member file all options advertisements, educational material and/or sales literature, or the portions of such member's material that is related to any specific types or classes of securities or services, with the Association's Advertising Department and/or the District Committee, at least ten days prior to use.

      The Committee shall notify the member in writing of the types of material to be filed and the length of time such requirement is to be in effect. The requirement shall not exceed one year, however, and shall not take effect until 30 days after the member receives the written notice, during which time the member may request a hearing be-fore the District Business Conduct Committee, and any such hearing shall be in reasonable conformity with the hearing and appeal procedures of the Code of Procedure.
      (3) In addition to the foregoing requirements, every member's options advertising and sales literature shall be subject to a routine spot-check procedure. Upon written request from the Association's Advertising Department, each member shall promptly submit the material requested. Members will not be required to submit material under this procedure that has been previously submitted pursuant to one of the foregoing requirements.
      (4) The requirements of this subsection shall not be applicable to:
      (A) advertisements or educational material submitted to another self-regulatory organization having comparable standards pertaining to such advertisements or educational material and
      (B) advertisements in which the only reference to options is contained in a listing of the services of a member organization.
      (5) Except as otherwise provided in Subsections (d)(2)(B) and (d)(2)(C), no written material respecting options may be disseminated to any person who has not previously or contemporaneously received one or more current options disclosure documents.
      (d) Standards Applicable to Communications with the Public
      (1) General Standards — No member or member organization or person associated with a member shall utilize any advertisement, educational material, sales literature or other communications to any customer or member of the public concerning options which:
      (A) contains any untrue statement or omission of a material fact or is otherwise false or misleading;
      (B) contains promises of specific results, exaggerated or unwarranted claims, opinions for which there is no reasonable basis or forecasts of future events which are unwarranted or which are not clearly labeled as forecasts;
      (C) contains hedge clauses or disclaimers which are not legible, which attempt to disclaim responsibility for the content of such literature or for opinions expressed therein, or which are otherwise inconsistent with such communication; or
      (D) would constitute a prospectus as that term is defined in the Securities Act of 1933, unless it meets the requirements of Section 10 of said Act.
      (2) Specific Standards
      (A) The special risks attendant to options transactions and the complexities of certain options investment strategies shall be reflected in any advertisement, educational material or sales literature which discusses the uses or advantages of options. Such communications shall include a warning to the effect that options are not suitable for all invest ors. In the preparation of written communications respecting options, the following guidelines shall be observed:
      (i) Any statement referring to the potential opportunities or advantages presented by options shall be balanced by a statement of the corresponding risks. The risk statement shall reflect the same degree of specificity as the statement of opportunities, and broad generalities should be avoided. Thus, a statement such as "with options, an investor has an opportunity to earn profits while limiting his risk of loss", should be balanced by a statement such as "of course, an options investor may lose the entire amount committed to options in a relatively short period of time."
      (ii) It shall not be suggested that options are suitable for all investors. (iii) Statements suggesting the certain availability of a secondary market for options shall not be made.
      (B) Advertisements pertaining to options shall conform to the following standards:
      (i) Advertisements may only be used (and copies of the advertisements may be sent to persons who have not received one or more options disclosure documents) if the material meets the requirements of Rule 134 under the Securities Act of 1933, as that Rule has been interpreted as applying to options. Under Rule 134, advertisements must be limited to general descriptions of the security being offered and of its issuer. Advertisements under this Rule shall state the name and address of the person from whom a current options disclosure document(s) may be obtained. Such advertisements may have the following characteristics:
      (a) The text of the advertisement may contain a brief description of such options, including a statement that the issuer of every such option is the Options Clearing Corporation. The text may also contain a brief description of the general attributes and method of operation of the exchange or exchanges on which such options are traded and of the Options Clearing Corporation, including a discussion of how the price of an option is determined on the trading floor(s) of such exchange(s);
      (b) The advertisement may include any statement required by any state law or administrative authority;
      (c) Advertising designs and devices, including borders, scrolls, arrows, pointers, multiple and combined logos and unusual type faces and lettering as well as attention-getting headlines and photographs and other graphics may be used, provided such material is not misleading.
      (ii) The use of recommendations or of past or projected performance figures, including annualized rates of return, is not permitted in any advertisement pertaining to options.
      (C) Educational material, including advertisements, pertaining to options may be used if the material meets the requirements of Rule 134A under the Securities Act of 1933. Those requirements are as follows:
      (i) The potential risks related to options trading generally and to each strategy addressed are explained;
      (ii) No past or projected performance figures, including annualized rates of return are used;
      (iii) No recommendation to purchase or sell any option contract is made;
      (iv) No specific security is identified other than
      (a) a security which is exempt from registration under the Act, or an option on such exempt security, or
      (b) an index option, including the component securities of the index; or
      (c) a foreign currency option; and
      (v) The material contains the name and address of a person or persons from whom the appropriate current Options Disclosure Document(s), as defined in Rule 9b-1 of the Securities Exchange Act of 1934, may be obtained.
      (D) Sales literature pertaining to options shall conform to the following standards:
      (i) Sales literature shall state that supporting documentation for any claims (including any claims made on behalf of options programs or the options expertise of sales persons), comparisons, recommendations, statistics or other technical data, will be supplied upon request.
      (ii) Such communications may contain projected performance figures (including projected annualized rates of return), provided that:
      (a) no suggestion of certainty of future performance is made;
      (b) parameters relating to such performance figures are clearly established (e.g., to indicate exercise price of option, purchase price of the underlying stock and its market price, option premium, anticipated dividends, etc.);
      (c) all relevant costs, including commissions and interest charges (if applicable with regard to margin transactions) are disclosed;
      (d) such projections are plausible and are intended as a source of reference or a comparative device to be used in the development of a recommendation;
      (e) all material assumptions made in such calculations are clearly identified (e.g., "assume option expires", "assume option unexercised", "assume option ex
      (f) the risks involved in the proposed transactions are also discussed; and
      (g) in communications relating to annualized rates of return, that such returns are not based upon any less than a sixty-day experience; any formulas used in making calculations are clearly displayed; and a statement is included to the effect that the annualized returns cited might be achieved only if the parameters described can be duplicated and that there is no certainty of doing so.
      (iii) Such communications may feature records and statistics which portray the performance of past recommendations or of actual transactions, provided that:
      (a) any such portrayal is done in a balanced manner, and consists of records or statistics that are confined to a specific "universe" that can be fully isolated and circumscribed and that covers at least the most recent 12-month period;
      (b) such communications include the date of each initial recommendation or transaction, the price of each such recommendation or transaction as of such date, and the date and price of each recommendation or transaction at the end of the period or when liquidation was suggested or effected, whichever was earlier; provided that if the communications are limited to summarized or averaged records or statistics, in lieu of the complete record there may be included the number of items recommended or transacted, the number that advanced and the number that declined, together with an offer to provide the complete record upon request;
      (c) such communications disclose all relevant costs, including commissions and interest charges (if applicable with regard to margin transactions) and, whenever annualized rates of return are used, all material assumptions used in the process of annualization;
      (d) an indication is provided of the general market conditions during the period(s) covered, and any comparison made between such records and statistics and the overall market (e.g., comparison to an index) is valid;
      (e) such communications state that the results presented should not and cannot be viewed as an indicator of future performance; and
      (f) a Registered Options Principal determines that the records or statistics fairly present the status of the recommendations or transactions reported upon and so initials the report.
      (iv) In the case of an options program (i.e., an investment plan employing the systematic use of one or more options strategies), the cumulative history or unproven nature of the program and its underlying assumptions shall be disclosed.
      (v) Standard forms of options worksheets utilized by member organizations, in addition to complying with the requirements applicable to sales literature, must be uniform within a member organization.
      (vi) If a member organization has adopted a standard form of worksheet for a particular options strategy, nonstandard worksheets for that strategy may not be used.
      (vii) Communications that portray performance of past recommendations or actual transactions and completed worksheets shall be kept at a place easily accessible to the sales office for the accounts or customers involved.

      1 In NASD Notice to Members 89-20 (Feb. 17, 1989), the membership approved new rules and amendments to the Rules of Fair Practice. When the new rules and amendments have been approved by the SEC, this section will be renumbered to conform to the new numbering of the Rules of Fair Practice.

      2 NASD Notice to Members 91-26 (May 1991) announced the SEC's approval of amendments to Article III, Section 35 relating to the use and disclosure of member names. Those amendments, among other things, created a new subsection (g) in Section 35. The approval of the amendments set forth in this notice require that the new subsection (g) be renumbered subsection (f). Other nonsubstantive conforming amendments and renumbering to Section 35 are also being announced herein.

      3 New text is underlined. Deleted text is in brackets. The current text of Section 35 set forth herein reflects amendments announced in Notice to Members 91-26 (May 1991). See note 2, supra.

    • 91-61 SEC Approval of Amendment to Article VI, Sections 3 and 4 of NASD By-Laws Re: Suspension or Cancellation of Registration for Failure to Pay Fees, Dues, or Other Assessments

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Registration
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission has approved an amendment to Article VI, Sections 3 and 4 of the NASD By-Laws to provide for the suspension or cancellation of the registration of an associated person in the event of nonpayment of fees, dues, or assessments. The text of the amendment, which took effect August 29, 1991, follows this notice.

      BACKGROUND

      Article VI of the NASD By-Laws generally provides the Board of Governors with the authority to charge fees, dues, and assessments to members, issuers, and persons using facilities and systems operated or controlled by the NASD. Prior to the adoption of these rule changes, Section 3 of that Article authorized the NASD, after providing written notice, to suspend or cancel the membership of any member that fails to pay any fees, dues, assessments, or other charges. Section 3, however, did not apply to associated persons who fail to pay fees, dues, or assessments. Failure to pay forum fees associated with the arbitration process operated by the NASD could result in the suspension or cancellation of a firm's membership, but no similar remedy was available for associated persons.

      EXPLANATION

      The amendment to Sections 3 and 4 of Article VI of the By-Laws allows the NASD to suspend or cancel after 15 days notice, in writing, the registration of any associated person who has failed to pay fees, including arbitration forum fees, dues, assessments, or other charges owed for the use of facilities or systems operated or controlled by the NASD.

      The NASD Board believes that this rule change will protect the integrity of the arbitration process and the marketplace and provide uniformity in the treatment of members and associated persons failing to pay fees.

      Questions regarding the applicability of this rule change to arbitration forum fees may be directed to Kenneth L. Andrichik, Arbitration Department, at (212) 858-3915.

      ARTICLE VI, NASD BY-LAWS

      (Note: Proposed new language is underlined.)

      Dues, Assessments and Other Charges

      * * * * *

      Suspension or Cancellation of Membership or Registration for Nonpayment of Dues

      Sec. 3. The Corporation after fifteen (15) days notice in writing, may suspend or cancel the membership of any member or the registration of any person in arrears in the payment of any fees, dues, assessments or other charges or for failure to furnish any information or reports requested pursuant to Section 2 of this Article.

      Reinstatement of Membership or Registration

      Sec. 4. Any membership or registration suspended or canceled under this Article may be reinstated by the Corporation upon such terms and conditions as it shall deem just; provided, however, that any applicant for reinstatement of membership or, registration shall possess the qualifications required for membership or registration in the Corporation.

    • 91-60 Proposed Amendments to Article III, Section 5 and Article IV, Sections 3 and 4 of The NASD By-Laws Regarding Retention of Jurisdiction; Last Voting Date: November 19, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      *These are suggested departments only. Others may be appropriate for your firm.

      MAIL VOTE

      EXECUTIVE SUMMARY

      The NASD invites members to vote on proposed amendments to Article HI, Sections 5 and 6 and Article IV, Sections 3 and 4 of the NASD By-Laws relating to retaining jurisdiction over member firms that resign their memberships and associated persons who terminate their registrations, or whose memberships or registrations have been canceled or revoked. The proposed amendments would extend the NASD's jurisdiction over such members and associated persons to two years following the resignation, termination, cancellation, or revocation of their memberships or registrations.

      The text of the proposed amendments follows this notice.

      BACKGROUND

      In October 1990, after approval by the Board of Governors and the membership, the NASD submitted rule filing SR-NASD-90-53 to the Securities and Exchange Commission (SEC) proposing amendments to the NASD By-Laws and Rules of Fair Practice. The filing proposed, among other things, codifying procedures currently employed by the NASD in processing terminations of associated persons and cancellations and revocations of member firms. The most significant aspect of current NASD procedures is the practice of "holding" the effectiveness of the member's resignation or the associated person's termination if the NASD is aware of or is investigating potential violations of the NASD's rules or the federal securities laws by the firm or person. The NASD also retroactively holds member resignations or registration terminations if it becomes aware of matters that would have resulted in a hold after the termination had been allowed to take effect.

      The rule filing also proposed amending the By-Laws to provide that the NASD would continue to retain jurisdiction over firms whose memberships were canceled or revoked and associated persons whose registrations were revoked. This amendment would correct the situation under the current provisions where the NASD retains jurisdiction over a member who resigned or an associated person who terminated his or her registration, but loses jurisdiction over firms that had their membership canceled or revoked and associated persons whose registrations were revoked.

      The SEC expressed concern that the proposal permits the NASD to hold indefinitely a member resignation or registration termination pending the outcome of an investigation. In response to the SEC concerns, the Board has reconsidered the proposed amendments to the By-Laws relating to retention of jurisdiction.

      SUMMARY OF PROPOSED AMENDMENTS

      Under the current provisions of the By-Laws, the NASD has one year from the effective date of the filing of a resignation of membership1 or a termination of registration2 to file a complaint for any actionable misconduct that occurred before the member's resignation or the associated person's termination. If the NASD is not aware of misconduct by an associated person when a termination takes effect, the time period for filing a complaint could expire before action is taken. This is the reason for the use of the hold and retroactive hold procedure.

      The Board believes that to maintain the fairness and effectiveness of the NASD's disciplinary system, the NASD should extend its current one-year time period for retaining jurisdiction to file a complaint to a fixed two years from the date a resignation or termination is filed or from the date the NASD revokes or cancels a member or associated person. This proposed amendment will eliminate the need for the NASD to hold the effectiveness of resignations and terminations and to issue letter notices. The Board believes a fixed two-year time limit will be less intrusive than the current indefinite and potentially unlimited "hold" process and will allow sufficient time to bring virtually all disciplinary actions.

      For associated persons, the Board is proposing that the two-year period recommence on the filing date of the last amendment to a Form U-5 filed within the original two-year period. This would provide for the situation in which a routine Form U-5 is filed at the time of termination but a subsequent amendment discloses potential violations requiring an investigation. Running the two-year period from the date of the last Form U-5 amendment would prevent persons from avoiding disciplinary action through their own active concealment or the dilatory conduct of others. Moreover, because members have to send any amended Form U-5s to the terminated person, he or she would know when the two-year period recommences. The Board also notes that the two-year limit would be consistent with current rules that permit a person to become associated with another member without requalifing by examination up to two years from the date of termination.

      The Board believes that these amendments to the NASD By-Laws are necessary and appropriate and recommends that members vote their approval.

      Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to the Corporation Trust Company. Ballots must be postmarked no later than November 19, 1991.

      Because the rule language mirrors the rule change pending at the SEC, the text is written as if the amendments had been adopted. Prior to becoming effective, the proposed amendments also must be approved by the SEC.

      Questions concerning this notice may be directed to the Office of General Counsel at (202) 728-8294.

      TEXT OF PROPOSED AMENDMENTS TO NASD BY-LAWS3

      ARTICLE III

      Membership

      * * * * *

      Resignation of Members

      (Note: New text is underlined; deleted text is in brackets.)

      Sec. 5 Membership in the Association may be voluntarily terminated only by formal resignation. Resignations of members must be in writing and addressed to the Corporation which shall immediately notify the appropriate District Committee. Any member may resign from the Corporation at any time. Such resignation shall not take effect until thirty (30) days after receipt thereof by the Corporation and until all indebtedness due the Corporation from such member shall have been paid in full and so long as any complaint or action is pending against the member [and so long as any examination of such member is in process] under the Code of Procedure. The Corporation, however, may in its discretion declare a resignation effective at any time.

      Retention of Jurisdiction

      Sec. 6 A resigned member or a member that has had its membership canceled or revoked shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior to the effective date of the member's resignation from the Corporation or the cancellation or revocation of its membership. Any such complaint, however, shall be filed within [one] two (2) years after the effective date of the resignation, cancellation or revocation.

      ARTICLE IV

      Registered Representatives and Associated Person

      * * * * *

      Notification by Member to Corporation and Associated Person of Termination; Amendments to Notification

      Sec. 3

      (a). Following the termination of the association with a member of a person who is registered with it, such member shall promptly, but in no event later than thirty (30) calendar days after such termination, give written notice to the Association on a form designated by the Board of Governors of the termination of such association, and concurrently shall provide to the person whose association has been terminated a copy of said notice as filed with the Association. A member [who] which does not submit such notification in writing, and provide a copy thereof to the person whose association has been terminated, within the time period prescribed shall be assessed a late filing fee as specified by the Board of Governors. Termination of registration of such person associated with a member shall not take effect so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually under the Code of Procedure, [or so long as any examination of the member or person associated with such member is in process. The Corporation may in its discretion determine that termination of registration of such person associated with a member shall not take effect where the written notice thereof discloses that such person engaged or may have engaged in conduct that may constitute a violation of any statute, rule or regulation governing such person's activities while associated with a member. The Corporation, however, may in its discretion declare the termination effective at any time. The Corporation may also in its discretion declare the termination ineffective as of the date the Corporation first received notice of the termination if, during the period that such person remains subject to the Corporation's jurisdiction to file a complaint under the Code of Procedure as provided in Section 4 of this Article IV, the Corporation shall receive notice from any source that such person engaged or may have engaged in conduct that may constitute a violation of any statute, rule or regulation governing such person's activities while associated with a member.]
      (b) The member shall notify the Association in writing by means of an amendment to the notice filed pursuant to paragraph (a) above in the event that the member learns of facts or circumstances causing any information set forth in said notice to become inaccurate or incomplete. Such amendment shall be filed with the Association and provided to the person whose association with the member has been terminated not later than thirty (30) calendar days after the member learns of the fact or circumstances giving rise to the amendment.

      Retention of Jurisdiction

      Sec. 4. A person whose association with a member has been terminated and is no longer associated with any member of the Corporation or a person whose registration has been revoked shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior to the termination or revocation or upon such person's failure, while subject to the Corporation's jurisdiction as provided herein, to provide information requested by the Corporation pursuant to Article IV, Section 5 of the NASD Rules of Fair Practice, but any such complaint shall be filed within: [one (1) year after the effective date of termination of registration pursuant to Section 3 above, within one (1) year after the effective date of revocation of registration pursuant to Article V, Section 2 of the Association's Rules of Fair Practice or, in the case of an unregistered person, within one (1) year after the date upon which such person ceased to be associated with the member. In the event that the Corporation shall determine pursuant to Section 3 above that the termination of a person's association with a member shall not take effect, such person shall continue to be subject to the filing of a complaint as provided herein until, and for one (1) year following, the Corporation's determination to permit the termination to take effect.]

      (a) two (2) years after the effective date of termination of registration pursuant to Section 3 above, provided, however, that any amendment to a notice of termination filed pursuant to Section 3(b) that is filed within two years of the original notice which discloses that such person may have engaged in conduct actionable under any applicable statute, rule or regulation shall operate to recommence the running of the two-year period under this paragraph;
      (b) two (2) years after the effective date of revocation of registration pursuant to Article V, Section 2 of the Association's Rules of Fair Practice; or,
      (c) in the case of an unregistered person, within two (2) years after the date upon which such person ceased to be associated with the member.

      1 A member must advise the NASD of its resignation of membership on a Form BDW.

      2 A member must advise the NASD of a termination of or resignation by an associated person on Form U-5.

      3 The rule language is the text of the rule change pending at the SEC as if the amendments proposed in that rule change had been adopted. Additions proposed herein to the amended version are underlined, deletions are in brackets.

    • 91-59 Nasdaq National Market System (Nasdaq/NMS) Additions, Changes, and Deletions As of August 23, 1991

      SUGGESTED ROUTING:*

      Internal Audit
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      As of August 23, 1991, the following 53 issues joined Nasdaq/NMS, bringing the total number of issues to 2,605:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      VRTX

      Vertex Pharmaceuticals Incorporated

      7/24/91

      1000

      CATH

      Catherines Stores Corporation

      7/25/91

      1000

      GMIS

      GMIS Inc.

      7/25/91

      500

      KOLL

      Koll Management Services, Inc.

      7/25/91

      1000

      GRNTP

      Grant Tensor Geophysical Corp. (Pfd)

      7/26/91

      1000

      RCORF

      R-Tek Corporation

      7/26/91

      1000

      MNRO

      Monro Muffler Brake, Inc.

      7/30/91

      1000

      PRGS

      Progress Software Corporation

      7/30/91

      200

      DIAN

      Dianon Systems, Inc.

      7/31/91

      500

      GTII

      Genetic Therapy, Inc.

      7/31/91

      1000

      WFLT

      Wellfleet Communications, Inc.

      7/31/91

      1000

      COMMP

      Cellular Communications, Inc. (Pfd)

      8/1/91

      1000

      MECS

      Medicus Systems Corporation

      8/1/91

      1000

      OHCO

      OCOM Corporation

      8/1/91

      1000

      OFII

      Omni Films International, Inc.

      8/1/91

      500

      SMTG

      Somatogen, Inc.

      8/2/91

      1000

      AGSV

      Ag Services of America, Inc.

      8/6/91

      1000

      CRCL

      Circle Financial Corporation

      8/6/91

      200

      EXTL

      Executive TeleCard, Ltd.

      8/6/91

      1000

      KLOC

      Kushner-Locke Company (The)

      8/6/91

      1000

      KLOCW

      Kushner-Locke Company (The) (Wts)

      8/6/91

      1000

      NABC

      NAB Asset Corporation

      8/6/91

      500

      NMRR

      NMR of America, Inc.

      8/6/91

      1000

      NTAIF

      Nam Tai Electronics. Inc.

      8/6/91

      1000

      VALE

      Valley Systems, Inc.

      8/6/91

      1000

      BIOX

      Biomatrix, Inc.

      8/7/91

      1000

      HYBWV

      Hycor Biomedical Inc. (Wts)(WI)

      8/7/91

      500

      MPLX

      Mediplex Group, Inc. (The)

      8/7/91

      1000

      OXHP

      Oxford Health Plans, Inc.

      8/7/91

      500

      RVAC

      Royal Appliance Mfg. Co.

      8/7/91

      1000

      SDII

      Special Devices, Incorporated

      8/7/91

      1000

      STMX

      SyStemix, Inc.

      8/7/91

      1000

      CABK

      Capital Bancorporation, Inc.

      8/8/91

      1000

      IGHC

      Intergroup Healthcare Corporation

      8/8/91

      500

      PCHM

      PharmChem Laboratories, Inc.

      8/8/91

      1000

      RCMIF

      Rogers Cantel Mobile Communications Inc. (Cl B)

      8/8/91

      1000

      PIZB

      National Pizza Company (Cl B)

      8/12/91

      1000

      AMHC

      American Healthcorp, Inc.

      8/13/91

      1000

      CFBX

      Community First Bankshares, Inc.

      8/13/91

      500

      LSKI

      Liuski International, Inc.

      8/13/91

      500

      LPAC

      Laser-Pacific Media Corporation

      8/14/91

      200

      SYBS

      Sybase, Inc.

      8/14/91

      1000

      FIMG

      Fischer Imaging Corporation

      8/15/91

      1000

      ZBRA

      Zebra Technologies Corporation (Cl A)

      8/15/91

      1000

      IFRA

      Infrasonics, Inc.

      8/16/91

      1000

      NMPC

      NutraMax Products, Inc.

      8/16/91

      1000

      AEOK

      Alexander Energy Corporation

      8/20/91

      500

      GLBCP

      Great Lakes Bancorp, A Federal Savings Bank (Pfd)

      8/20/91

      200

      HAUS

      Hauser Chemical Research, Inc.

      8/20/91

      1000

      JEAN

      Jean Philippe Fragrances, Inc.

      8/20/91

      1000

      JEANW

      Jean Philippe Fragrances, Inc. (Wts)

      8/20/91

      500

      SCHR

      Scherer Healthcare, Inc.

      8/20/91

      200

      BMCW

      BMC West Corporation

      8/22/91

      1000

      Nasdaq/NMS Symbol and/or Name Changes

      The following changes to the list of Nasdaq/NMS securities occurred since July 26, 1991:

      New/Old Symbol

      New/Old Security

      Date of Change

      PIZA/PIZA

      National Pizza Company (Cl A)/National Pizza Company

      7/31/91

      INAC/VLCM

      InaCom Corp./ValCom, Inc.

      8/6/91

      CNSI/CNSI

      Cambridge NeuroScience, Inc./Cambridge NeuroScience Research, Inc.

      8/8/91

      Nasdaq/NMS Deletions

      Symbol

      Security

      Date

      CPST

      CPC-Rexcel, Inc.

      7/30/91

      CIZCF

      City Resources (Canada) Ltd.

      7/30/91

      KIND

      Kinder-Care Learning Centers, Inc.

      7/30/91

      MLXX

      MLX Corp.

      7/30/91

      ROBVC

      Robotec Vision Systems, Incorporated

      7/30/91

      COMM

      Cellular Communications, Inc.

      8/1/91

      CWLD

      Child World, Inc.

      8/1/91

      REDI

      ReadiCare, Inc.

      8/1/91

      VANF

      VanFed Bancorp

      8/1/91

      IMRI

      IMCO Recycling Inc.

      8/2/91

      INFN

      Infotron Systems Corporation

      8/5/91

      NUTM

      Nutmeg Industries, Inc.

      8/5/91

      INAC

      Inacomp Computer Centers, Inc.

      8/6/91

      VTRX

      Ventrex Laboratories, Inc.

      8/7/91

      LDBC

      LDB Corporation

      8/7/91

      LSER

      Laser Corporation

      8/13/91

      CTIAC

      Communications Transmission, Inc.

      8/20/91

      VREOS

      Vanguard Real Estate Fund I

      8/20/91

      VRETS

      Vanguard Real Estate Fund II

      8/20/91

      ADTLY

      ADT Limited

      8/21/91

      INVG

      INVG Mortgage Securities Corp.

      8/21/91

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, Market Listing Qualifications, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 91-58 Columbus Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 14, 1991. On this day, the Nasdaq system and the exchange markets will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed in observance of Columbus Day.

      Trade Date

      Settlement Date

      Reg. T Date*

      Oct. 3

      10

      14

      4

      11

      15

      7

      15

      16

      8

      16

      17

      9

      17

      18

      10

      18

      21

      11

      21

      22

      14

      21

      23

      15

      22

      24

      Note: October 14, 1991 is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 14, will be combined with transactions made on the previous business day, October 11, for settlement on October 21. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 14.

      Brokers, dealers, and municipal securities dealers should use these settlement dates for purposes of clearing and settling transactions pursuant to the NASD Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at (212) 858-4341.

      * Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)m, make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Reg. T Date."

    • 91-57 Adoption of Amendments to Interpretation of the Board of Governors — Forwarding Of Proxy and Other Materials, Article III, Section 1 of the NASD Rules of Fair Practice Re: Forwarding of Material on the Issuer's Behalf to Beneficial Owners

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Operations
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission has approved amendments to the Interpretation of the Board of Governors — Forwarding of Proxy and Other Materials, Article III, Section 1 of the NASD Rules of Fair Practice to require NASD members to forward on the issuer's behalf all material in addition to material required by law to be sent to beneficial owners. The text of this amendment, which took effect September 14, 1991, follows this notice.

      BACKGROUND AND SUMMARY OF AMENDMENTS

      On July 31, 1991, the Securities and Exchange Commission (SEC or "Commission") approved amendments to the Interpretation of the Board of Governors — Forwarding of Proxy and Other Materials, Article III, Section 1 of the NASD Rules of Fair Practice (the "Interpretation of the Board") to require members, on the issuer's behalf, to forward material in addition to that required by law to be sent to beneficial owners.

      Prior to the approval of these amendments, the Interpretation of the Board required NASD members to forward on the issuer's behalf only proxy material, annual reports, information statements, and other material required by law to be sent to stockholders periodically. The NASD member's duty to forward did not extend to materials not required by law to be sent periodically.

      The NASD became aware that a disparity existed among different NASD members regarding the duty to forward material not required by law to be sent periodically, and that such disparity could create unnecessary confusion in the area of issuer communications. The disparity existed because NASD members affiliated with the New York Stock Exchange (NYSE) are required to forward all material on the request of either NYSE-listed or unlisted companies.1 Therefore, a Nasdaq issuer that requested the forwarding of material not required to be sent by law could receive a different level of service from an NASD member, depending on the member's affiliation or nonaffiliation with the NYSE.

      This amendment eliminates the disparity among NASD members regarding their duty to forward material on behalf of the issuer to beneficial owners. As amended, the Interpretation of the Board requires that NASD members forward other material on behalf of the issuer. The amended requirement is not limited to material required by law to be sent periodically.

      Currently, NASD members are reimbursed for expenses incurred in forwarding other material pursuant to Section 4 of the Interpretation. The rates for such reimbursement are set forth under the Appendix to the Interpretation of the Board. As amended, Section 4 and the Appendix to the Interpretation clarify that the application of the reimbursement rate applies to the additional material required to be forwarded under this amendment.

      TEXT OF RULE CHANGE

      The following is the full text of amendments to Interpretation of the Board of Governors — Forwarding of Proxy and Other Materials, Article III, Section 1 of the NASD Rules of Fair Practice.

      (Note: New language is underlined; deleted language is in brackets.)

      Rules of Fair Practice Article III

      Section 1

      * * * * *

      Interpretation of the Board of Governors

      Forwarding of Proxy and Other Materials Introduction

      A member has an inherent duty in carrying out high standards of commercial honor and just and equitable principles of trade to forward all proxy material, annual reports, information statements and other material [required by law to be] sent to stockholders [periodically], which are properly furnished to it by the issuer of the securities, to each beneficial owner of shares of that issue which are held by the member for the beneficial owner thereof. For the assistance and guidance of members in meeting their responsibilities, [therefore,] the Board of Governors has promulgated this interpretation. The provisions hereof shall be followed by all members and failure to do so shall constitute conduct inconsistent with high standards of commercial honor and just and equitable principles of trade in violation of Article III, Section 1 of the Rules of Fair Practice of the Association.

      Interpretation

      * * * * *

      Section 4. A member when so requested by an issuer and upon being furnished with:

      (1) sufficient copies of annual reports, information statements or other material [required by law to be] sent to stockholders [periodically], and
      (2) satisfactory assurance that it will be reimbursed by such issuer for all out-of-pocket expenses, including reasonable clerical expenses, shall transmit promptly to each beneficial owner of stock of such issuer which is in its possession and control and registered in a name other than the name of the beneficial owner all such material furnished.

      This section shall not apply to beneficial owners residing outside of the United States of America though members may voluntarily comply with the provisions hereof in respect to such persons if they so desire.

      * * * * *

      Appendix

      * * * * *

      Charges for Interim Report [Mailings], Post Meeting Report and Other Material Mailings

      30 cents for each copy, plus postage, for interim reports, post meeting reports; or other material with a minimum of $2.00 for all sets mailed;
      Members may charge for envelopes, provided that they are not furnished by the person soliciting proxies.
      Members are reminded that Article III, Section 3 of the Rules of Fair Practice requires that any such charges must be reasonable. Accordingly, this is a guide and a member may request reimbursement of expenses at other rates after taking into consideration all relevant factors.


      1 NYSE Rule 465 and Section .10 of Supplementary Material to Rule 465.

    • 91-56 SEC Approval of Amendments to Appendix F Concerning Member Participation in Partnership RoIIups

      SUGGESTED ROUTING:*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC or "Commission") has approved amendments to Appendix F under Article III, Section 34 of the NASD Rules of Fair Practice regarding members' compensation arrangements in connection with the solicitation of investor votes in partnership rollup transactions. The amendments are effective immediately. The text of the amendments follows this notice.

      BACKGROUND

      In December 1990, the NASD requested comments on the receipt of differential compensation contingent on investor votes in connection with members' solicitation of votes or tenders in partnership rollups. Differential compensation plans provide for NASD members soliciting limited partners in a rollup to receive compensation only when an investor votes "yes" on the proposed transaction. The NASD was concerned that arrangements providing payment only for "yes" votes may raise a conflict of interest or the appearance of a conflict of interest. In light of serious regulatory and legislative concerns that have been raised about rollup transactions, the NASD questioned the appropriateness of compensation arrangements that provide members with an incentive to recommend only approval of the transaction, particularly when it is unclear that a "yes" vote is in the best interest of investors.

      Commenters were strongly in favor of an amendment prohibiting differential compensation and indicated that compensation arrangements should provide an incentive for general partners to propose fair transactions. Therefore, the NASD's proposal was amended to prohibit member participation in rollups unless the general partner or sponsor has agreed to pay the costs of the solicitation, including the preparatory work related thereto, if the transaction is not approved. The commenters also indicated that solicitation compensation paid to members should not be contingent on approval of the transaction. In addition, the NASD decided to limit the amount of solicitation compensation that may be received by members to 2 percent of the exchange value of the newly issued securities resulting from the rollup.

      The NASD believes that amendments to Appendix F requiring payment for any vote, regardless of whether the transaction is approved, will eliminate any conflict of interest, or the appearance of any conflict of interest, that may be present when NASD members soliciting limited partners in a rollup receive compensation only when the investor votes "yes" to the transaction. The intended result of the NASD's action is that the general partner or sponsor, if faced with the responsibility of paying the costs of an unsuccessful solicitation, will have a strong incentive to structure and propose rollup transactions that are fair to limited partners. Meanwhile, NASD members will have equal incentive to advise their customers to vote "yes" or "no" as is appropriate.

      EXPLANATION OF AMENDMENTS

      The amendments to Appendix F prohibit NASD members from receiving compensation for soliciting votes or tenders from participants in connection with a rollup of a direct participation program unless such compensation (1) is payable and equal in amount regardless of whether limited partners vote affirmatively or negatively on the proposed rollup, (2) in the aggregate does not exceed 2 percent of the exchange value of the newly created securities, and (3) is paid regardless of whether the limited partners accept or reject the proposed rollup.

      The amendments also prohibit members or persons associated with members from participating in the solicitation of votes or tenders in connection with a rollup unless the general partner or sponsor proposing the rollup agrees to pay all solicitation expenses related to the transaction, including all preparatory work related thereto, in the event the rollup is not approved. Solicitation expenses include direct marketing expenses such as telephone calls, broker/dealer fact sheets, legal and other fees related to the solicitation, as well as direct solicitation compensation to members. Solicitation expenses do not include other expenses normally paid by the registrant such as counsel fees, accounting fees, printing costs, and financial advisory fees related to the rollup transaction.

      The amendments define "rollup" or "rollup of a direct participation program" as a transaction involving an acquisition, merger, or consolidation of at least one direct participation program, not currently listed on a national securities exchange or The Nasdaq Stock Market,SM into another direct participation program, public corporation, or public trust. The definition of rollup in the amendments differs from the definition employed in proposed rollup legislation being considered by Congress. The NASD will consider conforming the definition of rollup to the legislative definition in the event it becomes law.

      EFFECTIVENESS OF AMENDMENTS

      The amendments were approved by the SEC August 19, 1991.* Members must comply with the amendments immediately. Questions concerning this notice may be directed to Richard J. Fort-wengler, Associate Director, or Carl R. Sperapani, Assistant Director, Corporate Financing Department at(202) 728-8258.

      TEXT OF AMENDMENTS TO APPENDIX F UNDER ARTICLE III, SECTION 34 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New language is underlined.)

      APPENDIX F

      Sec. 1.

      No member or person associated with a member shall participate in a public offering of a direct participation program or a rollup of a direct participation program except in accordance with this Appendix.

      Sec. 2.

      DEFINITIONS

      * * *

      (b) The following terms shall have the stated meaning when used in this Appendix:

      * * *
      (7) Rollup or Rollup of a Direct Participation Program — a transaction involving an acquisition, merger or consolidation of at least one direct participation program, not currently listed on a registered national securities exchange or the Nasdaq System, into another public direct participation program or a public corporation or public trust.

      * * *

      Sec. 6.

      PARTICIPATION IN ROLLUPS

      (a) No member shall receive compensation for soliciting votes or tenders from participants in connection with a rollup of a direct participation program or programs, irrespective of the form of the entity resulting from the rollup (i.e., a partnership, real estate investment trust or corporation), unless such compensation;
      (1) is payable and equal in amount regardless of whether the participant votes affirmatively or negatively on the proposed rollup;
      (2) in the aggregate, does not exceed 2% of the exchange value of the newly-created securities; and
      (3) is paid regardless of whether the participants reject the proposed rollup.
      (b) No member or person associated with a member shall participate in the solicitation of votes or tenders in connection with the rollup of a direct participation program unless the general partner or sponsor proposing the rollup agrees to pay all solicitation expenses related to the rollup, including all preparatory work related thereto, in the event the rollup is not approved.

      * See SEC Release No. 34-29582; 56 F.R. 42095, August 26, 1991

    • 91-55 Nasdaq National Market System (Nasdaq/NMS) Additions, Changes, and Deletions As of July 24, 1991

      SUGGESTED ROUTING:*

      Internal Audit
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      As of July 24, 1991, the following 54 issues joined Nasdaq/NMS, bringing the total number of issues to 2,568:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      GNLB

      Genelabs Technologies, Inc.

      6/13/91

      1000

      GLYC

      Glycomed Incorporated

      6/13/91

      1000

      ADLI

      American Dental Laser, Inc.

      6/18/91

      1000

      AXXXR

      Artel Communications Corporation (Rts)

      6/18/91

      500

      BTGC

      Bio-Technology General Corp.

      6/18/91

      1000

      GKIE

      General Kinetics Incorporated

      6/18/91

      1000

      OSSI

      Outback Steakhouse, Inc.

      6/18/91

      1000

      SLFC

      Shoreline Financial Corporation

      6/18/91

      200

      USLD

      U.S. Long Distance Corp.

      6/18/91

      1000

      GHVI

      Genesis Health Ventures, Inc.

      6/19/91

      1000

      SDYNW

      Staodyn, Inc. (Wts)

      6/19/91

      500

      ICST

      Integrated Circuit Systems, Inc.

      6/20/91

      500

      MEDX

      Medarex, Inc.

      6/20/91

      500

      MEDXW

      Medarex, Inc. (Wts)

      6/20/91

      500

      TANK

      Tanknology Environmental, Inc.

      6/20/91

      1000

      CGRP

      Coastal Healthcare Group, Inc.

      6/21/91

      1000

      DVRY

      DeVRY INC.

      6/21/91

      1000

      IDXX

      IDEXX Laboratories, Inc.

      6/21/91

      1000

      RGIS

      Regis Corporation

      6/21/91

      1000

      APTV

      Advanced Promotion Technologies, Inc.

      6/26/91

      1000

      AESC

      AES Corporation (The)

      6/26/91

      500

      CLWY

      Galloway's Nursery, Inc.

      6/26/91

      1000

      RHBC

      RehabCare Corporation

      6/26/91

      1000

      CORR

      COR Therapeutics, Inc.

      6/27/91

      200

      RIDL

      Riddell Sports Inc.

      6/27/91

      1000

      BERT

      Bertucci's, Inc.

      6/28/91

      1000

      CURE

      Curative Technologies, Inc.

      6/28/91

      1000

      FORT

      FORTIS Corporation

      6/28/91

      1000

      FNOW

      Future Now, Inc. (The)

      6/28/91

      200

      STFC

      State Auto Financial Corporation

      6/28/91

      1000

      KOKO

      Central Indiana Bancorp

      7/1/91

      500

      CNTOW

      Centocor, Inc. (Wts)

      7/2/91

      500

      FFSB

      First Federal Savings Bank of New Smyrna

      7/2/91

      200

      GENBB

      Genessee Corporation (Cl B)

      7/2/91

      1000

      MMSI

      Merit Medical Systems, Inc.

      7/2/91

      1000

      ASBK

      Aspen Bancshares, Inc.

      7/3/91

      500

      FSVBP

      Franklin Savings Bank, FSB (Pfd)

      7/3/91

      500

      ABDN

      American Biodyne, Inc.

      7/12/91

      1000

      IHOP

      IHOP Corp.

      7/12/91

      1000

      IWBK

      InterWest Savings Bank

      7/12/91

      1000

      SSPE

      Software Spectrum, Inc.

      7/12/91

      1000

      ALKS

      Alkermes, Inc.

      7/16/91

      200

      FTSP

      First Team Sports, Inc.

      7/16/91

      1000

      POPEZ

      Pope Resources

      7/16/91

      500

      STBS

      Sierra Tahoe Bancorp

      7/16/91

      500

      MCRN

      Micronics Computers, Inc.

      7/17/91

      1000

      OSTE

      Osteotech, Inc.

      7/17/91

      1000

      SNTV

      Sun Television and Appliances, Inc.

      7/17/91

      1000

      LSVI

      Little Switzerland, Inc.

      7/18/91

      1000

      TCSI

      Teknekron Communications Systems, Inc.

      7/18/91

      1000

      MERS

      Meris Laboratories, Inc.

      7/19/91

      200

      RELF

      ReLife, Inc. (Cl A)

      7/23/91

      1000

      IBCC

      Interstate Bakeries Corporation

      7/24/91

      1000

      VLTS

      Video Lottery Technologies, Inc.

      7/24/91

      1000

      Nasdaq/NMS Symbol and/or Name Changes

      The following changes to the list of Nasdaq/NMS securities occurred since June 13, 1991:

      New/Old Symbo

      New/Old Security

      Date of Change

      VSLF/VSLF

      Banyan Strategic Land Fund II/VMS Strategic Land Fund II

      6/24/91

      CABI/NCCB

      California Bancshares, Inc./Northern California Community Bancorporation, Inc.

      7/1/91

      MDCO/MDCO

      Marine Drilling Co./Marine Holding Co.

      7/1/91

      STUA/BNGO

      Stuart Entertainment Inc./Bingo King, Inc.

      7/1/91

      VABF/VABF

      Virginia Beach Federal Financial Corp ./Virginia Beach Federal Savings Bank

      7/1/91

      PWBC/ECCB

      PennFirst Bancorp, Inc./Ellwood Federal Savings Bank

      7/2/91

      STVI/STVI

      STV Group, Inc./STV Engineers, Inc

      7/9/91

      MCON/MCON

      EMCON/EMCON Associates

      7/15/91

      ORBT/ORBT

      Orbit International Corporation/Orbit Instrument Corporation

      7/16/91

      KMCI/KMCI

      KMC Enterprises, Inc./Keegan Management Company

      7/19/91

      Nasdaq/NMS Deletions

      Symbol

      Security

      Date

      BGENP

      Biogen, Inc. (Pfd)

      6/14/91

      ALOY

      Alloy Computer Products, Inc.

      6/17/91

      AMKG

      Amoskeag Bank Shares, Inc.

      6/17/91

      SSBA

      Seacoast Savings Bank

      6/17/91

      CRBN

      Calgon Carbon Corporation

      6/21/91

      CONT

      Continental Medical Systems, Inc.

      6/21/91

      HMDY

      Hemodynamics Incorporated

      6/24/91

      VIVI

      Vivigen, Inc.

      6/24/91

      BLLQE

      W. Bell & Co., Inc.

      6/25/91

      BZMT

      BizMart, Inc.

      6/25/91

      UGNEW

      Unigene Laboratories, Inc. (Cl A Wts)

      6/26/91

      COCA

      CoCa Mines, Inc.

      6/27/91

      ENCC

      Encore Computer Corporation

      6/27/91

      IBCAC

      International Broadcasting Corporation

      6/27/91

      NMDY

      Normandy Oil and Gas Company

      6/27/91

      STRC

      Stratford American Corporation

      6/27/91

      USGL

      U.S. Gold Corporation

      6/27/91

      CO CAW

      CoCa Mines, Inc. (Wts)

      6/28/91

      ECFC

      Eastchester Financial Corporation

      7/1/91

      IUTL

      Iowa Southern Inc.

      7/1/91

      MVBC

      Mission-Valley Bancorp

      7/1/91

      WVTK

      Wavetek Corporation

      7/1/91

      TOCRZ

      Tocor, Inc.

      7/2/91

      VITA

      Vitalink Communications Corporation

      7/2/91

      CCEAW

      Coca-Cola Enterprises, Inc. (Wts)

      7/3/91

      HAML

      Hamilton Oil Corporation

      7/3/91

      DRMD

      Duramed Pharmaceutical, Inc.

      7/5/91

      MCOMQ

      Midwest Communications Corporation

      7/5/91

      MRGQE

      Mr. Gasket Company

      7/8/91

      BLAU

      Barry Blau & Partners, Inc.

      7/11/91

      FAMS

      Famous Restaurants Inc.

      7/12/91

      MSICE

      Microscience International Corporation

      7/12/91

      USWNA

      US West NewVector Group, Inc. (Cl A)

      7/12/91

      AMWI

      Air Midwest, Inc.

      7/15/91

      ROYL

      Royalpar Industries, Inc.

      7/15/91

      ROYLW

      Royalpar Industries, Inc. (Wts)

      7/15/91

      FBRC

      Fabricland, Inc.

      7/17/91

      BENHQ

      BankEast Corporation

      7/18/91

      NUME

      Numerica Financial Corporation

      7/22/91

      RGLD

      Royal Gold, Inc.

      7/22/91

      SHRT

      Shirt Shed, Inc. (The)

      7/22/91

      VITC

      Victoria Creations, Inc.

      7/22/91

      VBMV

      Viejo Bancorp

      7/22/91

      AXXXR

      Artel Communications Corporation (Rts)

      7/23/91

      PFCP

      Perpetual Financial Corporation

      7/23/91

      PFCPP

      Perpetual Financial Corporation (Pfd)

      7/23/91

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, Market Listing Qualifications, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 91-54 Labor Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      Securities markets and the Nasdaq® system will be closed on Monday, September 2, 1991, in observance of Labor Day. "Regular way" transactions made on the preceding business days will be subject to the settlement-date schedule listed below:

      Trade Date

      Settlement Date

      Reg. T Date*

      Aug. 23

      Aug. 30

      Sept. 4

      26

      Sept. 3

      5

      27

      4

      6

      28

      5

      9

      29

      6

      10

      30

      9

      11

      Sept. 2

      Markets Closed

      -

      3

      10

      12

      Brokers, dealers, and municipal securities dealers should use these settlement dates for purposes of clearing and settling transactions pursuant to the NASD Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at (212) 858-4341.

      * Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)m, make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Reg. T Date."

    • 91-53 Misuse of Treasury Form PD 1832, "Special Form of Detached Assignment for United States Registered Securities"

      SUGGESTED ROUTING:*

      Senior Management
      Government Securities
      Legal & Compliance
      Operations
      *These are suggested departments only. Others may be appropriate for your firm.

      The NASD recently has been advised by the Department of the Treasury, Bureau of the Public Debt, of the reported misuse of federal government Form PD 1832, "Special Form of Detached Assignment for United States Registered Securities."

      Form PD 1832 is used to certify assignments of registered physical Treasury securities. It should be used only at the discretion of the Bureau of the Public Debt or a Federal Reserve Bank, acting as Treasury's fiscal agent, in one or more of the following circumstances:

      • To correct a defective assignment already made on the back of a registered physical security.

      • To accommodate owners required to sign a large number of securities.

      • To obtain the assignment of two or more geographically separated assignors.

      Several incidents have been reported to the Bureau of the Public Debt whereby Form PD 1832 was erroneously being used to represent, convey interest in, or prove ownership of a security. The form is not intended for use without an accompanying registered physical Treasury security. As such, it should not be used to assign or establish an interest in book-entry or agency securities.

      Form PD 1832 does not by itself convey any interest nor does it imply any ownership in securities described on its face. Even when properly certified and accompanied by registered physical securities, this form is not to be used unless authorized by the Bureau of the Public Debt or a Federal Reserve Bank.

      Report any attempted misuse of Form PD 1832 or direct any questions regarding the form to Walter Childs, Director, Division of Securities Accounts, Bureau of the Public Debt, at (202) 287-4040.

    • 91-52 SEC Approval of Amendments to the Resolution of the Board of Governors — Notice to Membership and Press of Suspensions, Expulsions, Revocations, and Monetary Sanctions Under Article V, Section 1 of the Rules of Fair Practice Regarding the

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Registration
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On July 15, 1991, the SEC approved an NASD rule change to provide three clarifications to the Resolution of the Board of Governors — Notice to Membership and Press of Suspensions, Expulsions, Revocations, and Monetary Sanctions under Article V, Section 1 of the Rules of Fair Practice (the "Resolution"). The Resolution has been amended to provide that (1) sanctions imposed in District Business Conduct Committee (DBCC) decisions do not become effective and will not be publicized until 45 days after the DBCC's decision; (2) expulsions and bars imposed pursuant to an "offer of settlement, or an acceptance, waiver and consent" are effective and may be published immediately on approval by the National Business Conduct Committee (NBCC); and (3) all final decisions of the NASD that call for bars or expulsions will become effective immediately. The amended text follows this notice.

      BACKGROUND

      On July 15, 1991, the SEC approved three NASD rule changes to the Resolution dealing with the effectiveness of and publication for the NASD membership and the press of disciplinary sanctions that have been imposed. The three changes conform the Resolution to current practices of the NASD with respect to the effectiveness of and publicity on disciplinary actions.

      SUMMARY OF AMENDMENTS

      The Resolution currently provides that a DBCC decision may become effective, and thus its sanctions publicized, after a 30-day period following the date of the decision. This suggests that a DBCC decision may become effective and its sanctions made known to the public during the last 15 days of the 45-day period in which the NBCC may call a decision for review and the respondent may appeal the decision to the NBCC. As amended, the Resolution now clarifies that the sanctions imposed in the DBCC decisions that are not appealed to or called for review by the NBCC do not become effective until 45 days after the DBCC's decision. Furthermore, notices of decisions imposing monetary sanctions of $10,000 or more, or penalties of expulsion, revocation, suspension, and/or the barring of a person from being associated with all members shall not be publicized until 45 days after the DBCC's decision.

      It is current practice for respondents in NASD disciplinary actions to waive all rights to appeal when they agree to an offer of settlement ("Offer") or Letter of Acceptance, Waiver and Consent (AWC). Once the Offer or AWC is approved by the NBCC, there is no need for a delay in the effectiveness or publication of expulsions or bars since there can be no SEC review. As amended, the Resolution now provides that expulsion and bars imposed pursuant to an Offer or AWC are effective and may be published immediately on approval by the NBCC.

      The Resolution currently provides that all decisions of the Board, if not appealed to the SEC, are effective on the later of 30 days after the date of the decisions or on a date specified by the Association. The current practice is to make any bars or expulsions effective immediately on issuance of the decision. As amended, the Resolution is revised to provide that a final NASD decision issued by either the NBCC or the Board that calls for a bar or expulsion is effective immediately regardless of whether it is appealed to the SEC. All other final decisions of the NBCC or Board, if not appealed to the SEC, continue to be effective on the later of 30 days after the date of the decision or on a date specified by the Association.

      Questions concerning this notice may be directed to P. William Hotchkiss, Director, Surveillance, at (202) 728-8235.

      RULES OF FAIR PRACTICE

      ARTICLE V

      (Note: New language is underlined; deleted language is in brackets.)

      Sec. 1 Sanctions for Violation of the Rules

      * * * * *

      Resolution of the Board of Governors

      Notice to Membership and Press of Suspensions, Expulsions, Revocations, and Monetary Sanctions

      * * * * *

      If a decision of a District Business Conduct Committee is not appealed to or called for review by the [Board of Governors] NBCC, the order of the District Business Conduct Committee shall become effective on a date set by the Association but not before the expiration of 45 [30] days after the date of decision. Notices of decisions imposing monetary sanctions of $10,000 or more or penalties of expulsion, revocation, suspension and/or the barring of a person from being associated with all members shall promptly be transmitted to the membership and to the press, concurrently; provided, however, no such notice shall be sent prior to the expiration of 45 [30] days from the date of the said decision.

      Notwithstanding the preceding paragraph, expulsions and bars imposed pursuant to the provisions of Article II, Sections 10 and 11 of the Code of Procedure shall become effective upon approval or acceptance by the National Business Conduct Committee, and publicity regarding any sanctions imposed pursuant to Article II, Sections 10 and 11 of the Code may be issued immediately upon such approval or acceptance.

      * * * * *

      If a final decision of the [Board of Governors] Association is not appealed to the Securities and Exchange Commission, the [decision] sanctions specified in the decision (other than bars and expulsions) shall become effective on a date established by the Association but not before the expiration of 30 days after the date of the decision. Bars and expulsions, however, shall become effective upon issuance of the decision, unless the decision specifies otherwise. Notices of decisions imposing monetary sanctions of $10,000 or more or penalties of expulsion, revocation, suspension and/or the barring of a person from being associated with all members shall promptly be transmitted to the membership and to the press, concurrently; provided, however, no such notice shall be sent prior to the expiration of 30 days from the date of the said decision.

    • 91-51 Request for Comments on Proposed Changes to Schedule C to the NASD By-Laws Regarding the Sale of Partnership Debt by Direct Participation Programs Representatives and Principals; Last Date for Comments: September 25, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Registration
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD requests comments on proposed amendments to Schedule C to the NASD By-Laws that would permit Direct Participation Programs Representatives and Principals to sell partnership debt. The text of the amendments follows this notice.

      DISCUSSION

      Since the implementation of the direct participation programs registration categories in the early 1980s, the NASD has consistently interpreted the relevant provisions of Schedule C to apply only to the sale of equity interests in direct participation programs as this term is defined in Part II, Section 2(e)(ii) of Schedule C to the By-Laws. In recent years, however, partnership syndicators have begun to issue debt securities of direct participation programs, usually promissory notes, for sale to "qualified plans" as that term is defined under the Employee Retirement Income Security Act (ERISA) regulations.

      The principal reason for issuing the security as a debt instrument is to avoid the receipt of unrelated business taxable income (UBTI) as part of the distribution to debtholders. The NASD believes that these debt instruments are equivalent to equity interests in a partnership and would be offered as equity if not for the adverse tax consequences that would occur.

      The NASD is proposing amendments to Schedule C that would permit the sale of partnership debt by direct participation registrants. The NASD believes this to be a reasonable response to the evolution noted above in the syndication business that does not compromise the limited scope of the direct participation registration categories. Since this change would replace past interpretations of the direct participation programs registration provisions, the NASD requests comment from members and other interested parties before the amendments are presented to the NASD Board of Governors for adoption.

      Questions may be directed to Carole Hartzog in the Qualifications Department at (301) 590-6696 or Craig Landauer in the Office of General Counsel at (202) 728-8291.

      Written comments should be forwarded to Stephen Hickman, Office of the Secretary, National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, DC 20006-1506. Comments should be received by September 25, 1991.

      TEXT OF PROPOSED SCHEDULE C CHANGES

      (Note: New language is underlined.)

      Part II, Section (2)(e)(i)a Of Schedule C to the NASD By-Laws

      REGISTRATION OF PRINCIPALS

      (2) Categories of Principal Registration
      (e) Limited Principal Direct Participation Programs
      (i) Each person associated with a member who is included within the definition of principal in Part II, Section (1) hereof may register with the Corporation as a Limited Principal — direct participation programs if:
      a. his activities in the investment banking and securities business are limited solely to the equity interests in or the debt of direct participation programs as defined in Part II, Section (2)(e)(ii) hereof;

      Part III, Section (2)(c)(i)a Of Schedule C to the NASD By-Laws

      REGISTRATION OF REPRESENTATIVES

      (2) Categories of Representative Registration
      (c) Limited Representative Direct Participation Programs
      (i) Each person associated with a member who is included within the definition of a representative in Part III, Section (1) hereof may register with the Corporation as a Limited Representative — direct participation programs if:
      a. his activities in the investment banking or securities business are limited to the solicitation, purchase and/or sale of equity interests in or the debt of direct participation programs as defined in Part II, Section (2)(e)(i) hereof;

    • 91-50 NASD Board Authorizes Industry Committee to Design Program to Assure Continuing Qualifications of Securities Industry Professionals

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Registration
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD Board of Governors has decided to move forward with plans to develop an industry-wide program of continuing education and assessment for the securities personnel registered with the NASD. The Board authorized the NASD's Membership Committee to develop a program in which member firms have the option either to adopt a continuing education program for registered personnel that must include an assessment capability and be approved by the NASD, or require their registered personnel to undergo periodic assessment by the NASD of their knowledge in their areas of responsibility. A "grandfather" provision will be available to individuals with significant industry experience and no disciplinary histories.

      BACKGROUND AND DISCUSSION

      In June 1990, the NASD circulated to members in Notice to Members 90-38 a proposed concept for continuing assessment of registered representatives. The proposal resulted from widespread concerns in the industry and among state securities regulators that the proliferation of new securities products, as well as new laws and regulations, may be creating a need for a formal program to provide assurances that minimum knowledge levels are being maintained by securities industry professionals after their initial registration.

      The North American Securities Administrators Association (NASAA) has advised the NASD that several state securities administrators are considering the institution of formal continuing education requirements for the securities industry. Both the NASD and NASAA are concerned that the institution of such requirements on a state-by-state basis could proliferate and that these requirements may differ widely among the states.

      More than 100 member firms and securities industry organizations submitted comments and suggestions in response to Notice to Members 90-38.

      After carefully considering the comments, the NASD concluded that the self-regulated securities industry should take the lead in increasing the standards of professionalism for its practitioners. Investors and the general public should feel confident that securities professionals have a thorough knowledge of the investment products they sell, the rules they must follow, and the increasingly complex financial markets in which they operate.

      PLANNED ACTIONS

      In an effort to develop an appropriate vehicle to demonstrate competency and professionalism of registered personnel, the NASD Board at its July 19, 1991 meeting authorized the NASD Membership Committee, composed of industry representatives, to begin developing details of a program that would give member firms two options. One would be to adopt a continuing education program for registered personnel that must include an assessment capability and be approved by the NASD. The other would be to require their registered personnel to undergo periodic assessment by the NASD of their knowledge in their areas of responsibility.

      The Board authorized the Committee to design the program with a limited "grandfather" provision in order to exempt from these requirements persons with significant industry experience and no disciplinary histories.

      Using those guiding concepts, the Board asked the Committee, which is chaired by Ronald E. Buesinger of A.G. Edwards & Sons, Inc., to report to it this year with specific proposals in the following areas:

      • the standards that the NASD will apply in reviewing and approving continuing education and assessment programs adopted by member firms;

      • the manner in which the NASD will monitor members' continuing education and assessment programs;

      • the role, if any, for the NASD in providing educational materials for continuing education programs conducted by and for members;

      • the terms of the "grandfather" provision;

      • the number of years in the assessment cycle, with possible variations for limited representatives;

      • the consequences for an individual who fails to complete successfully either the member's continuing education program or the NASD's assessment program; and

      • the specific actions to be taken with NASAA to ensure that the NASD program will be accepted by any state contemplating continuing education or assessment programs of its own.

      Questions concerning this notice may be directed to Frank J. McAuliffe, Vice President, Qualifications and Membership, at (301) 590-6694.

    • 91-49 Proposed New Rule Re: Definition of "Executive Representative" in Article Section 3 of the NASD By-Laws; Last Voting Date: September 25, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Registration
      *These are suggested departments only. Others may be appropriate for your firm.

      MAIL VOTE

      EXECUTIVE SUMMARY

      The NASD invites members to vote on proposed changes to the definition of "Executive Representative" that are intended to better assure proper communication with members on important matters.

      BACKGROUND

      In Notice to Members 91-9 (February 1991), the Board requested comment from members on proposed changes to the definition of "Executive Representative" in Article III, Section 3 of the NASD By-Laws. The current definition of "Executive Representative" is quite broad and has, in the past, led to the designation as Executive Representative of persons who have limited authority in their firms. Since all important membership communications are directed to Executive Representatives, who are eligible to cast votes for their respective firms, the Board was concerned that important matters may not be directed to the right person at each member.

      The Board proposed, therefore, to amend the definition of Executive Representative to require that only persons of authority in member firms be so designated to the NASD. The Board also noted that the Executive Representative list will be maintained separately from the firm contact list in the Central Registration Depository (CRD). This will assure that the Executive Representative will receive all important NASD communications and that routine CRD notices will be directed to the right persons at the member.

      COMMENTS RECEIVED

      Notice to Members 91-9 elicited five (5) comments from members. Three (3) of the five comments supported the proposed changes without reservation.

      Two (2) commenters, both affiliated with insurance company members, were critical of the proposal, noting that, where an insurance company itself is a member, securities activities are likely to be handled by persons in "middle management." In the past, the NASD has taken a "carved-out" entity approach toward insurance company members and applied its requirements only to the middle managers in charge of the insurance company's securities sales operation. It would appear that this approach is equally applicable to the Executive Representative and that this could be conveyed to insurance company members administratively, as in the past. Both insurance-affiliated commenters also questioned the appropriateness of the NASD substituting its judgment for that of the member in appointing a person to represent the member with the NASD.

      After consideration of these comments, the Board concluded that the unique situation presented by certain insurance companies, where the entire insurance company is a member, can be handled administratively as has been the case in the past without introducing verbal complications to the By-Laws definition of Executive Representative. The Board also believes the NASD has a stake in the determination of the primary contacts in members and that the proposed definition specifying the proper level of a person in members to receive communications and vote on NASD matters is a justifiable exercise of NASD authority. Accordingly, the NASD Board of Governors recommends that members vote their approval of the proposed changes to the definition of Executive Representative.

      Please mark the attached ballot according to your convictions and return it in the enclosed stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than September 25, 1991.

      Questions regarding this notice may be directed to John Vaughn in the Membership Department at (301) 590-6865 or Craig Landauer in the Office of General Counsel at (202) 728-8291.

      TEXT OF PROPOSED BY-LAW CHANGE

      Article III, Section 3

      NASD By-Laws

      EXECUTIVE REPRESENTATIVE

      (Note: New text is underlined; deleted text is in brackets.)

      Sec. 3. Each member shall appoint and certify to the Secretary of the Corporation one "executive representative" who shall represent, vote and act for the member in all the affairs of the Corporation, except that other executives of a member may also hold office in the Corporation, serve on the Board of Governors or committees of the Corporation, or otherwise take part in the affairs of the Corporation. A member may change its executive representative upon giving written notice thereof to the Secretary, or may, when necessary, appoint, by written notice to the Secretary, a substitute for its executive representative. An executive representative of a member or a substitute shall [preferably] be a[n executive officer] member of senior management and registered principal of the member[,]. [if a corporation, a partner in case of a partnership, and the member himself if an individual, but he may be an employee and registered principal of the member, if given authority to act for the member in the course of the Corporation's activities.]

    • 91-48 Proposed New Rule Re: Definition of Branch Office in Article III, Section 27(g)(2) and (g)(3) of the Rules of Fair Practice; Last Voting Date: September 25, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Registration
      *These are suggested departments only. Others may be appropriate for your firm.

      MAIL VOTE

      EXECUTIVE SUMMARY

      The NASD invites members to vote on proposed amendments to Article III, Section 27(g)(2) and a new Paragraph (g)(3) of the Rules of Fair Practice that would codify certain interpretations by the NASD regarding the definition of branch office.

      BACKGROUND

      In 1989, the NASD Qualifications Committee, a predecessor to the current NASD Membership Committee, issued several interpretations under Article III, Section 27(g)(2) of the NASD Rules of Fair Practice, which defines branch office. These interpretations were intended to clarify the rule's definition of a branch office and the exemption from branch-office registration available for nonbranch business locations that meet certain conditions under the rule. The interpretations were reviewed by the NASD Board of Governors in November 1989 and published in the February 1990 issue of NASD Regulatory & Compliance Alert.

      While these interpretations clarify the rule's intent, they also materially expand the range of actions that may be performed in the field without triggering the branch-office registration requirement. The absence in the rule itself of language reflecting these interpretations has resulted in some confusion among members, especially with the passage of time. To address this situation, the NASD Board proposes to codify the earlier interpretations into the branch-office definition in the Supervision Rule (Article III, Section 27 of the NASD Rules of Fair Practice). Since these interpretations have been used for more than a year and have been found workable in practice, the Board believes it is appropriate to proceed directly to a membership vote without the formality of a comment period.

      SUMMARY OF PROPOSED AMENDMENTS

      Under the current rule, a location may be exempt from registration as a branch office if it is identified to the public only in telephone book listings, business cards, or stationery that also include the address and telephone number of the branch office or office of supervisory jurisdiction (OSJ) responsible for supervising the nonbranch business location.

      Under the proposed amendments, members' sales literature (as this term is defined in Article III, Section 35(a)(2) of the NASD Rules of Fair Practice) may include the local address of a non-branch business location. However, the literature also must identify the location and telephone number of the appropriate supervisory branch office or OSJ of the member. In addition, members' advertisements (as this term is defined in Article III, Section 35(a)(1) of the NASD Rules of Fair Practice) may include a local telephone number and/or local post-office box of a nonbranch location if the advertisements also identify the location and telephone number of the appropriate branch office or OSJ. These advertisements may not include the address of the nonbranch location.

      A new Paragraph (g)(3) allows a member to use the firm's main-office address and telephone number for reply purposes on sales literature, advertisements, business cards, and business stationery. However, a member wishing to list such a central site instead of a supervisory branch or OSJ must show that it has in place a significant and geographically dispersed supervisory system appropriate to its business. In addition, any complaints coming through the central site have to be sent to and resolved in conjunction with the office or offices with jurisdiction over the nonbranch business location.

      The Board also notes that these exemptions from the branch-office definition were intended as a reasonable accommodation to firms with widely dispersed sales personnel selling limited product lines such as variable contracts and mutual funds. Branch-office registration would still be required for locations that: (1) perform any function under the definition of Office of Supervisory Jurisdiction; (2) publicly display signage other than on lobby directories or doors in office-building internal corridors; (3) operate from public areas of buildings, such as bank branches, even when such locations are temporarily staffed; and (4) advertise an address in any public media.

      REQUEST FOR VOTE

      The NASD Board of Governors believes that these changes to the Rules of Fair Practice are necessary and appropriate and recommends that members vote their approval. Please mark the enclosed ballot according to your convictions and return it in the enclosed, stamped envelope to the Corporation Trust Company. Ballots must be postmarked no later than September 25, 1991.

      Questions concerning this notice may be directed to Frank J. McAuliffe in the Membership & Qualifications Department at (301) 590-6694, R. Clark Hooper in the Advertising Department at (202) 728-8330, or Craig Landauer in the Office of General Counsel at (202) 728-8291.

      TEXT OF PROPOSED CHANGES TO ARTICLE III, SECTION 27 OF THE RULES OF FAIR PRACTICE

      Supervision

      (Note: New text is underlined; deleted text is in brackets.)

      (g)(2) "Branch Office" means any location identified by any means to the public or customers as a location at which the member conducts an investment banking or securities business, excluding:
      (i) any location identified [solely] in a telephone directory line listing or on a business card or letterhead, which listing, card, or letterhead also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch location are directly supervised [.];
      (ii) any location referred to in a member advertisement, as this term is defined in Article HI, Section 35(a)(1) of the NASD Rules of Fair Practice, by its local telephone number and/or local post office box provided that such reference may not contain the address of the non-branch location and, further, that such reference also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch locations are directly supervised; or
      (iii) any location identified by address in a member's sales literature, as this term is defined in Article III, Section 35(a)(2) of the NASD Rules of Fair Practice provided that the sales literature also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch locations are directly supervised.
      (g)(3) A member may substitute a central office address and telephone number for the supervisory branch office and OSJ locations referred to in paragraph (g)(2) above provided it can demonstrate to the NASD District Office having jurisdiction over the member that it has in place a significant and geographically dispersed supervisory system appropriate to its business and that any investor complaint received at the central site is provided to and resolved in conjunction with the office or offices with responsibility over the non-branch business location involved in the complaint.

    • 91-47 Nasdaq National Market System (Nasdaq/NMS) Additions, Changes, and Deletions As of June 12, 1991

      SUGGESTED ROUTING:*

      Internal Audit
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      As of June 12, 1991, the following 38 issues joined Nasdaq/NMS, bringing the total number of issues to 2,560:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      OWWH

      OW Office Warehouse, Inc.

      5/15/91

      500

      DNKG

      Danek Group, Inc.

      5/17/91

      1000

      ISIP

      Isis Pharmaceuticals, Inc.

      5/17/91

      1000

      AURA

      Aura Systems, Inc.

      5/21/91

      1000

      ZENL

      Zenith Laboratories, Inc.

      5/21/91

      1000

      IMUL

      ImmuLogic Pharmaceutical Corporation

      5/22/91

      1000

      WCLX

      Wisconsin Central Transportation Corporation

      5/22/91

      500

      ENVY

      Envoy Corporation

      5/23/91

      1000

      SCGNZ

      SciGenics, Inc.

      5/23/91

      200

      SOTA

      State Of The Art, Inc.

      5/23/91

      200

      BWIP

      BWIP Holding, Inc. (Cl A)

      5/24/91

      1000

      MARSB

      Marsh Supermarkets, Inc. (Cl B)

      5/28/91

      1000

      PNDR

      Ponder Industries, Inc.

      5/28/91

      500

      ASHBY

      Automated Security (Holdings) PLC

      5/29/91

      500

      WTXT

      Wheatley TXT Corp.

      5/31/91

      1000

      AMCE

      American Claims Evaluation, Inc.

      6/4/91

      500

      CBLM

      CBL Medical, Inc.

      6/4/91

      1000

      CBLMW

      CBL Medical, Inc. (Wts)

      6/4/91

      1000

      CEMC

      Century MediCorp

      6/4/91

      1000

      HBHC

      Hancock Holding Company

      6/4/91

      200

      MAROA

      Marrow-Tech Incorporated (Cl A)

      6/4/91

      1000

      MOOR

      Moorco International Inc.

      6/4/91

      1000

      PTON

      Proteon, Inc.

      6/4/91

      1000

      RENT

      Rentrak Corporation

      6/4/91

      1000

      CASH

      C.A. Short International, Inc.

      6/4/91

      1000

      TSIN

      TSI International, Inc.

      6/4/91

      1000

      CHKE

      Cherokee Inc.

      6/5/91

      1000

      LCUT

      Lifetime Hoan Corporation

      6/5/91

      1000

      RAGS

      Rag Shops, Inc.

      6/5/91

      500

      USHO

      U.S. HomeCare Corporation

      6/5/91

      200

      AETC

      Applied Extrusion Technologies, Inc.

      6/6/91

      1000

      CNSI

      Cambridge NeuroScience Research, Inc.

      6/6/91

      1000

      CRGN

      Cragin Financial Corp.

      6/6/91

      1000

      ICOS

      ICOS Corporation

      6/6/91

      1000

      ABPCA

      Au Bon Pain Co., Inc. (Cl A)

      6/7/91

      1000

      PLSE

      Pulse Engineering, Inc. (Cl A)

      6/11/91

      1000

      QLMD

      Qual-Med, Inc.

      6/11/91

      1000

      QDEK

      Quarterdeck Office Systems, Inc.

      6/11/91

      1000

      Nasdaq/NMS Symbol and/or Name Changes

      The following changes to the list of Nasdaq/NMS securities occurred since May 13, 1991:

      New/Old Symbol

      New/Old Security

      Date of Change

      MARSA/MARS

      Marsh Supermarkets, Inc. (Cl A)/Marsh Supermarkets, Inc.

      5/16/91

      SFLD/BMAC

      Seafield Capital Corporation/BMA Corporation

      5/16/91

      GRNT/GRNT

      Grant Tensor Geophysical Corporation/Grant-Norpac, Inc.

      5/20/91

      LABK/CBNE

      Lafayette American Bancorp, Inc./Constitution Bancorp of New England, Inc.

      5/21/91

      GROV/GROV

      Grove Bank/Grove Bank for Savings

      5/24/91

      SNLB/SNFS

      Second National Bancorporation/Second National Federal

       
       

      Savings Bank

      5/28/91

      LACE/FWCH

      Alpine Lace Brands, Inc./First World Cheese, Inc.

      6/3/91

      CHLN/CHLN

      Chalone Wine Group, Ltd. (The)/Chalone, Inc.

      6/5/91

      HARL/HARL

      Harleysville Savings Bank/Harleysville Savings Association

      6/11/91

      Nasdaq/NMS Deletions

      Symbol

      Security

      Date

      PVNA

      Provena Foods, Inc.

      5/14/91

      RAXRC

      Rax Restaurants, Inc.

      5/15/91

      WCBK

      Workingmens Corporation

      5/15/91

      SNSR

      Sensormatic Electronics Corporation

      5/16/91

      NVBC

      Napa Valley Bancorp

      5/17/91

      CITGS

      Citizens Growth Properties

      5/20/91

      MMOA

      Medical Management of America, Inc.

      5/20/91

      VFEDC

      Valley Federal Savings and Loan Association

      5/21/91

      BNTN

      Benton Oil and Gas Company

      5/24/91

      JMLC

      James Madison Limited

      5/28/91

      MOTO

      Moto Photo, Inc.

      5/29/91

      MOTOP

      Moto Photo, Inc. (Pfd)

      5/29/91

      MOTOZ

      Moto Photo, Inc. (Wts)

      5/29/91

      UHSIB

      Universal Health Services, Inc. (Cl B)

      6/7/91

      HHGRW

      Helian Health Group, Inc. (Wts)

      6/11/91

      THFI

      Plymouth Five Cents Savings Bank

      6/11/91

      STWQE

      Statewide Bancorp

      6/11/91

      TTOI

      TEMPEST Technologies, Inc.

      6/11/91

      TWIN

      Twin Star Productions

      6/11/91

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, Market Listing Qualifications, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (301) 590-6429.

    • 91-46 Request for Comments on Exemption for Directly Marketed Mutual Funds From Article III, Section 21(c)(2)(ii) and (iii) of the Rules of Fair Practice Re: Customer Account Information Regarding Employment; Last Date for Comments: July 31, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Internal Audit
      Legal & Compliance
      Mutual Fund
      Operations
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On January 1, 1991, amendments to Article III, Sections 2 and 21 (c) of the Rules of Fair Practice ("Rules"), which require NASD members to make reasonable efforts to obtain information pertaining to customer accounts, became effective. Since that time, the NASD has received and considered comments from members of the mutual fund industry regarding their objections to the collection of customers' employment data pursuant to Article III, Subsections 21(c)(2)(ii) and (iii). Members of the industry have argued that the collection of such employment data is really intended to permit members to evaluate the suitability of an investment recommendation for a customer, and that such data is unnecessary for directly marketed mutual funds because no investment recommendation is ever involved.

      The NASD is considering an interpretation of Article III, Section 21 (c) that would state that the provisions of Subsections (2)(ii) and (iii) thereof are inapplicable to directly marketed mutual funds. In addition, the NASD wishes to determine whether other segments of the industry also desire an exemption for similarly valid reasons. Accordingly, the NASD is soliciting member comment on this requested exemption.

      BACKGROUND AND SUMMARY OF PROPOSED INTERPRETIVE EXEMPTION

      On May 2, 1990, the SEC approved an NASD rule change that requires NASD members to make reasonable efforts to obtain information pertaining to customer accounts.1 These amendments became effective January 1, 1991.2

      As amended, Section 21 (c) requires a member to make reasonable efforts to obtain, prior to the settlement of the initial transaction in a noninstitutional customer account, the tax identification or Social Security number of the customer, and the occupation and name and address of the employer of each customer for each account. In addition, the member must inquire as to whether the customer is associated with another member.

      Amended Section 21(c) specifically excludes transactions and accounts in which investments are limited to money market mutual funds.

      Members of the mutual fund industry have asked the NASD to interpret amended Section 21(c) so that directly marketed mutual funds are also exempt from the obligation to gather the employment data required by Subsections 21(c)(2)(ii) and (iii). The mutual fund industry members have argued that they sell shares of mutual funds to the public primarily through direct mail and through newspaper, magazine, radio, and television advertisements. They contend that interested investors are encouraged to secure a prospectus that contains all the essential information necessary for the prospective customer to make an informed investment decision, and that the investor may also utilize a variety of other source materials in deciding whether to purchase the shares of a mutual fund. In such a situation, the members argue that the investor makes his or her own investment decision, and that the NASD member's role is limited to furnishing information on request and answering factual questions.

      Section 21(c) requires each NASD member to "make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, the . . . [employment data] . . . to the extent it is applicable to the account..." Because no investment recommendation is made by the NASD member that effects a mutual fund transaction, the members argue that the employment data should be deemed not "applicable to the account." The members argue that the only purpose for collecting employment data is to evaluate the suitability of an investment recommendation for the account in later instances. The members state that the expense of collecting and storing the unnecessary employment data must either be absorbed by the member firm or passed on to the investing public through one of the mutual fund's agents. They also assert that data processing programs must be modified to create new data fields for the employment data, which inevitably increases expense and slows down the other data processing associated with essential functions. Members argue that account applications are already very long and complex documents, and that adding more requests for information increases the possibility that an investor's application will be incomplete and that his or her investment will be delayed. They contend that significant expense is also incurred when inventory of existing applications must be discarded and new forms printed.

      The NASD believes that there is merit to the requested interpretation of Section 21(c), and is soliciting comments from other members of the industry regarding this instance or similar requests for interpretive exemptions for their products. Such requests should specifically address any similarities to directly marketed mutual funds, (i.e., no possibility of recommendation to customers' accounts) and any other arguments that might justify an interpretive exemption.

      The NASD encourages all members and other interested persons to comment on the proposed interpretive exemption. Comments should be directed to:

      Stephen D. Hickman, Secretary
      National Association of Securities
      Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Comments must be received no later than July 31, 1991. Comments received by this date will be considered by the NASD National Business Conduct Committee and Board of Governors.

      Questions concerning this notice may be directed to Deborah F. Mcllroy, Senior Attorney, NASD Office of General Counsel, at (202) 728-8816.


      1 See Securities and Exchange Commission Release No. 34-27982 (May 2, 1990), 55 F.R. 19402 (May 9, 1990).

      2 See Securities and Exchange Commission Release No. 34-28312 (August 3, 1990), 55 F.R. 32722 (August 10, 1990).

    • 91-45 NASD/NYSE Joint Memo on Chinese Wall Policies and Procedures

      SUGGESTED ROUTING:*

      Senior Management
      Corporate Finance
      Internal Audit
      Legal & Compliance
      Research
      Syndicate
      Trading
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      The National Association of Securities Dealers, Inc., the New York Stock Exchange, Inc., and a committee of the Securities Industry Association have developed a joint memorandum that explains the "minimum elements" of adequate Chinese Wall policies and procedures pursuant to the requirements of the Insider Trading and Securities Fraud Enforcement Act of 1988. The memo, which has been reviewed by the Securities and Exchange Commission, is reprinted on the following pages.

      National Association of Securities Dealers, Inc.

      NYSE New York Stock Exchange, Inc.

      TO: MEMBERS AND MEMBER ORGANIZATIONS

      DATE: JUNE 21, 1991

      SUBJECT: CHINESE WALL POLICIES AND PROCEDURES

      I. Introduction

      In November 1988, Congress enacted the Insider Trading and Securities Fraud Enforcement Act of 1988 ("The 1988 Act" or "ITSFEA") which, among other things, requires all broker-dealers "to establish, maintain and enforce written procedures reasonably designed" to prevent the misuse of material, non-public information by employee and proprietary accounts. The 1988 Act also grants the Securities and Exchange Commission ("SEC" or "Commission") broad rule-making authority concerning these so-called Chinese Wall procedures. Under these circumstances, the SEC's Division of Market Regulation ("SEC Division") undertook a comprehensive review to identify, analyze and weigh the effectiveness of Chinese Wall policies and procedures of broker-dealers and, in March 1990, issued a report of its findings, conclusions and recommendations.

      The SEC Division's report identified what it viewed as necessary elements of an adequate Chinese Wall:
      These minimum elements include review of employee and proprietary trading, memorialization and documentation of firm procedures, substantive supervision of inter-departmental communication by the firm's compliance department, and procedures concerning proprietary trading when the firm is in possession of material, non-public information.
      The SEC Division report was particularly concerned about the need for firms to "maintain documentation sufficient to re-create actions taken pursuant to Chinese Wall procedures" and the report urged self-regulatory organizations ("SROs") to develop standards of documentation for their member firms. The report also concluded that SEC rule-making was not currently necessary since required improvements to broker-dealer Chinese Walls would best be effectuated by self-regulatory examination programs, supplemented by Commission oversight. However, the report further said that the Division will continue to monitor broker-dealer Chinese Walls closely, and will reconsider possible Commission rule-making should it determine that necessary Chinese Wall improvements are not being made.

      As a result of these concerns, the New York Stock Exchange, Inc. ("NYSE"), the National Association of Securities Dealers, Inc. ("NASD"), and a committee of the Securities Industry Association ("SLA") representing various member organizations met on a number of occasions to determine the scope and definition of the "minimum elements" of adequate Chinese Wall procedures, including minimum standards of documentation of actions taken pursuant to such procedures. This memorandum sets forth those conclusions which have been reviewed by the SEC staff.1
      II. Memorialization of the Firm's Chinese Wall Procedures and Documentation of Actions Taken

      A firm's Chinese Wall policies and procedures must be formalized, organized and incorporated within a firm's procedural/policy manuals. The SEC Division cautioned that a "loose mixture of internal memoranda, excerpts from employee manuals and certifications" is not an adequate memorialization of these important policies and procedures.

      The need to maintain documentation sufficient to re-create actions taken pursuant to Chinese Wall procedures was considered vitally important by the SEC Division. What constitutes sufficient documentation for a particular action taken is discussed in detail hereafter. In general, a firm must maintain documentation of its written policies and procedures as well as its analyses and investigations of employee and proprietary trading in accordance with SEC record-keeping requirements.
      III. Review of Employee and Proprietary Trading

      The SEC Division concluded that firms which conduct investment banking, research or arbitrage activities must maintain some form of watch and restricted lists and conduct reviews of employee and proprietary trading in securities appearing on those lists.2 NYSE members are also required by NYSE Rules 342 and 351 to conduct and report upon such trading reviews. The firm's written procedures should address its method for determining whether proprietary trading should be restricted or prohibited once a department of the firm comes into possession of material, non-public information.

      Generally speaking, a restricted list is a current list of securities in which proprietary, employee and certain solicited customer transactions are restricted or prohibited.3 A watch list is a current list of securities that generally do not carry trading restrictions, but whose trading is subject to close scrutiny by the firm's compliance and/or legal department. Although the dissemination of a watch list generally is limited, a restricted list is usually distributed periodically throughout the broker-dealer to make employees aware of those securities that the firm is restricted or prohibited from recommending and/or trading.

      A firm's procedures should explain why, when and how a security should be placed on and deleted from a restricted list or watch list and which activities are prohibited or restricted when a security is on either list. The minimum documentation for the use of restricted and watch lists is as follows:
      a. Reasonable written standards or criteria for placing a security on and deleting a security from such lists must be established.
      b. Restricted list documentation must include the date and time the security was added to and deleted from the list. It should also include the name of each contact person (such as the involved investment banker or research analyst) who was responsible for the addition or deletion and can answer specific questions concerning the timing and circumstances of the addition or deletion.
      c. Watch list records must include the date the security was added to and deleted from the list. They should also include the name of each contact person (such as the involved investment banker or research analyst) who was responsible for the addition or deletion and can answer specific questions concerning the timing and circumstances of the addition or deletion.
      d. The firm's rationale for additions to and deletions from the watch and restricted lists need not be recorded as long as the name of the contact person is recorded. This person should know the rationale if questioned by the SEC or an SRO.
      The firm's procedures must adequately address how the firm monitors employee trading outside the firm for transactions in a watch list or restricted list security.4 If the firm permits an employee to maintain a securities account with another broker-dealer, it must require the employee to have duplicate confirmations and account statements sent to it as the employing member with supervisory responsibility. See NYSE Rule 407 and NASD Rules of Fair Practice (Article III, Section 28).

      The firm's procedures should specify the time period covered and frequency of any review of proprietary and employee trading and the department or person responsible for the review. The procedures also should impose a requirement that the reviewer initial or sign a record or form reflecting the completion of the review.

      Documentation is a required element in evidencing routine reviews of employee and proprietary trading. Each firm should also establish a manual or automated exception report, or procedure, to at least record the pertinent details of any transaction by an employee or proprietary account in a restricted list or watch list security. Additionally, firms must maintain a sample of any exception report and must be able to provide to SEC or SRO examiners data concerning proprietary or employee transactions in restricted list or watch list securities. Both lists must be maintained in accordance with SEC record-keeping requirements.

      A firm must reasonably inquire into or investigate for possible misuse of material, non-public information transactions by any employee or the firm's proprietary accounts, particularly those transactions in restricted list or watch list securities. The need for or extent of such an inquiry or investigation of an employee transaction should be determined by reasonable criteria, including consideration of the timing or unusual nature of the transaction, such as whether the employee traded on a short-term basis or in a size or dollar amount larger than his normal trading pattern. However, a failure to investigate merely because the employee worked in a "non-sensitive" department may be insufficient.

      Any investigations initiated must be documented. At a minimum, an investigation record should include: (1) the name of the security; (2) the date the investigation commenced; (3) an identification of the accounts involved; and (4) a summary of the investigation disposition. The underlying investigative records, including any analyses, inter-office memoranda and employee statements, should also be made available to the SEC or SRO staff upon request.

      Although the maintenance of a so-called "rumor" list is not a required element for an adequate Chinese Wall, some firms have employed such lists as part of their Chinese Wall monitoring systems. The SEC Division report encourages firms to do so. Securities are generally placed by the firm on a rumor list when the issuer of the security becomes the subject of rumors of a significant impending third party deal.

      Firms that do not conduct investment banking, research or arbitrage activities usually would not need to include a restricted list or watch list as part of their written procedures to prevent the misuse of material, non-public information. Nonetheless, their written procedures must include a reasonable method of periodically reviewing employee and proprietary trading for misuse of material, non-public information, given the nature and scope of the firm's business, and include reasonable provisions for investigating any suspect trades as described above. Of course, any investigation of such trading would need to be documented as described above. In addition, such a firm must have reasonable procedures for the education and training of its employees about insider trading, as discussed under Section V herein.
      IV. Supervision of Inter-Departmental Communications

      Adequate Chinese Walls must include policies and procedures reasonably designed to limit or contain the necessary flow of material, non-public information to employees who have a "need to know." They include: (1) policy statements in this regard; (2) the physical separation of the trading and sales departments from departments which regularly receive confidential information; (3) other restrictions to access, such as separate record-keeping and support systems for sensitive departments; and (4) supervision of inter-departmental communications involving material, non-public information.

      Restrictions on inter-departmental communications of material, non-public information may be designed primarily to isolate a firm's investment banking department from other departments. Occasions arise when the investment banking department requires information from the research or sales departments. Such occasions necessitate procedures that allow an investment banking employee to obtain the needed information without disclosing the purpose of the request and tipping the research or sales department. The scope and form of an information request itself may, in certain circumstances, tip the employee. In these instances, it may be necessary to bring a research or sales employee "over the wall" before making a request. Prompt notification should be made to the Compliance and/or Legal Department of any "wall crossing."

      An employee who is brought over the wall is treated as a temporary member of the investment banking department possessing material, non-public information for Chinese Wall surveillance purposes.

      In instances where employees are brought over the wall, the firm must document and maintain written records of: (1) the name of the employee brought over the wall; (2) the employee's department; (3) the date; (4) the name of the issuer(s) involved; and (5) the name of the person requesting that the wall be crossed. It is not necessary for the firm to record the reasons for bringing a particular employee over the wall if it is apparent from the employee's department affiliation.
      V. Education and Training of Employees

      Another important element of an effective Chinese Wall system, according to the SEC Division's report, is employee understanding of federal and state laws, self-regulatory organization requirements, and the firm's own policies and procedures relating to the use of material, non-public information. First, to assure every employee's awareness of such requirements, every firm must establish a procedure whereby such requirements are provided to or made available to each employee. Second, the firm's procedures must require each employee, at least once during the course of employment (e.g., upon hiring for new employees or upon initiation of this requirement for existing employees), to sign an attestation of his or her knowledge and understanding of such requirements. Such attestation or statement of understanding must be retained in the firm's files. Firms should consider requiring employees in sensitive departments (e.g., investment banking) to sign such attestation on an annual basis. Third, the firm's procedures must include some process to update employees as to new or revised requirements, and to continue their education and compliance in this area. Policy or education memos may be used for this purpose in conjunction with the "annual compliance review" for registered employees, which is required under Article III, Section 27 of the NASD Rules of Fair Practice.

      Firms are reminded that the "minimum elements" for an adequate Chinese Wall system, as discussed in this memorandum, must be addressed in the firm's written policies and procedures designed to detect and prevent insider trading and must be reasonable for individual circumstances and conditions at each firm.

      Questions concerning this memorandum may be directed to Mary Anne Furlong at (212) 656-4823 or Patricia Dorilio at (212) 656-2744 at the NYSE or William R. Schief at (202) 728-8229 at the NASD.

      John E. Pinto
      Executive Vice President
      National Association of Securities Dealers, Inc.

      Edward A. Kwalwasser
      Executive Vice President
      New York Stock Exchange, Inc.


      1 Uniform Chinese Wall procedures are not required. Moreover, whether a firm's procedures to detect and prevent insider trading are adequate under the 1988 Act will depend upon the nature and scope of the firm's business and its organizational structure.

      2 For trade review purposes, the term "employee" includes employee-related accounts.

      3 For example, most firms prohibit employee trading for one to five days in securities in which the firm has issued a research report. Some firms also use the restricted list to ensure that proprietary trading does not occur in violation of SEC Rule 10b-6.

      4 In addition, NYSE Rules 342 and 351 and the NASD Rules of Fair Practice require member firms to monitor transactions in other securities such as those in which there is a known close relationship with the issuer's management.

    • 91-44 Nasdaq National Market System (Nasdaq/NMS) Additions, Changes, and Deletions As of May 13, 1991

      SUGGESTED ROUTING:*

      Internal Audit
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      As of May 13, 1991, the following 28 issues joined Nasdaq/NMS, bringing the total number of issues to 2,540:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      PNRL

      Penril DataComm Networks, Inc.

      4/15/91

      1000

      BTRE

      Brooktree Corporation

      4/17/91

      1000

      CVTY

      Coventry Corporation

      4/17/91

      1000

      PLAT

      PLATINUM technology, inc.

      4/18/91

      500

      LESL

      Leslie's Poolmart

      4/19/91

      1000

      UAHC

      United American Healthcare Corporation

      4/23/91

      1000

      OUTL

      Outlook Graphics Corp.

      4/24/91

      1000

      SERA

      Sierra Semiconductor Corporation

      4/24/91

      1000

      CEPH

      Cephalon, Inc.

      4/25/91

      500

      IHSI

      Integrated Health Services, Inc.

      4/25/91

      1000

      ROSS

      Ross Systems, Inc.

      4/26/91

      500

      XPLX

      Xyplex, Inc.

      4/26/91

      1000

      CCLRB

      Commerce Clearing House, Inc. (Cl B)

      4/29/91

      1000

      QHRI

      Quantum Health Resources, Inc.

      4/30/91

      1000

      BSMT

      Filene's Basement Corp.

      5/1/91

      1000

      AISX

      Applied Immune Sciences, Inc.

      5/2/91

      1000

      HOME

      Homedco Group, Inc.

      5/2/91

      200

      CHPM

      Chipcom Corporation

      5/3/91

      1000

      BMDC

      Biomedical Dynamics Corporation

      5/7/91

      1000

      BIOP

      Bioplasty, Inc.

      5/7/91

      1000

      MTEC

      Machine Technology, Inc.

      5/7/91

      1000

      MYLX

      Mylex Corporation

      5/7/91

      1000

      OSGI

      OTRA Securities Group, Inc.

      5/7/91

      1000

      RHMO

      Ramsey-HMO, Inc.

      5/7/91

      1000

      SNRS

      Sunrise Technologies, Inc.

      5/7/91

      1000

      MEDI

      Medlmmune, Inc.

      5/8/91

      1000

      HILO

      Hi-Lo Automotive, Inc.

      5/9/91

      1000

      OESI

      OESI Power Corporation

      5/10/91

      1000

      Nasdaq/NMS Symbol and/or Name Changes

      The following changes to the list of Nasdaq/NMS securities occurred since April 12, 1991:

      New/Old Symbol

      New/Old Security

      Date of Change

      CAREW/CAREW

      Care Group, Inc. (The) (4/24/92 Wts)/Care Group, Inc. (The) (4/24/91 Wts)

      4/17/91

      UTLX/MOLE

      UTILX Corporation/FlowMole Corporation

      4/19/91

      IPPIF/IHEIF

      Interprovincial Pipe Line Inc./Interhome Energy, Inc.

      5/1/91

      MTEL/MTTL

      Mobile Telecommunication Technologies Corp./Mobile Telecommunication Technologies Corp.

      5/1/91

      ISLI/ISLI

      INTERSOLV/Sage Software, Inc. (INTERSOLV)

      5/6/91

      CSFCB/CSFCB CSF

      Holdings, Inc. (Cl B)/Citizens Savings Financial Corporation (Cl B)

      5/9/91

      STLG/WLBK

      Sterling Bancshares Corporation/Waltham Corporation (The)

      5/13/91

      Nasdaq/NMS Deletions

      Symbol

      Security

      Date

      ATTWY

      Attwoods pic

      4/12/91

      FEXC

      First Executive Corporation

      4/16/91

      FEXCP

      First Executive Corporation (Ser. E Dep. Pfd.)

      4/16/91

      FEXCO

      First Executive Corporation (Ser. F Dep. Pfd.)

      4/16/91

      FEXCM

      First Executive Corporation (Ser. G Dep. Pfd.)

      4/16/91

      FEXCN

      First Executive Corporation (Ser. H Dep. Pfd.)

      4/16/91

      UBKS

      United Banks of Colorado, Inc.

      4/22/91

      BNHI

      Bancorp Hawaii, Inc.

      4/24/91

      NECC

      Critical Care America, Inc.

      4/24/91

      NHLI

      National Health Laboratories, Inc.

      4/24/91

      EBMI

      E & B Marine Inc.

      4/25/91

      FFSD

      First Federal Savings Bank

      4/25/91.

      SIZZ

      Sizzler Restaurants International, Inc.

      4/29/91

      BIOW

      Banks of Iowa, Inc.

      4/30/91

      DPHZ

      DATAPHAZ, Inc.

      4/30/91

      SOBK

      Southern Bankshares Inc.

      5/1/91

      ACOM

      Astrocom Corporation

      5/1/91

      MFTN

      Metropolitan Federal Bank, a federal savings bank

      5/2/91

      PPSA

      Prospect Park Financial Corporation

      5/2/91

      JHSL

      John Hanson Bancorp, Inc.

      5/8/91

      ENST

      Enstar Group, Inc. (The)

      5/9/91

      HLCO

      Healthco International, Inc.

      5/9/91

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, Market Listing Qualifications, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (301) 590-6429.

    • 91-43 Independence Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      Securities markets and the Nasdaq system will be closed on Thursday, July 4, 1991, in observance of Independence Day. "Regular way" transactions made on the preceding business days will be subject to the settlement-date schedule listed below:

      Trade Date

      Settlement Date

      Reg. T Date*

      June 26

      July 3

      July 8

      27

      5

      9

      28

      8

      10

      July 1

      9

      11

      2

      10

      12

      3

      11

      15

      4

      Markets Closed

      -

      5

      12

      16

      Brokers, dealers, and municipal securities dealers should use these settlement dates for purposes of clearing and settling transactions pursuant to the NASD Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at(212)858-4341.

      * Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(1), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Reg. T Date."

    • 91-42 Appointment of SIPC Trustees for Two Firms

      SUGGESTED ROUTING:*

      Senior Management
      Municipal
      Operations
      Systems
      *These are suggested departments only. Others may be appropriate for your firm.

      On April 23, 1991, the United States District Court for Connecticut appointed the Securities Investor Protection Corporation (SIPC) trustee for:

      Gateway Securities, Inc.
      45 E. Putnam Avenue
      Greenwich, CT 06830.

      Questions regarding the firm should be directed to SIPC trustee:

      Securities Investor Protection Corporation
      805 15th Street, NW, Suite 800
      Washington, DC 20005-2207
      (202)371-8300.

      On April 24, 1991, the United States District Court for the Middle District of Florida appointed a Securities Investor Protection Corporation (SIPC) trustee for:

      C. J. Wright & Company, Inc.
      2403 SE 17th Street, Suite 401
      Ocala, FL 32671.

      Questions regarding the firm should be directed to SIPC trustee:

      K. Rodney May, Esquire
      Foley & Lardner
      111 North Orange Avenue, Suite 1800
      P.O. Box 2193
      Orlando, FL 32802-2193

      and

      200 W. Forsyth Street, Suite 1700
      P.O. Box 1290
      Jacksonville, FL 32201-1290.

      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.

    • 91-41 Department of Treasury Proposes Significant Amendments to the Regulations Issued on July 24, 1987 Under the Government Securities Act of 1986; Last Date for Comments: June 17, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Operations
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On April 17, 1991, the Department of Treasury issued 56 FR 15529-15532 containing proposed amendments to 17 CFR Part 403 ("Protection of Customer Securities and Balances"). The proposal would implement a buy-in requirement for mortgage-backed securities that are in fail status for more than 60 calendar days and all government securities that are needed to complete a sell order of a customer (other than a short sale) if the securities have not been received from the customer within 10 business days after the settlement date. The change would apply to all firms that are required to be registered or provide notice of their status as government securities brokers or dealers pursuant to Section 15C(a)(1) of the Securities Exchange Act of 1934. The Treasury Department's comment period expires June 17, 1991. The text of 56 FR 15529-15532 follows this notice.

      SUMMARY OF PROPOSED CHANGES

      I. PROTECTION OF CUSTOMER SECURITIES AND BALANCES
      A. Buy-ins for Fails to Receive

      Presently under 17 CFR 403.4(g), all government securities except for mortgage-backed securities are subject to the buy-in requirements of paragraph (d)(2) of SEC Rule 15c3-3. The Treasury Department proposes to amend the rule by adding a paragraph that requires all registered brokers or dealers to take prompt steps to buy in or otherwise obtain mortgage-backed securities that are in a fail-to-receive status longer than 60 calendar days.
      B. Buy-ins for Customer Sell Orders

      Presently, paragraph (m) of SEC Rule 15c3-3 does not apply to transactions in government securities. The Treasury Department proposes to add paragraph 403.4(1) that will adopt, with certain modifications, paragraph (m) of SEC Rule 15c3-3 for government securities. This would require any registered broker or dealer that executes a customer sell order (other than a short sale) and that has not obtained the securities from the customer within 10 business days after the settlement date to close out the transaction with the customer by purchasing securities of like kind and quantity.

      NASD members that wish to comment on the proposed rule change should do so by June 17, 1991. Comment letters should be sent to:

      Government Securities Regulations Staff
      Public Debt, Department of the Treasury
      999 E Street, NW, Room 209
      Washington, DC 20239-0001.

      All comment letters received will be made available for public inspection and copying at the Treasury Department Library, Room 5030, Main Treasury Building, 1500 Pennsylvania Avenue, NW, Washington, DC 20220.

      Members are requested to send copies of their comment letters to:

      Stephen D. Hickman
      Corporate Secretary
      National Association of
      Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Questions concerning this notice may be directed to Walter Robertson, NASD Associate Director, Financial Responsibility, at (202) 728-8236 or Samuel Luque, Associate Director, Financial Responsibility at (202) 728-8472.

      Federal Register / Vol. 58, No. 74 / Wednesday, April 17, 1991 / Proposed Rules

      DEPARTMENT OF THE TREASURY

      Office of the Assistant Secretary (Domestic Finance)

      17 CFR Part 403

      Implementing Regulations for the Government Securities Act of 1338

      AGENCY: Office of the Assistant Secretary (Domestic Finance), Treasury.

      ACTION: Proposed rule.

      SUMMARY: The Department of the Treasury ("Department") is issuing for comment proposed amendments to the regulations issued on July 24, 1987 (52 FR 27910) under the Government Securities Act of 1986 (the "Government Securities Act" or "GSA") (Pub. L 99-571,17 CFR Ch. IV). The proposed amendments would implement a buy-in requirement for (1) Mortgage-backed securities that are in a fail to receive status for more than 60 calendar days, and (2) all government securities that are needed to complete a sell order of a customer (other than a short sale) if the securities have not been received from the customer within ten business days after the settlement date. These proposed requirements would apply to all entities that are required to register or provide notice of their status as government securities brokers or dealers pursuant to section 15C(a)(1) of the Securities Exchange Act of 1934 ("Exchange Act").

      DATES: Comments must be submitted on or before June 17, 1991.

      ADDRESSES: Comments should be sent to: Government Securities Regulations Staff, Public Debt, Department of the Treasury, Room 209,999 E Street, NW., Washington, DC 20239-0001. Comments received will be available for public inspection and copying at the Treasury Department Library, room 5030, Main Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.

      FOR FURTHER INFORMATION CONTACT: Ken Papaj (Director) or Clifford Rones (Attorney-Advisor), Public Debt, room 209,999 E Street NW., Washington, DC 20239-0001, (202) 376-4632.

      SUPPLEMENTARY INFORMATION:

      I. Background

      Sections 403.1 and 403.4 (17 CFR 403.1 end 403.4) of the final GSA regulations incorporate the buy-in provision contained in Securities and Exchange Commission (SEC) Rule 15c3-3(d)(2) (17 CFR 240.15c3-3(d)(2)) for transactions in government securities conducted by registered brokers or dealers and registered government securities brokers or dealers. Financial institutions that filed notice as government securities brokers or dealers are subject to a similar buy-in rule set out at § 403.5(c)(1)(iii) of the GSA regulations. These rules require a government securities broker or dealer to take prompt steps to obtain possession or control of customers' fully paid and excess margin government securities that have been in a fail to receive status for more than 30 calendar days through a buy-in or other procedure. Mortgage-backed securities, however, are not subject to these buy-in requirements.

      The buy-in provisions for fails to receive of mortgage-backed securities, which had been included in the temporary GSA regulations (52 FR 19642, 19703-18705), were suspended in the final regulations. This suspension was in response to a number of industry comments which expressed concerns over the difficulties and problems of buying-in mortgage-backed securities, particularly where the customer specified delivery of a particular pool number with unique characteristics. In addition, the SEC had already suspended enforcement of the buy-in requirement as it applied to mortgage-backed securities. For these reasons, the Department suspended the buy-in provision for mortgage-backed securities pending further examination and investigation of this market The Department and staff of the SEC have worked together to gain a better understanding of the complexities and unique features of the mortgage-backed securities market that contribute to the scarcity of securities and to the larger number of deliveries not accomplished en the scheduled settlement date as compared to transactions in other government securities. Treasury and the SEC have been assisted in their efforts to develop e workable buy-in rule for mortgage-backed securities by an industry task force, organized by the Public Securities Association (PSA).1 For the reasons more fully explained below, the Department supports a 60-day buy-in rule for mortgage-backed securities.

      In addition, the Department is reproposing that paragraph (m) of SEC Rule 15C3-3 (17 CFR 240.15c3-3(m)), which requires the buying-in of securities that have not been received after tea days and that are needed to complete a customer sell order (other than a short sale), be incorporated by cross reference and be made applicable to government securities transactions conducted by registered brokers and dealers and registered government securities brokers and dealers.2 A similar provision that would apply to financial institutions that have filed notice as government securities brokers or dealers is also being proposed at § 403.5(g).
      II. Analysis
      A. Buy-ins for Fails to Receive

      Currently, 17 CFR 403.4(g), which applies to both registered brokers or dealers end registered government securities brokers or dealers, states that the buy-in requirement of paragraph 240.15c3-3fd)(2) is suspended with respect to mortgage-backed securities. The Department proposes to modify § 4Q3.4(g) such that the requirements of paragraph 240.14c3-3(d)(2) to take prompt steps to obtain possession or control of failed to receive securities through a buy-in procedure or otherwise would apply to mortgage-backed securities in a fail to receive status for more than 60 calendar days. Similarly, paragraph 403.5(c)(1)(iii), which applies to financial institutions that have filed notice as government securities brokers or dealers, would be modified to prescribe a similar buy-in requirement for these entities.

      The Department proposes a longer buy-in period of 60 calendar days for fails to receive for mortgage-backed securities (as compared to the 30 calendar day time frame applicable to other government securities that is currently in place). This difference can, for the most part, be attributed to the length of the settlement cycle associated with mortgage-backed securities, which, in many instances, may be as long as 30 days. In addition, as previously stated, the buying-in of mortgage-backed securities can be difficult to the complexities of the instruments, the particularities of the settlement process, and the scarcity in the market of specified pools, especially when a customer requests delivery of a particular pool with unique characteristics. These factors indicate that a time frame greater than 30 days may be required to successfully settle or otherwise acquire a specified mortgage-backed securities trade. Therefore, a time frame of 60 calendar days reasonably addresses the concerns of customer protection while, at the same time, taking into consideration the ability of brokers or dealers to acquire the securities.

      Historically, mortgage-backed securities have had a high fail rate because of the reasons cited above, particularly the variances in the settlement time frames. As a result, several years ago, an attempt was made by market participants to standardize the settlement process for mortgage-backed securities. Specific monthly settlement dates were assigned to each particular class or pool of mortgage-backed securities. This settlement date system has proved to be successful in alleviating the workload during the heaviest settlement periods. Although a settlement date other than a scheduled settlement date can be requested, the buyer pays a premium for this exception. Thus, in order to avoid the additional expenses associated with abnormal settlements, any buy-in accomplished pursuant to the proposed rules would be permitted to settle on the next regularly scheduled settlement date for that particular class or pool of mortgage-backed securities.

      The Department is also aware that a larger number of fails have been due to the loss of physical securities and problems associated with the clearance and settlement of mortgage-backed securities that have not yet been converted to book-entry form and maintained by the Participant Trust Company (FTC) system, which serves as a book-entry depository for Government National Mortgage Association (GNMA) securities. Although the number of fails of mortgage-backed securities is expected to decrease as more GNMA securities are converted to book-entry form and maintained by FTC, the scarcity of specific pools, together with the complexity of mortgage-backed securities and their extended settlement cycle, will continue to be problematic. Thus, a 60-day buy-in time frame for mortgage-backed securities appears to be reasonable and appropriate as part of an overall framework to ensure that customer security positions are protected. The 60-day time frame will provide adequate time for most fails to receive to be corrected through existing procedures.

      It is the Department's understanding that the PSA will develop buy-in procedures for mortgage-backed securities similar to those already in place for other government securities. We also understand that the SEC staff does not object to the 60-day buy-in time frame for mortgage-backed securities and that it intends, at some future time, to recommend to the Commission a proposal to revise Rule 15c3-3(d)(2) in a manner consistent with the Department's proposed change to paragraph 403.4(g).
      B. Buy-ins for Customer Sell Orders

      The Department is reproposing a buy-in requirement for customer sell orders that was included in the temporary regulations but was suspended in the final regulations. In the temporary regulations (52 FR19642, 19704], the Department adopted, with certain modifications, paragraph (m) of SEC Rule 15c3-3 (17 CFR 24G.15c3-3(m)) for government securities. This rule had been suspended by the SEC in 1973 with respect to exempted securities, including government securities.3 Paragraph (m), which was applicable to registered brokers and dealers and registered government securities brokers and dealers, states that if a broker or dealer executes a customer sell order (other than a short sale) and the broker or dealer has not obtained the securities from the customer within ten business days after the settlement date, then the broker or dealer shall close out the transaction with the customer by purchasing securities of like kind and quantity. The temporary GSA regulations (paragraphs 403.1 and 403.4(i]) modified paragraph (m) of SEC Rule 15c3-3 by defining the term "short sale" and by extending the time frame to 30 calendar days for mortgage-backed securities. However, in response to commenters' objections to the operational burdens of this provision, the incorporation of paragraph (m) was excluded from the final regulations (52 FR 27910, 27921-22), which had the effect of suspending the applicability of this paragraph to transactions in government securities conducted by government securities brokers and dealers. The Department also noted that it would, in consultation with the SEC, continue to study this issue to determine if eventual application of a buy-in rule for customer sell orders in government securities would be desirable.

      In light of the resolution of issues in the mortgage-backed securities market that now enables the Department to propose a buy-in rule for fails to receive on mortgage-based securities, and given the fact that a buy-in rule for all other government securities has been in operation for approximately three years without any significant problems, the Department believes that the operational burdens associated with a buy-in rule for customer sell orders have been significantly diminished. Accordingly, the Department proposes to add paragraph 403.4(1) to the GSA regulations, which incorporates by reference, paragraph (m) of SEC Rule 15c3-3, with one modification. The modification defines "short sale" for the purposes of the rule to mean that the customer has informed the broker or dealer that the sale is a short sale.

      A companion, buy-in rule for financial institutions that have filed notice as government securities brokers or dealers is also being proposed by adding this provision as new paragraph 403,5(g). Existing paragraph 403.5(g) would be redesignated as paragraph 403.5(h), and it would be revised to give the appropriate regulatory agencies for financial institutions the authority to grant extensions of the 10-day buy-in requirement for customer sell orders. This additional authority is being provided to the bank regulatory agencies because paragraph (n) of SEC Rule 15c3-3 (17 CFR 24G.15c3-3(n)) gives a registered national securities exchange or a registered national securities association the authority to grant extensions of time for the close-out of a customer sell order in exceptional circumstances.

      The main purpose of the buy-in requirements for customer sell orders is to encourage brokers and dealers to close-out transactions after a stated period of time. These provisions are also intended to prevent customers from attempting to take advantage of changes in the market value of securities by refusing to deliver a security to a broker or dealer when the price goes up after a sell order has been executed. The buy-in rules for customer sell orders will also enhance customer protection since a customer's failure to deliver a security to the executing broker or dealer could result in that broker's or dealer's failure to deliver to its counterparty.

      The Department is proposing a 10-day close-out time frame for all government securities. The roles provide an exemption for short sales, which are the primary cause of non-delivery. Since the government securities market is primarily a dealer market, and one in which short sales are common practice, the exemption of short sales from these requirements should make the rules inapplicable to the majority of sell orders. In addition, if more than ten days are needed, the appropriate regulatory agencies have the authority to extend the buy-in time period, if so requested by the broker or dealer. The Department specifically invites comments regarding the appropriateness of the 10-day time frame.

      It is the Department's understanding that the SEC staff intends to recommend to the Commission's a proposal to reinstate paragraph I$c3-3(m) in a manner that conforms with the Department's proposed rule in paragraph 403.4(1).
      III. Special Analysis

      The proposed rules would require government securities brokers or dealers that registered or filed notice pursuant to section 15C(a)[l) of the Exchange Act to take prompt steps to buy-in or otherwise obtain mortgage-backed securities that are in a fail to receive status longer than 60 calendar days. The proposed rules supplement the 30-day buy-in requirement for other government securities by terminating the suspension of buy-in requirements for mortgage-backed securities. The Department had previously incorporated buy-in requirements for mortgage-backed securities in the proposed and temporary regulations. However, they were suspended in the final regulations in response to commenter concerns, including a suggestion that an industry task force, organized by the PSA. study the issues involved and develop a recommended buy-in rule and related procedures. In was understood, that upon completion of this evaluation, a buy-in rule for mortgage-backed securities would be forthcoming.

      These amendments proposing a 60-day buy-in rule for mortgage-backed securities are responsive to the concerns expressed by the industry commenters and reflect the additional complexities of the mortgage-backed securities market. As such, the proposed rules would establish buy-in requirements for mortgage-backed securities. Similar rules are already in place for all other government securities. Regarding the buy-in rule for customer sell orders, the exemption for short sales provided in the rules should exclude most fails from being subject to this provision. Thus, the two proposed buy-in rules do not impose any substantial additional regulatory requirements.

      It is the Department's view that the proposed buy-in regulations will not impose any major increase in costs on those affected or significantly affect the economy in general. The buy-in rules are intended to strengthen customer protection and to ensure that transactions which have been contracted to occur, actually do occur. Since the proposed regulations reinstate a suspended buy-in requirements for mortgage-backed securities, and a suspended buy-in rule for customer sell orders, the Department has also concluded that they will not have an unnecessary or inappropriately differential impact on classes of entities affected by .them such as to create a burden on competition. The rules are intended to impact equally upon all participants in the government securities market. Based on the foregoing, the Department has concluded that the proposed regulations do not constitute a major rule for the purposes of Executive Order 12291 and that a regulatory impact analysis is not required.

      In addition, pursuant to the Regulatory Flexibility Act (5 U.S.C. 601, et. seq.), it is hereby certified that the proposed regulations, if adopted, will not have a significant economic impact on a substantial number of small entities and, as a result, a regulatory flexibility analysis is not required.

      The Paperwork Reduction Act (44 U.S.C. 3504(h)) requires that collections of information prescribed in proposed rules be submitted to the Office of Management and Budget for review and approval. Since these proposed rules contain no new collections of information, the submission described in the Paperwork Reduction Act is inapplicable.

      List of Subjects in 17 CFR Part 403

      Banks, banking, Brokers, Government securities.

      For the reasons set out in the Preamble, it is proposed that 17 CFR part 403 be amended to read as follows:

      PART 403—PROTECTION OF CUSTOMER SECURITIES AND BALANCES

      1. The authority citation for Part 403 continues to read as follows:

      Authority: Sec. 101, Pub. L. 99-571,100 Stat. 3209 (15 U.S.C. 78o-5(b)(1)(A), (b)(2)).
      2. Section 403.1 is revised to read as follows:

      § 403.1 Application of part to registered brokers and dealers.

      With respect to their activities in government securities, compliance by registered brokers or dealers with § 240.8c-1 of this title (SEC Rule 8c-1), as modified by § 403.2(a), (b) and (c), with § 240.15c2-1 of this title (SEC Rule 15c2-1), with § 240.15C3-2 of this title (SEC Rule 15c3-2), as modified by § 403.3, and with § 240.15c3-3 of this title (SEC Rule 15c3-3], as modified by § 403.4(a)-(d), (e)(2)-(3), (f)-(1), and (1), constitutes compliance with this part.
      3. Section 403.4 is amended by revising paragraph (g) and by adding paragraph (1) to read as follows:

      § 403.4 Customer protection—reserves and custody of securities. * * * * *
      (g) For the purposes of this section, § 240.15c3(d)(2) of this title is modified to read as follows:
      "(2) Securities included on his books or records as failed to receive more than 30 calendar days, or in the case of mortgage-backed securities, more than 60 calendar days, then the broker or dealer shall, not later than the business day following the day on which such determination is made, take prompt steps to obtain possession or control of securities so failed to receive through a buy-in procedure or otherwise; or"

      * * * * *
      (1) For purposes of this section, § 240.15c3-3(m] of this title shall apply to government securities, notwithstanding the May 9, 1973, order of the Commission (38 FR 12103) suspending such applicability, except that "an order to execute a sale of securities which the seller does not own" shall mean that the customer placing the sell order has identified the sale as a short sale to the broker or dealer.
      * * * * *
      4. Section 403.5 is amended by revising paragraph (c)(1)(iii); by redesignating paragraph (g) as paragraph (h) and revising newly redesignated paragraph (h); and by adding new paragraph (g) to read as follows:

      § 403.5 Custody of securities held by financial institutions that are government securities brokers or dealers.

      * * * * *
      (c)(1) * * *
      (iii) Take prompt steps to obtain possession or control of securities failed to receive for more than 30 days, or in the case of mortgage-backed securities, for more than 60 days; or
      * * * * *
      (g) If a financial institution executes a sell order of a customer (other than an order to execute a sale of securities which the seller does not own, which for the purposes of this paragraph shall mean that the customer placing the sell order has identified the sale as a short sale to the financial institution) and if for any reason whatever the financial institution has not obtained possession of the securities from the customer within ten business days after the settlement date, the financial institution shall immediately thereafter close the transaction with the customer by purchasing securities of like kind and quantity.
      (h) The appropriate regulatory agency of a financial institution that is a government securities broker or dealer may extend the period specified in paragraphs (c)(1)(iii) and (g) of this section on application of the financial institution for one or more limited periods commensurate with the circumstances, provided the appropriate regulatory agency is satisfied that the financial institution is acting in good faith in making the application and that exceptional circumstances warrant such action. Each appropriate regulatory agency should make and preserve for a period of not less than three years a record of each extension granted pursuant to this paragraph, which contains a summary of the justification for the granting of the extension.

      Dated: April 5th, 1991.

      Jerome H. Powell,

      Assistant Secretary for Domestic Finance.

      [FR Doc. 91-8925 Filed 4-16-91; 8:45 am]

      BILLING CODE 4813-40-M


      1 The task force, having completed its examination of the mortgage-backed securities market, recommends that government securities brokers or dealers initiate buy-in procedures for customers' fully paid or excess margin mortgage-backed securities that are failed to receive for more than 60 calendar days.

      2 The temporary regulations incorporated, with some revisions, SEC Rule 15c3-3(m). Sec 52 FR 19642,18704 (temporary § 403.4(i)).

      3 38 FR 12103 (May 9, 1873).

    • 91-40 SEC Approval of Amendment Regarding Disclosure of Contingent Deferred Sales Charges on Confirmations

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Mutual Fund
      Operations
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission has approved an amendment to Article III, Section 26 of the NASD Rules of Fair Practice that requires members selling investment company shares to disclose the existence of deferred sales charges on the front of the customer's purchase confirmation. The amendment will take effect October 1, 1991. The text of the amendment follows this notice.

      BACKGROUND

      On April 11, 1991, the Securities and Exchange Commission (SEC or "Commission") approved an amendment to Article III, Section 26 of the NASD Rules of Fair Practice (SEC Release No. 34-29069) that adds a new subsection (n) to Section 26. Subsection 26(n) requires member firms selling investment company shares to disclose the existence of deferred sales charges on the front of a customer's purchase confirmation.

      In April 1989, the NASD published Notice to Members 89-35 advising members that it would be a violation of the NASD Rules of Fair Practice for a registered representative to state or imply to a prospective investor that an investment company with a contingent deferred sales charge is a "no load fund." The notice resulted from a number of complaints received by the NASD from investors who claimed they were unaware of the existence of a sales charge on redemption and that they had been advised that the companies were "no load" or "no initial load" funds.

      In that notice, the NASD indicated that a contingent deferred sales load is a sales load that is charged on redemption on a declining-percentage basis annually and is usually reduced to zero percent by the sixth or seventh year of share ownership. The NASD stated that to assert that a mutual fund with a contingent deferred sales load is a "no load" fund is an unacceptable misrepresentation and that to state that there is "no initial load" without explanation of the nature of the contingent deferred sales load is an omission of material information.

      The NASD believes that it is the responsibility of all members and their registered representatives to ensure that prospective investors understand the nature of the various charges made by mutual funds to defray sales and sales-promotion expenses, regardless of whether they are deducted from an investor's initial purchase payment, charged on redemption, or levied against the net assets of the fund. The NASD also believes that disclosure on confirmations of the possibility of a deferred sales charge on redemption would help to alert prospective investors to the existence of such charges before they have paid for the shares. Many investors apparently do not study the prospectus thoroughly before making a purchase of investment company shares and often rely on the oral representations of a registered representative. Thus, through inadvertence or design, they may not be aware of the possibility of a sales charge on redemption.

      EXPLANATION

      Because of the continuing potential for investors to be unaware of deferred sales charges and the NASD's continuing concern that reliance on disclosures of sales loads in prospectuses may not be sufficient to alert investors to the existence of a deferred sales charge at the time of the purchase, the NASD is adding a new subsection (n) to Section 26 of the Rules of Fair Practice. The new subsection requires that a short, simple disclosure statement be included on all confirmations for investment company shares that impose a deferred sales charge on redemption. The amendment to Section 26 was approved by a vote of the membership in Notice to Members 90-27 (May 1990).

      The amendment originally was proposed as an amendment to Section 12. The comments on the amendment to Section 12 received from the membership, however, indicated that applying the requirement to insurance company variable contracts would not advance the purposes of the proposed rule change. The disclosure problem that the amendment was designed to solve was related exclusively to mutual funds, not insurance company variable contracts. Therefore, the NASD decided to make the requirement a part of Section 26, which specifically applies to investment companies.

      The disclosure requirement in Section 26(n) applies only to "sales charges" — charges and fees that are used to finance sales-related expenses.

      Nominal and short-term charges that are not used to pay for sales-related expenses and that are returned to the mutual fund as a credit to the net assets of the fund are not covered by the new disclosure requirement.1

      In order to provide sufficient time for members to modify their procedures to comply with the new disclosure request, the amendment will take effect October 1, 1991. Any questions regarding this amendment should be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202) 728-8329.

      TEXT OF NEW SUBSECTION 26(n) TO ARTICLE III, SECTION 26 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New language is underlined.)

      Investment Companies

      Sec. 26

      * * * * *

      Disclosure of Deferred Sales Charges

      (n) In addition to the requirements for disclosure on written confirmations of transactions contained in Section 12 of the NASD Rules of Fair Practice, if the transaction involves the purchase of shares of an investment company that imposes a deferred sales charge on redemption, such written confirmation shall also include the following legend: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus." The legend shall appear on the front of a confirmation and in, at least, 8-point type.

      1 See SR-NASD-90-69, published for comment in Notice to Members 90-26 (April 16, 1990), proposing amendments to Article III, Section 26 of the Rules of Fair Practice relating to asset-based sales charge limits, for a discussion of the term "sales charge."

    • 91-39 Limitations on Use of "Negative Response" Letters in Switching Customers From One Mutual Fund to Another

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Mutual Fund
      *These are suggested departments only. Others may be appropriate for your firm.

      The NASD has recently received information about the increasing use of so-called "negative response" letters. These letters are used to facilitate members' recommendations that customers switch from one mutual fund to another.

      The letters contain a recommendation that customers redeem mutual fund shares and invest the proceeds in another fund. The reasons for the recommendation, which usually are related to investment performance, are stated. And the letter also says that if the customer does not respond by a specific date, the exchange will be executed automatically (the negative response feature).

      The NASD reminds members that engage in this practice that, in addition to the suitability, prospectus delivery, and disclosure requirements governing such recommendations, no member may exercise discretion in a customer's account without obtaining prior written authorization from the customer (Article III, Section 15, NASD Rules of Fair Practice).

      Thus, the lack of a response would preclude the automatic exchange of shares unless the member has on file prior written authorization from the customer permitting the member to exercise discretion in the account.

      Discretionary authority would not be required in situations where a mutual fund states in the prospectus that it reserves the right to redeem shares without customer permission if the value of the shares owned by the customer falls below a specific minimum amount.

      Questions regarding this notice may be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts at (202) 728-8328.

    • 91-38 Market-Maker Obligations in SelectNetSM

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Operations
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      Since November 1990, members have been able to negotiate transactions through the SelectNetSM service, which was enhanced from the original Order Confirmation Transaction (OCT) service. The enhancements to SelectNet were approved by the Securities and Exchange Commission (SEC) in November for six months with three operational rules in place. The NASD has requested that the SEC extend the SelectNet rules for an additional six-month period in order to consider whether to make the rules permanent or to recommend additional modifications to SelectNet. The rules are described below.

      BACKGROUND AND DISCUSSION

      On November 21, 1990, the SEC approved certain modifications to Nasdaq's OCT service, renamed SelectNet. Among other things, SelectNet was enhanced to permit easier negotiation of trades, including counteroffers and broadcasts of orders to all market makers in a security. In addition, the NASD implemented three operational rules to ensure the integrity of SelectNet as a trading system with negotiation features.

      The SelectNet rules are:

      • SelectNet will be available only for agency or principal orders that are greater than the SOES tier size.

      • Market makers receiving orders through SelectNet will not be required to execute partial orders, but may elect to execute partials at their discretion.

      • In the event of an emergency or during extraordinary market conditions, either one or both of the aforementioned conditions may be eliminated pursuant to the authority granted to the Board of Governors and its designees in Article VII, Section 3 of the NASD By-Laws.

      The NASD believes that SelectNet should retain its current operational structure to allow more time to evaluate whether the rules should be made permanent or be modified in any way. These rules were implemented for SelectNet in November because the mandatory display of size that requires market makers to post quotations at the Small Order Execution Service (SOES) tier level took effect on December 1, 1990, and the SEC firm-quote rule requires broker-dealers to execute orders presented to them at their quoted size. The NASD believed that the same sort of abuse taking place in SOES might occur in SelectNet, especially since SelectNet allows principal as well as agency orders, and therefore sought Commission approval of these rules.

      The NASD believes that SelectNet should continue operating as it does today — voluntary for market makers posting the mandatory SOES tier size in their quotations. SelectNet should retain its interactive, negotiation features, with market-maker participation truly voluntary — as opposed to a system that takes on the characteristics of an automatic execution system with mandatory participation requirements — recognizing that, during emergency market conditions, the fundamental nature of the system may be modified to include mandatory market-maker obligations.

      The NASD notes that, although SelectNet is available for orders larger than the SOES tier size, smaller orders are not precluded by the system and, although market makers are encouraged to execute those orders, they are not required to do so.

      Market-maker obligations when responding to orders in SelectNet must also be clarified, the NASD believes. When market makers are displaying size in their quotations that is larger than the SOES tier size, they are obligated to execute orders directed to them in SelectNet when the orders are larger than SOES tier size up to and including the market maker's posted size. For example:

      • If a market maker in a 1,000-share tier size stock quotes 1,000 shares in its displayed size, it does not have to execute any order through SelectNet.

      • If the market maker is quoting 2,000 shares in the same issue and an order greater than 1,000 shares up to and including 2,000 shares is directed to it at its bid or offer quote through SelectNet, such as for 1,100 shares, 1,500 shares, or 2,000 shares, it is obligated to execute that order, pursuant to the firm-quote rule and SelectNet operational rules.

      • An order larger than the market maker's posted size, for example an order of 2,500 shares when the market maker is quoting 2,000 shares, would not be required to be executed in SelectNet, because market makers are not required to execute partial orders.

      Market makers should be aware of these obligations in SelectNet as well as in dealings over the telephone when quoting in sizes larger than SOES tier size, especially because market makers are now required to execute orders at their posted size from all members, including competing market makers. (See Notice to Members 91-37.)

      Questions regarding SelectNet operational rules and market-maker obligations should be addressed to Jeff Englander, Market Surveillance Department, at (301) 590-6450.

    • 91-37 Market-Maker Obligations With Regard to Display of Size in Quotations

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Operations
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      Since December 1, 1990, Nasdaq market makers that are also market makers in the Small Order Execution System (SOES) have been required to display sizes in their quotations equal to or greater than the SOES tier size of the security. At the same time, because of a temporary exemption from the Securities and Exchange Commission's (SEC) firm-quote rule, market makers did not have to execute more than 100 shares against competing market makers in the same issues. That exemption has now expired. As of June 1, 1991, Nasdaq market makers must execute any order at their displayed quotations.

      BACKGROUND AND DISCUSSION

      In response to a recommendation by the NASD's Quality of Markets Committee, the NASD on December 1, 1990, implemented a rule to require Nasdaq market makers that are also market makers in SOES to display size in Nasdaq at least equal to the maximum size of an order eligible for execution in SOES. Market makers were also required to extend such size to all parties except firms that are market makers in the same security.1

      The order-size limits in SOES are currently set at 200, 500, and 1,000 shares, depending on the trading characteristics of the security. The NASD believes that the mandatory display of size provides a realistic picture of the actual size of executions available from market makers as well as the depth of the market in each security.

      The mandatory display of size applies to all Nasdaq National Market securities and to market makers in regular Nasdaq securities that are registered as market makers in those securities in SOES. The rule, as implemented in December 1990, contained an exemption from the SEC's firm-quote rule for orders from competing market makers, requiring executions of only 100 shares. Although the firm-quote rule obligates a market maker to execute any order presented at its quoted price and size, the NASD requested a temporary exemption from the rule because of concerns about the impact on market-making risk should market makers be required to execute sizeable orders from competitors. The SEC approved the exemption for six months, expiring June 1, 1991.

      As of June 1, 1991, market makers must execute all orders at their displayed sizes, regardless of whether the orders are from other market makers in the security. Moreover, market makers

      are no longer able to avail themselves of the exemption from the firm-quote rule for orders from competing market makers.

      Questions concerning this notice may be directed to Beth E. Mastro, Office of General Counsel, at (202) 728-6998.

      (Note: Deleted language is in brackets.)

      Schedule D

      Part VI

      Sec. 2 Character of Quotations

      (b) Firm Quotations. A market maker that receives an offer to buy or sell from another member of the Association shall execute a transaction for at least a normal unit of trading at its displayed quotation as disseminated through the Nasdaq system at the time of receipt of any such offer. If a market maker displays a quotation for a size greater than a normal unit of trading, it shall, upon receipt of an offer to buy or sell from another member of the Association, [other than a member who is a market maker registered in the security,] execute a transaction at least at the size displayed.

      1 See Notice to Members 90-75, November 1990.

    • 91-36 Adoption of Amendments to SEC Rule 15c2-11 Regarding Initiation or Resumption of Quotations Without Specified Information

      SUGGESTED ROUTING:*

      Legal & Compliance
      Operations
      Trading
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC or "the Commission") recently issued Release No. 34-29094 adopting amendments to Rule 15c2-11 ("the Rule") that became effective June 1, 1991. This is an important SEC rule for broker-dealers engaged in quoting non-Nasdaq, over-the-counter securities in an interdealer quotation medium, such as the NASD's OTC Bulletin Board. Nasdaq and exchange-listed securities are exempt from the Rule's requirements. The Rule was designed primarily to prevent certain manipulative and fraudulent trading schemes and was intended to prevent brokers and dealers from furnishing initial quotations in the absence of information about the issuer.

      To comply with the Rule, as amended, a broker-dealer must gather, review, and retain in its files specified information about the issuer before initiating or resuming a quotation for the issuer's security in any quotation medium. The Rule's review and information maintenance requirements can be satisfied in one of only five ways as set forth in paragraphs (a)(1) through (a)(5) of the Rule (collectively, "paragraph (a) information"). The first [(a)(1)] is to review and have on file a prospectus for the issuer that has been filed with the SEC and is less than 90 days old. The second [(a) (2)] is to review and have on file a Regulation A offering statement for the issuer that is less than 40 days old. The third [(a)(3)] is to review and have on file the issuer's latest 10-K, 10-Qs, and 8-Ks. The fourth [(a) (4)] relates to certain foreign issuers that file periodic reports with the SEC. The fifth [(a)(5)] is a provision generally used when the other provisions do not apply and requires the broker-dealer to review and have on file other specified information about the issuer, such as financial statements that cover the past two years.

      In addition, the amended Rule now requires broker-dealers to have a "reasonable basis under the circumstances for believing that the information is accurate in all material respects and obtained from reliable sources."

      The amendments also require the broker-dealer to have in its records a copy of any trading suspension order, or Exchange Act release announcing a trading suspension, issued by the Commission regarding any of such an issuer's securities during the preceding 12 months, and require the broker-dealer to review paragraph (a) information together with the information contained in the trading suspension orders or releases and any other material information concerning the issuer in the broker-dealer's knowledge or possession.

      Finally, the amended Rule (i) expands the information to be gathered for any issuer that files periodic reports with the Commission, (ii) requires retention of all specified documents and information for at least three years, and (iii) specifies a lead time of three business days for submission of certain information to the operator of a quotation medium for covered securities.

      Broker-dealers are exempt from Rule 15c2-11 requirements only when they can qualify for any of four exemptions specified in the Rule. The first exemption covers a security listed on any U.S. stock exchange provided that the security trades on the exchange the same day or the business day before the publication or submission of the quotation request to a quotations medium. The second exemption applies when the broker-dealer enters a quotation solely on behalf of a customer and such quotation is not solicited. The third exemption is the piggyback exemption, which exists when the security has been quoted during the past 30 calendar days for at least 12 days with no more than four consecutive days without quotes. The fourth exemption is the Nasdaq exemption applicable to a security that is authorized for quotation on Nasdaq and has not been suspended, terminated, or prohibited.

      It should be noted that the Commission has not amended the so-called "piggyback" exemption provided by paragraph (f)(3) of the Rule. However, the Commission has proposed to narrow that exemption in Release No. 34-29095 (April 17, 1991). The deadline for submitting comments on that proposal is January 1, 1992.

      The text of the SEC's adopting release follows this notice.

      BACKGROUND

      The initiative to amend Rule 15c2-11 followed the SEC's establishment of the Penny Stock Fraud Task Force to combat abusive sales and trading practices involving low-priced non-Nasdaq and non-exchange-listed securities. The principal amendments to the Rule focus on the scope of information and documents needed to satisfy paragraphs (a)(1) through (a)(5), the affirmative nature of a broker-dealer's obligation to review such information before initially publishing a quotation for a covered security in a quotation medium, and the data gathering and review process required to resume quotations following the expiration of an SEC trading suspension.

      Affirmative Review Requirement

      The introductory text of paragraph (a) makes it unlawful for a broker-dealer to publish (or submit for publication) any quotation for a covered security in a quotation medium without having the appropriate paragraph (a) information in its possession. Moreover, before a broker-dealer may publish its initial quotation, it must gather and review the paragraph (a) information (together with any documents or information required by paragraph (b) of the Rule) and form a reasonable basis for concluding that such information is accurate in all material respects and that the information's source is reliable.

      In its release adopting the amendments, the SEC emphasized that the affirmative review requirement does not equate to the "due diligence" investigation performed by an underwriter. Likewise, full compliance does not necessitate that a market maker establish a business relationship with the issuer of any covered security. However, the amended Rule clarifies that a broker-dealer must make the specified determinations as to accuracy and source reliability for each of the five categories of information comprising paragraph (a) information. To assist broker-dealers, the SEC has offered specific guidance regarding source reliability and the review of documents containing paragraph (a) information.

      The requirement to make a determination regarding source reliability is not new. In most circumstances, it is reasonable to consider the following parties as reliable sources of paragraph (a) information: (i) the issuer of the covered security; (ii) an authorized agent of the issuer (e.g., the company's officers, directors, attorney, or accountant); (iii) an independent information service such as the SEC's Public Reference Room, a document retrieval service, or standard research sources (e.g., Standard & Poor's Standard Corporation Descriptions); and (iv) any lending institution that can represent that it prepared the requisite information or received such information directly from the issuer. On the other hand, if paragraph (a) information is obtained from another market maker (e.g., a copy of a filing made with the NASD pursuant to Section 4 of Schedule H to the NASD By-Laws), the recipient should verify the source of the information compiled by that market maker. The SEC cautions that the presence of a "red flag" — information that under the circumstances reasonably indicates that the source is unreliable — requires that a broker-dealer make further inquiry to determine the reliability and/or ultimate source of the paragraph (a) information.

      The second part of the affirmative review relates to the examination of the relevant documents). Because there are five distinct categories of paragraph (a) information (i.e., subparagraphs (1)-(5) under Rule 15c2-11(a)), a broker-dealer must determine the category appropriate to the particular covered security and gather all specified information and documents. Next, the broker-dealer must review the paragraph (a) information in relation to all other information (particularly adverse information) it may know or possess about the particular issuer.1 While conducting this review, the broker-dealer must be alert to any "red flags," (i.e., information that reasonably indicates the presence of material inaccuracies). The SEC offered the following examples of "red flags:" (i) a qualified auditor's opinion resulting from management's failure to provide all of the information needed to prepare the financial statements, (ii) financial statements of a development-stage issuer that list as the principal component of net worth an asset wholly unrelated to the issuer's lines of business, (iii) material inconsistencies within the paragraph (a) information itself, or (iv) material inconsistencies between the paragraph (a) information and other information in the broker-dealer's knowledge or possession.

      If the review process for initiating or resuming quotations discloses no "red flags," the broker-dealer would have a reasonable basis for believing that the information is accurate.2 Alternatively, if the review reveals a "red flag," no quotation may be initiated or resumed until the discrepancy or deficiency is resolved. The additional effort required of the broker-dealer will vary with the circumstances and may involve obtaining supplemental information (e.g., the most recent Forms 8-K or 10-Q) or verifying existing information.

      Finally, the Commission observed that a broker-dealer would file paragraph (a) information with the NASD, pursuant to Section 4 of Schedule H to the NASD By-Laws. The NASD must complete its review of such information before a member may initiate or resume entry of quotations for a covered security in any quotation medium. The Commission noted that the NASD's review does not alter a broker-dealer's obligations to form a reasonable belief as to the accuracy of the paragraph (a) information and the reliability of its source. Thus, a broker-dealer cannot rely on the NASD's review to meet its affirmative obligations under the Rule.

      Action Following a Trading Suspension

      The SEC has expressed concern about a broker-dealer's compliance with the Rule following expiration of a trading suspension instituted under Securities Exchange Act Section 12(k). A suspension is a significant, regulatory event that should alert a broker-dealer to the possibility that existing information concerning the issuer may no longer be accurate. In this circumstance, the broker-dealer should, at a minimum, obtain assurances or additional information regarding the matters cited in the suspension order or other matters affecting the broker-dealer's reasonable belief as to the accuracy of the information before attempting to resume quotations in the relevant security. Where the source (typically, the issuer or its agents) is unable to provide reasonable assurances about the reliability of the information, the SEC recommends contacting an independent accountant or attorney.

      The NASD notes that a Section 12(k) suspension typically lasts for more than four business days. As a result, a broker-dealer cannot rely on the "piggyback" exemption to initiate or resume quotation of a covered security immediately after the suspension expires. The "piggyback" exemption will not be available until the frequency-of-quotation test can be satisfied over a period of 30 days after resumption of quotations in the covered security.

      In general, the resumption of quotations immediately after a Section 12(k) suspension requires that a broker-dealer re-establish compliance with the Rule: (i) by obtaining (and in most instances, supplementing) the pertinent paragraph (a) information, (ii) by obtaining a copy of the SEC suspension order (or a copy of the SEC release announcing the suspension), and (iii) by reviewing the applicable information and making the necessary determinations regarding accuracy and source reliability. Furthermore, the broker-dealer must make the filing required by Section 4 of Schedule H to the NASD By-Laws.

      Other Amendments to the Rule

      Most of the amendments to the Rule are substantive in character. Because of their number, we have chosen to highlight only the most significant changes. However, this notice includes the full text of the Commission's adopting release and all amended provisions of the Rule. Members that act as market makers in covered securities are urged to review this material in its entirety.

      Questions concerning this notice may be directed to Kenneth Worm, Roger Sherman, or Daniel M. Sibears of the NASD's OTC Bulletin Board Unit at (202) 728-8149, or Michael Kulczak of the Office of General Counsel at (202) 728-8811.


      1 "Other information" would include the information specified by paragraph (b) of the Rule. As amended, paragraph (b) will require the broker-dealer to maintain, as part of its written records, any other material information about the issuer, including adverse information (e.g., a copy of an SEC trading suspension order) that comes to its knowledge or possession that would be considered important in determining whether there is a reasonable basis for believing in the accuracy (and the reliability of the source) of the paragraph (a) information. Paragraph (b) does not require the broker-dealer to maintain trivial information or information from an uncertain source. Also, paragraph (b) does not require a broker-dealer, on a routine basis, to affirmatively seek additional information about the issuer. However, if material information about the issuer comes to the broker-dealer's knowledge or possession (orally or in writing) from an authoritative source, the broker-dealer must include that information in its files (i.e., documents should be retained, and oral information should be recorded and maintained).

      2 Because of the liabilities attaching to documents filed with the Commission, (see e.g., Sections 11 and 24 of the Securities Act, 15 U.S.C. 77k and 77x, and Sections 18 and 32 of the Exchange Act, 15 U.S.C. 78r and 78ffm), a broker-dealer could reasonably have a stronger belief as to the accuracy of information contained in such documents than of information in documents not so filed. Of course, the presence of "red flags" must be considered in the review of any information or documents.


      19143 Federal Register / Vol. 56, No. 80 / Thursday, April 25, 1991 / Rules and Regulations

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-23094; File No. S7-27-89]

      RIN 3235-AA48

      Initiation or Resumption of Quotations Without Speeded Information

      AGENCY: Securities and Exchange Commission.

      ACTS ON: Final rule.

      SUMMARY: The Commission is adopting amendments to Rule 15c2-11 under the Securities Exchange Act of 1934 ("Exchange Act"). Rule 15c2-11 governs the submission and publication of quotations by brokers or dealers for certain over-the-counter securities. The amendments expressly require a broker-dealer to review the information and documents specified in paragraph (a) of the Rule before publishing a quotation for such securities in a quotation medium, and to have a reasonable basis under the circumstances for believing that the information is accurate in all material respects and obtained from reliable sources. The amendments also require the broker-dealer to have in its records a copy of any trading suspension order, or Exchange Act release announcing a trading suspension, issued by the Commission respecting any of such an issuer's securities during the preceding twelve months, and require the broker-dealer to review the paragraph (a) information together with the information contained in the trading suspension orders or releases and any other material information concerning the issuer in the broker-dealer's knowledge or possession.

      The Rule's information gathering requirements in paragraph (a) also are amended. If the issuer of a security that is required to file reports under the Exchange Act ("reporting issuer") has not filed its first annual report, a broker-dealer is required to have in its records a copy of the document subjecting the issuer to reporting obligations under the Exchange Act, together with any subsequently filed reports. Also, the amendments generally require a broker-dealer to obtain a copy of any current report filed with the Commission by a reporting issuer since its latest annual report

      In addition, the Commission is clarifying the period during which broker-dealers must retain the specified information, and amending the time by which broker-dealers must furnish certain information to the interdealer quotation system to commence quotations. Finally, the amendments clarify the exception for NASDAQ securities.

      EFFECTIVE DATE: June 1, 1991.

      FOR FURTHER INFORMATION CONTACT: Nancy J. Sanow or Jodie J. Kelley, Office of Trading Practices, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549, telephone (202) 272-2848.

      SUPPLEMENTARY INFORMATION:

      I. Introduction and Summary of Amendments

      The Securities and Exchange Commission has adopted amendments to Rule 15c2-11 ("Rule")1 under the Securities Exchange Act of 1934 ("Exchange Act"),2 which governs the publication and submission of quotations for certain over-the-counter securities in a quotation medium.3 As a result of exceptions to its provisions,4 the Rule applies to the initiation or resumption of quotations for securities traded in the non-NASDAQ market.5 The Rule requires that brokers and dealers have specified information about a security covered by the Rule ("covered security") and its issuer before publishing quotations for that security.

      In the past few years, the Commission has become increasingly concerned about instances of fraudulent and manipulative conduct involving transactions in low-priced securities, commonly referred to as "penny stocks," many of which are traded in the non-NASDAQ market. The Commission is actively addressing penny stock abuses through such measures as educational efforts,6 regulatory initiatives,7 enforcement actions,8 and trading suspensions. 9 In this context, the Commission has focussed on the role of market makers in facilitating the trading of certain penny stocks where, for example, available information about the issuer suggests that a fraudulent or manipulative scheme may be present. Also, there have been a number of instances where broker-dealers, without regard to their obligations under Rule 15c2-11, resumed quotations for penny stocks that recently had been subject to Commission trading suspension orders.10

      To further the goal of preventing fraudulent, deceptive, and manipulative practices in the market for non-NASDAQ securities, including penny stocks, the Commission proposed amendments to the Rule.11 Specifically, the Commission proposed that broker-dealers be required to review the Rule's specified information; have a reasonable basis for believing that the information is true and correct and obtained from reliable sources; have in its records a copy of any trading suspension order, or Exchange Act release announcing a trading suspension, issued by the Commission with respect to any of the issuer's (or its predecessor's) securities during the previous twelve months; and review the Rule's required information in light of the information contained in that order or release.12 The Commission also proposed amendments to expand the information gathering requirements of the Rule for reporting issuers; clarify the time period that a broker-dealer must retain the specified information; revise the time period by which a broker-dealer must furnish the necessary form to the interdealer quotation system to initiate or resume a quotation; and clarify the exception for NASDAQ securities. The Proposing Release also sought commenter's views on the Rule's "piggyback" exception.13 While the amendments were developed in the context of the Commission's concerns regarding penny stocks, the Rule and the present amendments are addressed to the fraudulent and manipulative potential that exists when a broker or dealer submits quotations concerning any non-NASDAQ security in the absence of certain information.14

      Sixteen comment letters were received in response to the Proposing Release.15 Commenters generally supported the Commission's efforts to prevent penny stock fraud. Commenters did not object to the requirements that market makers have specified information about a security and its issuer, and review that information, before publishing quotations. Most commenters, however, were concerned about the proposed standard for that review, i.e., that the broker-dealer have a "reasonable basis for believing that the information is true and correct in relation to the date that the quotation is submitted," as they understood that standard. Commenters believed that this proposed amendment represented a significant and burdensome change in a broker-dealer's obligations and might cause a number of broker-dealers to cease making a market for non-NASDAQ securities, thereby impairing the liquidity of these stocks. Commenters favored the proposal to include trading suspension orders among the Rule's information requirements. However, they were divided on the proposed standard for review of the Rule's required information following expiration of a suspension order. After carefully considering the views of the commenters, the Commission has adopted the amendments with certain modifications.
      II. Amendments
      A. The Rule's Review Requirements
      1. Paragraph (a) Introductory Text
      a. The Commission proposed to clarify and enhance the degree of scrutiny that a broker-dealer must give to the required information prior to publishing a quotation. The Rule contained a "double negative" standard regarding the broker-dealer's belief as to the accuracy of the information, i.e., the broker-dealer was required to have "no reasonable basis for believing (that the information) is not true and correct." 16 However, the Rule included an affirmative standard regarding the reliability of the source of the information, i.e., the information had to be "obtained by the [broker-dealer] from sources which he has a reasonable basis for believing are reliable." The double negative language was susceptible to varying interpretation, especially when juxtaposed with the affirmative standard regarding the reliability of the information's source.

      As the Commission has noted, the information gathering requirements of the Rule were designed to require the broker-dealer "to give some measure of attention to financial and other information about the issuer of a security before it commences trading in that security."17 However, the Rule is precise as to the information the broker-dealer must obtain, but was ambiguous as to the relationship between the Rule's information gathering requirements and the obligations of the broker-dealer to review its contents. Thus, the Rule did not expressly require a broker-dealer to review the information in its records prior to entering a quotation for a non-NASDAQ security. Nevertheless, inherent in the prior requirements of paragraph (a)18 was the obligation that the broker-dealer, at a minimum, inspect the documents to verify that it had received all of the required information and knew the sources of that information. Beyond that basic level, however, the nature of the broker-dealer's review obligations may have been uncertain, for example, where a broker-dealer, in addition to the information required by paragraph (a), also had knowledge or possession of material adverse information regarding the issuer prior to its publication or submission of a quotation. A firm might have argued that it had no duty to incorporate this additional information in the review process, and that this other information was only required to be documented and preserved in the broker-dealer's records by former paragraph (c) of the Rule.19

      Although the comments generally indicated that some measure of review is appropriate, the substantial majority of commenters stated that the proposed paragraph (a) amendment would not simply clarify the required level of review, but would unduly expand the burdens, responsibilities, and liabilities of a broker-dealer. Many of these commenters believed that the amendments would impose on market makers a "due diligence" standard similar to that imposed on underwriters in a public offering of securities. Some commenters noted that, unlike an underwriter in a securities offering, market makers do not have a sufficiently substantial relationship with the issuer of the quoted security to permit them to undertake meaningful investigative activities. Even if the broker-dealer were to employ independent counsel or accountants, commenters noted that issuers would be reluctant to grant them access to their books and records. One commenter, the NASD, supported the requirements that the broker-dealer review the Rule's specified information and have a reasonable basis for believing that the information was obtained from a reliable source. The NASD, however, opposed adoption of the requirement that the broker-dealer have a reasonable basis for believing that the information is accurate "in relation to the day the quotation is submitted," because it believed that any such requirement would necessitate the performance of a merit-type review, including independent verification of the issuer's financial statements.

      A substantial majority of commenters also suggested that a distinction be made between wholesale market makers20 and retail firms.21 Some commenters pointed out that wholesale market makers often ignore fundamentals (i.e., basic information about the issuer) and trade on the basis of perceived supply and demand of the quoted security. They believed that any heightened standard of review might force some market makers, particularly wholesalers, to cease making a market and thus would impair the liquidity of the marketplace. Several commenters maintained that any heightened standard of review is more appropriate for retail broker-dealers, who must satisfy suitability and other requirements when recommending a security to a customer.22
      b. The Commission believes that many of the commenters misapprehend the nature and potential impact of the amendments to paragraph (a). Accordingly, the Commission has revised the proposed provisions to help clarify its intentions in this regard. By including an express review requirement and substituting an affirmative "reasonable basis" standard for the double negative language, the amendments refine the duties of the broker-dealer and thus further the underlying objectives of the Rule. In addition, by incorporating the review and reasonable basis requirements in the introductory portion of paragraph (a), the amendments make it clear that these requirements attach to all information required by that paragraph. As amended, paragraph (a) of the Rule prohibits a broker-dealer from publishing or submitting a quotation for a covered security unless it has reviewed the information specified in subparagraphs (a)(1) through (a)(5) ("paragraph (a) information") together with the information required by paragraph (b) as amended today ("paragraph (b) information")23 and based upon such review has a reasonable basis under the circumstances 24 for believing that the required information is accurate "in all material respects and that the information was obtained from reliable sources.25

      The Commission contemplates that the review will be performed in accordance with the following basic principles.

      Source reliability. As an initial step, the broker-dealer should satisfy itself that it has a reasonable basis for believing that any source of the paragraph (a) information is reliable. This "reasonable belief' standard was required pursuant to subparagraph (a)(5) under the prior formulation of the Rule and is not altered by today's amendments, except that it now applies to subparagraphs (a)(1) through (a)(5). In the absence of any "red flag" (i.e., information that under the circumstances reasonably indicates that the source is unreliable), a broker-dealer would be able to satisfy the Rule's requirements regarding the reliability of the information's source, if that information was provided by the issuer of the securities or its agents, including its officers and directors, attorney, or accountant, or was obtained from an independent information service, such as the Commission's Public Reference Room, a document retrieval service, or standard research sources (e.g.. Standard & Poor's Standard Corporation Descriptions).

      Occasionally, a broker-dealer may receive Rule 15c2-11 information about an issuer from another market maker or from someone other than the issuer or its agents or an independent information service. In these situations, while the broker-dealer might be aware of the identity of the immediate source of the specified information, it might not have any knowledge about the person that actually prepared the Rule 15c2-11 information. To satisfy the Rule's requirements regarding source reliability, the broker-dealer would have to ascertain the reliability of the preparer of the Rule 15c2-11 information. Where the broker-dealer is informed by the immediate source that the issuer has prepared or approved the Rule's specified information, a broker-dealer should generally verify that representation by contacting the issuer directly. Where the broker-dealer receives the information, however, from an independent and objective source, such as a bank but not a market maker in the security, which represents that it prepared the information or received the information directly from the issuer, the broker-dealer typically may rely on that representation as to the source. Additionally, when a "red flag" regarding the source's reliability exists, the broker-dealer would have to conduct the inquiry called for by the circumstances to reasonably determine whether the information's source is reliable.26

      Document review. Once the broker-dealer has a reasonable belief as to the source's reliability, it should examine the materials in its records to make certain that all of the required information has been obtained. Paragraph (a) as amended requires this review process for the information required by each of its subparagraphs. For the particular subparagraph on which the broker-dealer is relying to publish quotations, the broker-dealer should review the categories of information listed in subparagraph (a)(5).27 Next the broker-dealer should review the paragraph (a) information in the context of all other information about the issuer in its knowledge or possession, i.e., paragraph (b) information.28 Ordinarily, the broker-dealer need not take any further steps, e.g., there would be no requirement to look behind the financial statements or any other information required to be obtained.29 However, in its review, the broker-dealer must be alert to any "red flags" (i.e., information under the circumstances that reasonably indicates that one or more of the required items of information is materially inaccurate).30 "Red flags" would be indicated, for example, by material inconsistencies in the paragraph (a) information, or material inconsistencies between that information and other information in the broker-dealer's knowledge or possession.31 Examples of "red flags" would include a qualified auditor's opinion resulting from management's failure to provide all of the information relevant to prepare the financial statements, or financial statements of a development stage issuer that lists as the principal component of its net worth an asset wholly unrelated to the issuer's lines of business. Warning signs such as these may call into question the accuracy of the information to be relied upon by a broker-dealer to satisfy the Rule's requirements.

      Where no "red flags" appear during this review process, the broker-dealer would have a reasonable basis for believing that the information is accurate. However, if "red flags" appear at any stage of the review process, the broker-dealer may not publish quotations unless and until those "red flags" are reasonably addressed. The broker-dealer's specific efforts to satisfy itself with respect to the accuracy of the information will vary with the circumstances, and may require the broker-dealer to obtain additional information or seek to verify existing information.32 For example, the broker-dealer may reasonably believe that the information is accurate after questioning the issuer directly. When information from the issuer is not adequate, or raises reasonable doubts on the part of the broker-dealer, the broker-dealer may wish to consult independent sources, e.g., an attorney or accountant.33

      The Rule requires that a market maker have a reasonable basis under the circumstances for believing that paragraph (a) information, in light of any other documents and information required by paragraph (b), is accurate in all material respects. If the market maker is aware that information required under paragraph (a) is inaccurate, it may nevertheless submit quotations without violating the Rule, as long as it is able to supplement the paragraph (a) information with additional information that it believes is accurate. Thus, for example, a market maker who is aware that information required pursuant to paragraph (a) is inaccurate could simply produce a written record reflecting the supplemental, accurate information that would then be maintained pursuant to paragraph (b). Similarly, the paragraph (a) information, coupled with, e.g., more recent Forms 8-K, or press releases maintained pursuant to paragraph (b)(3), would permit the market maker to satisfy the Rule's requirement.

      There are important differences between the obligations imposed by the Rule upon broker-dealers publishing quotations and the obligations of an underwriter. Because of its special relationship with the issuer, other distribution participants, and the investing public, an underwriter is subject to a largely separate, broad set of investigative responsibilities (commonly referred to as "due diligence" responsibilities) under both the securities laws and the standards of the profession.34 In contrast, the revised requirements of the Rule do not contemplate that, before submitting or publishing quotations for a covered security, a market maker must routinely conduct any independent "due diligence" investigation concerning the issuer or its business operations and financial condition such as the investigation expected to be conducted by an underwriter. 35 A market maker publishing quotations for a non-NASDAQ security may have no relationship with the issuer of the security. The Rule does not demand that the market maker develop such a relationship in order to obtain information about the issuer. Rather, as described above, the Rule specifies the information that must be gathered, and the Rule's requirements are satisfied if the market maker has a reasonable basis for believing that the information is accurate and obtained from a reliable source, after reviewing that information. In short, a reasonable basis for belief in the accuracy of the information can be founded solely on a careful review of the paragraph (a) information together with paragraph (b) information, provided that the paragraph (a) information was obtained from sources reasonably believed to be reliable and there are no "red flags." When "red flags" are initially present, the broker-dealer may upon inquiry obtain additional information that provides a reasonable basis for believing that the information is accurate.

      In brief, although the amendments make the review requirement explicit, the Commission believes that the review procedures necessary to comply with amended paragraph (a) will not begin to approach the depth and breadth of an underwriter's due diligence investigation. In light of these considerations, the Commission views the dangers to market efficiency suggested by commenters that could result from the adoption of the amendments as unlikely to arise.
      c. After considering the comments, the Commission believes that the proposed inclusion of the requirement that the broker-dealer have a reasonable basis for believing that the information is accurate "in relation to the day that the quotation is submitted" may have suggested a more extensive level of review than was intended. The proposed phrase was designed to require the broker-dealer to incorporate the information formerly required by paragraph (c), which will often be more current than the paragraph (a) information, into the review process. 36

      As described above, paragraph (a) does not require the broker-dealer to question any information unless the information contains apparent material discrepancies, or other material information in the broker-dealer's knowledge or possession (i.e., paragraph (b) information) reasonably indicates that the paragraph (a) information is materially inaccurate. Accordingly, the proposed phrase has been deleted.
      d. With respect to the comments discussing the respective market roles of retail firms and wholesale firms, the Commission does not agree with those commenters who suggested that the concerns set out in the Proposing Release would more properly be addressed by adopting or raising standards only as to retail firms. The Rule is directed at the fraudulent, deceptive, or manipulative potential of a broker-dealer's quotations,37 and does not focus on whether the broker-dealer also engages in retail activity.38 The securities laws already distinguish between retail and wholesale firms by placing fiduciary and other obligations on retail firms because they deal with the public.39

      Some securities traders have stated that in setting a price for a security they rely on their "feel" for the market in the security.40 While such market information is undoubtedly important in establishing quotations, in situations where the Rule applies, a broker-dealer must nevertheless review the required information before publishing a quotation. Accordingly, a claim to be trading solely "by the numbers" 41 will not excuse a failure to comply with the Rule's requirements, or support an argument that the Rule's information requirements are not relevant or "material" to the publication of quotations.42

      The Commission reaffirms its view that the Rule provides a necessary and appropriate means to prevent fraudulent, deceptive, and manipulative quotations by any broker or dealer.43
      2. Review Following a Trading Suspension

      The Commission proposed adding paragraph (h) to the Rule, which would have pertained specifically to a broker-dealer's obligation to review information in its files prior to publishing or submitting a quotation for the security of an issuer that had been the subject of a trading suspension order issued by the Commission during the preceding twelve months.44 Proposed paragraph (h) would not have imposed standards of review different from those envisioned by amended paragraph (a), but the problem of post-suspension market making was of sufficient concern that the Commission thought that it would be appropriate to treat it separately in the Rule. As discussed above, the Commission is simplifying the Rule by incorporating the requirements of proposed paragraph (h) into revised paragraph (a).

      Commenters were divided on whether the Commission should adopt proposed paragraph (h). Six commenters opposed the amendment, particularly because they believed it would unfairly delegate to broker-dealers the task of verifying the accuracy of available information about an issuer following a trading suspension. On the other hand, six commenters generally supported the need for broker-dealers to review available information when entering quotations after expiration of a trading suspension for the issuer's securities.

      The Commission recently has concluded enforcement actions involving two broker-dealers, who, following the expiration of a trading suspension covering 46 issuers, published quotations for a number of those issuers' securities without complying with the requirements of Rule 15c2-11.45 In ordering the trading suspensions, the Commission cited possible false statements by the issuers concerning the issuers' corporate history, stock ownership, financial condition, and claims for exemption from the registration provisions of the Securities Act46 pursuant to which the issuers' securities were trading. Prior to submitting quotations for four of those issuers' securities, one broker-dealer failed either to obtain any new information concerning the issuers, or to determine the accuracy and completeness of the information it already had in its files about those issuers.47 Thus, the concerns raised in the Commission's suspension order were either ignored or disregarded. Although both broker-dealers had obtained new information for a number of the issuers after the suspensions expired, they failed to examine the new information before resuming quotations for the securities of those issuers to determine whether the new information addressed the concerns raised in the suspension order.48

      These cases highlight the fact that a trading suspension should alert a broker-dealer to the possibility that information in its possession concerning the issuer may no longer be accurate. The cases also underscore the requirement that a broker-dealer review the Rule's required information in light of the information contained in a trading suspension order, and, if necessary, obtain updated information.

      In this context, the broker-dealer should, at a minimum, receive assurances or additional information with respect to matters cited in the suspension order or with respect to other matters affecting the broker-dealer's reasonable belief as to the accuracy of the information. Reliance on new information or assurances from prior sources of information in these circumstances, however, requires caution.49 In exceptional cases, where the source (typically, the issuer or its agents) is unable to provide reasonable assurances about the reliability of the information, consultation with an independent accountant or attorney may be warranted.

      The Commission does not agree that it is impermissibly delegating its enforcement responsibilities to broker-dealers, who, commenters asserted, are in no better position than the Commission to determine after a trading suspension whether or not available issuer information is accurate. As the Commission observed in the Proposing Release, the factors cited in its order as the basis for the trading suspension do not constitute an adjudication of fact or law with respect to those matters.50 It is necessary and appropriate that a broker-dealer consider the Commission's concerns regarding the trading of an issuer's securities when the broker-dealer reviews the paragraph (a) information to determine whether it has a reasonable basis for believing that the information is accurate and the source is reliable.

      In sum, the Commission believes that requiring review of paragraph (a) information together with the information contained in a trading suspension order will not result in any appreciable change in the application of the Rule. Rather, the Commission views amended paragraphs (a) and (b) (incorporating the requirements of proposed paragraph (h)) as explicitly setting forth a broker-dealer's previously implicit obligations following a trading suspension.
      B. Revisions to the Rule's Information Gathering Requirements
      1. Paragraph (a)(3)

      Paragraphs (a)(1) through (a)(5) of the Rule 51 specify the information that a broker-dealer must have before publishing a quotation for a covered security. Prior to the adoption of today's amendment, paragraph (a)(3)(iii) required a broker or dealer submitting quotations for a security of an issuer required to file reports under Sections 13 or 15(d) of the Exchange Act ("reporting issuer") to have in its records the issuer's most recent annual report 52 together with any other reports required to be filed at regular intervals thereafter, i.e., quarterly reports on Form 10-Q53 under the Exchange Act.54 The Commission has amended paragraph (a)(3) in two respects.
      a. Reporting Issuer That Has Not Filed Its First Annual Report. Although every reporting issuer has a continuing obligation to file detailed information with the Commission, a broker-dealer seeking to publish quotations for a reporting issuer could not comply with the terms of paragraph (a)(3) until the issuer filed its first annual report. Therefore, the broker-dealer had to look to the less comprehensive information requirements of paragraph (a)(5) of the Rule.55 Under the amendment adopted today, if a reporting issuer has not filed its first annual report, the broker-dealer may satisfy paragraph (a)(3) by having in its records the prospectus included in the registration statement that caused the issuer to become a reporting company,56 or the Form 10,57 which was filed and became effective, together with any subsequent reports filed with the Commission by the issuer.58 The three commenters that addressed this issue favored this revision to paragraph (a)(3). One commenter suggested that the amendment as proposed be reworded to parallel paragraph (a)(1), which permits broker-dealers to retain the prospectus specified by section 10(a) of the Securities Act rather than the entire registration statement as had been proposed. The Commission has incorporated this suggestion into the amendment as adopted;
      b. Current Reports. Paragraph (a)(3) also is amended to require broker-dealers publishing or submitting quotations for reporting issuers to have in their records copies of any current reports filed with the Commission on Form 8-K 59 since the issuer's latest annual report.

      Six commenters opposed the amendment. Some commenters suggested that, unless the broker-dealer has a substantial relationship with the issuer or engages a private search service, the broker-dealer would not know whether the issuer had filed a Form 8-K. One commenter, the NASD, supported the amendment, adding that the broker-dealer should have all current reports filed as of one business day prior to submitting the quotation.

      The Commission is adopting this amendment because the events triggering the Form 8-K filing requirements generally involve material events affecting the issuer.60 Market makers for non-NASDAQ securities should be aware of these material events when initiating or resuming quotations for the issuer's securities. A broker-dealer has several means of obtaining information regarding, or copies of, current reports on a timely basis.61 The Commission is not persuaded that the burden of obtaining current reports outweighs the benefit of the amendment, namely that market makers will have the most current information available when establishing quotations for non-NASDAQ securities.62

      Unlike annual and quarterly reports, however, current reports are not filed at regular intervals. In the Proposing Release, the Commission recognized that it may be difficult for a broker-dealer to determine contemporaneously with its quotation submission whether an issuer had filed a current report with the Commission. To alleviate this potential problem, the Proposing Release stated that a broker-dealer would be deemed in compliance with paragraph (a)(3) if the broker-dealer obtains all Forms 8-K filed with the Commission by the issuer as of a date reasonably in advance of the date of submission of the quotation to the quotation medium. The Commission noted in the Proposing Release that a period of up to five business days is reasonable.

      The Commission is modifying this interpretive position to account for a recent amendment to Schedule H of the NASD By-Laws, which requires a broker-dealer to submit Rule 15c2-11 information to the NASD at least three days prior to the publication or submission of a quotation for a non-NASDAQ security,63 Moreover, as suggested by some commenters, the position has been incorporated in the Rule as adopted. Under paragraph (d)(2)(i), broker-dealers need obtain only those Forms 8-K filed by the issuer as of a date that is up to five business days prior to the earlier of the broker-dealer's submission of the quotation to the quotation medium or submission to the NASD of the information required by Schedule H.64 This amendment should alleviate the problem of the unpredictability of the filing of Forms 8-K, and eliminate a potential timing problem under the amendment as proposed.

      The Commission understands that market makers often are included on an issuer's mailing list, and regularly receive documents publicly disseminated by the issuer. In the Commission's view, a broker-dealer that has made arrangements to receive all of the issuer's reports when they are filed, and the broker-dealer regularly has received the issuer's filed reports on a timely basis over a reasonable period of time (e.g., six months) may reasonably assume that it has satisfied and continues to satisfy the information gathering requirements of amended paragraph (a)(3), unless the broker-dealer has reason to believe that the issuer has failed to file a required report or has filed a report but has not sent it to the broker-dealer. The Commission has incorporated this position in paragraph (d)(2)(ii). In determining whether it receives current reports on a timely basis, a broker-dealer may compare the dates of the reports and the date of the broker-dealer's receipt of those forms. If the broker-dealer receives the reports shortly after their filing, it would be reasonable to assume that they are being received on a timely basis.

      One commenter requested clarification concerning whether a broker-dealer would be precluded from publishing a quotation for a reporting issuer, if it had a reasonable basis to believe that the issuer was delinquent in filing its annual, quarterly, or current reports. When paragraph (a)(3) information is not reasonably available,65 e.g., because the issuer is delinquent in its filing obligations, the broker-dealer may substitute the information specified by paragraph (a)(5) in order to publish or submit quotations.66 If the paragraph (a)(5) information is unavailable, the broker-dealer may not publish or submit a quotation, unless an exception to the Rule is applicable.
      2. Proposed Paragraph (a)(6)

      The Commission proposed to add paragraph (a)(6) to the Rule, which would have required a broker-dealer initiating or resuming quotations to have in its records a copy of any trading suspension order, or Exchange Act release announcing that trading suspension, issued by the Commission respecting any securities of the issuer (or its predecessor) during the preceding twelve month period. The majority of commenters responded favorably to this new requirement.

      The Commission believes that the information in trading suspension orders is important for broker-dealers because they will be apprised of questions the Commission has raised regarding the issuer or its securities that should be considered when they determine to publish quotations. Therefore, the Commission has determined to incorporate the substance of proposed paragraph (a)(6) in the Rule, but has revised the structure of the Rule so that the requirement now appears in paragraph (b).

      Information regarding trading suspensions is readily available from the Commission and from other sources.67 Moreover, to facilitate compliance with this requirement, the Commission has instituted a telephone service to provide broker-dealers and others with information about trading suspensions recently ordered by the Commission.68 Callers also can obtain upon request a written list of all trading suspensions ordered within the past twelve months prior to the request.69 A few commenters suggested that the Commission's telephone service provide a recorded listing of all trading suspensions issued within the past year. While any such enhancement could prove unwieldy if the number of suspensions were large,70 the telephone service will provide callers with information about the last fifteen trading suspensions or all trading suspensions within the previous 30 days, which ever is greater, ordered by the Commission.
      C. Amendments to Paragraphs (c) and (d)

      The Commission proposed to amend Rule 15c2-11(c) to require that the broker-dealer preserve the Rule's required information for the period specified in paragraph (b) of Rule 17a-471 under-the Exchange Act, namely, for at least a three-year period, the first two years in an easily accessible place. Previously, paragraph (c) stated that the information must be preserved "for the periods specified in Rule 17a-4." However, none of the time periods specified in that rule for retention of various categories of books and records referred directly to Rule 15c2-11 of its recordkeeping requirements.

      Five commenters supported this revision; however, one suggested incorporating in the Rule the required retention period. The Commission has followed this suggestion in paragraph (c) as adopted.

      The Commission also has amended Rule 15c2-11(d) to extend from two days to three business days the period between the time the broker-dealer submits to the interdealer quotation system the information required by Rule 15c2-11(a)(5) and the time the quotation may be published. This amendment is adopted to afford the interdealer quotation system and regulators sufficient time to obtain and review the information in advance of publication of quotations.

      Four commenters supported the proposed revision. One of these commenters, the NASD, proposed that broker-dealers also be required to submit the Rule's required information for review to that association, and believed it should be given the authority to extend the review period for an additional seven business days if it determined further inquiry was necessary. The Commission recently approved an amendment to Schedule H of the NASD By-Laws 72, which requires NASD member firms, before initiating or resuming quotations for non-NASDAQ securities, to provide the NASD with a copy of the Rule's specified information.73 Under revised Schedule H, the NASD will conduct a review of the member firms' Rule 15c2-11 information. The NASD will notify the broker-dealer if the submission is deficient and the NASD will act on any amended submission within seven business days of receipt. In light of this revision to Schedule H, the Commission believes it is unnecessary to consider modifying the Rule as recommended by the NASD.
      D. Amendment to Paragraph (f)(5)

      The Commission has adopted the amendment clarifying that the exception from the Rule afforded by paragraph (f)(5) is limited to securities authorized for inclusion in NASDAQ. Previously, the exception covered "[t]he publication or submission of a quotation respecting a security that is authorized for quotation in an interdealer quotation system sponsored and governed by the rules of a registered securities association * * *."

      When paragraph (f)(5) was added to the Rule in 1985, only the NASDAQ system was comprehended within this description. Today, however, other interdealer quotation systems, such as the NASD's OTC Service74 and PORTAL system 75 could fit within the terms of the exception. It is clear from the release adopting paragraph (f)(5), however, that its scope was intended to be limited to NASDAQ securities.76 In adopting the exception, the Commission took cognizance of those NASDAQ qualification standards regarding the issuer and the security which tended to promote the public availability of information about the issuer and helped to inhibit the fraudulent trading of shell company securities and similar abuses.77 Two commenters favored the proposal, although they also urged that quotations for the securities of all reporting issuers be excluded from the Rule's coverage.78

      The Commission believes that the amendment is necessary to provide notice to broker-dealers regarding the scope of the exception provided in paragraph (f)(5), and conforms the language to its original intent.
      III. The Piggyback Exception

      The "piggyback" exception of paragraph (f)(3) permits broker-dealers, under specified conditions, to publish or submit quotations for a security without having the information otherwise required by the Rule. For this exception to apply, the security must have been quoted in an interdealer quotation system with the frequency and for the duration specified in the Rule, i.e., quotations must have appeared on at least 12 days during the prior 30 calendar days, with no more than four consecutive business days elapsing without any quotations. Because the Commission is concerned that permitting broker-dealers to piggyback on existing quotations for a security may be inconsistent with, and thus undermine certain of the fundamental goals of the Rule, the Commission solicited comment on whether the piggyback exception should be retained, modified, or eliminated.79

      After reviewing the comments received on this issue, the Commission today is proposing Rule amendments to narrow substantially the piggyback exception.80 As described in greater detail in Release 34-29095, the Rule would continue to provide only for a modified version of "self-piggybacking," i.e., where a broker-dealer satisfied the Rule's informational requirements upon initiation or resumption of its quotation for a security, and thereafter published quotations with a specified frequency. The firm also would have an annual information gathering and review requirement.
      IV. Final Regulatory Flexibility Analysis

      The Commission has prepared a Final Regulatory Flexibility Analysis ("FRFA") in accordance with 5 U.S.C 604 regarding the proposed amendments to Rule 15c2-11. No comments were received on the Commission's Initial Regulatory Flexibility Analysis, although commenters raised concerns regarding the economic burden associated with the amendments to the Rule. The FRFA notes that commenters generally supported the Commission's efforts to strengthen and clarify the obligations of broker-dealers in the penny stock area. The FRFA points out that the review procedures necessary to comply with the revised Rule will not differ appreciably from those expected under the Rule prior to its amendment, and are distinct from an underwriter's due diligence investigation. In addition, the FRFA states the Commission is amending the Rule to require broker-dealers to obtain copies of current reports on Form 8-K because events triggering the filing requirements involve material events affecting the issuer.

      The FRFA states that the revised provisions of Rule 15c2-11 are not so burdensome as to outweigh the perceived benefits, namely, that market makers have and review the most current information available when establishing quotations for non-NASDAQ securities.

      A copy of the Final Regulatory Flexibility Analysis may be obtained by contacting Jodie J. Kelley, Division of Market Regulation, Securities and Exchange Commission, Washington, DC 20549, (202) 272-2848.
      V. Effects on Competition

      Section 23(a)(2) of the Exchange Act81 requires the Commission, in adopting rules under the Exchange Act, to consider any anticompetitive effects of such rules and to balance these effects against the regulatory benefits gained in furthering the purposes of the Exchange Act. The Commission received no comments on any specific competitive burdens that might result from the amendments described in this release. The Commission views the amendments to Rule 15c2-11 as causing no burden on competition unnecessary or inappropriate in furtherance of the purposes of the Exchange Act.

      List of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements, Securities.
      VI. Statutory Basis and Text of Rule Amendments

      The Commission is amending part 240 of chapter II of title 17 of the Code of Federal Regulations as follows:

      PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934
      1. The authority citation for part 240 is amended by adding the following citation:

      Authority: 15 U.S.C. 77c, 77d, 77s, 78c, 78d, 78i, 78j, 781, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 79q, 79t, 80a-29, 80a-37, unless otherwise noted.

      * * * * *

      Section 240.15c2-11 also issued under 15 U.S.C. 78((b), 78o(c), 78q(a), and 78w(a).

      §24C.15c2-11 [Amended]
      2. The authority citation following § 240.15c2-11 is removed.
      3. By amending § 240.15c2-11 by adding a Preliminary Note preceding paragraph (a), by revising paragraph (a) introductory text, paragraphs ,(a)(1)-(4), and introductory text of paragraph (a)(5), by amending (a)(5)(i) through (xvi) by setting out each paragraph as an individual paragraph, by revising the remaining text after paragraph (a) (5) (xvi) as flush text, and revising paragraphs (b), [c), (d), and (f)(5) to read as follows:
      § 24G.15C2-11 Initiation or resumption of quotations without specified information.

      Preliminary Note:

      Brokers and dealers may wish to refer to Securities Exchange Act Release No. 29004 (April 17, 1991), for a discussion of procedures for gathering and reviewing the information required by this rule and the requirement that a broker or dealer have a reasonable basis for believing that the information is accurate and obtained from reliable sources.
      (a) As a means reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices, it shall be unlawful for a broker or dealer to publish any quotation for a security or, directly or indirectly, to submit any such quotation for publication, in any quotation medium (as defined in this section) unless such broker or dealer has in its records the documents and information required by this paragraph (for purposes of this section, "paragraph (a) information"), and, based upon a review of the paragraph (a) information together with any other documents and information required by paragraph (b) of this section, has a reasonable basis under the circumstances for believing that the paragraph (a) information is accurate in all material respects, and that the sources of the paragraph (a) information are reliable. The information required pursuant to this paragraph is:
      (1) A copy of the prospectus specified by section 10(a) of the Securities Act of 1933 for an issuer that has filed a registration statement under the Securities Act of 1933, other than a registration statement on Form F-6, which became effective less than 90 calendar days prior to the day on which such broker or dealer publishes or submits the quotation to the quotation medium, Provided That such registration statement has not thereafter been the subject of a stop order which is still in effect when the quotation is published or submitted; or
      (2) A copy of the offering circular provided for under Regulation A under the Securities Act of 1933 for an issuer that has filed a notification under Regulation A and was authorized to commence the offering less than 40 calendar days prior to the day on which such broker or dealer publishes or submits the quotation to the quotation medium, Provided That the offering circular provided for under Regulation A has not thereafter become the subject of a suspension order which is still in effect when the quotation is published or submitted; or
      (3) A copy of the issuer's most recent annual report filed pursuant to section 13 or 15(i) of the Act or a copy of the annual statement referred to in section 12(g)(2)(G)(i) of the Act, in the case of an issuer required to file reports pursuant to section 13 or 15(d) of the Act or an issuer of a security covered by section 12(g)(2)(B) or (G) of the Act, together with any quarterly and current reports that have been filed under the provisions of the Act by the issuer after such annual report or annual statement; Provided, however, That until such issuer has filed its first annual report pursuant to section 13 or 15(d) of the Act or annual statement referred to in section 12(g)(2)(G)(i) of the Act, the broker or dealer has in its records a copy of the prospectus specified by section 10(a) of the Securities Act of 1933 included in a registration statement filed by the issuer under the Securities Act of 1933, other than a registration statement on Form F-6, that became effective within the prior 16 months, or a copy of any registration statement filed by the issuer under section 12 of the Act that became effective within the prior 16 months, together with any quarterly and current reports filed thereafter under section 13 or 15(d) of the Act; and Provided further, That the broker or dealer has a reasonable basis under the circumstances for believing that the issuer is current in filing annual, quarterly, and current reports filed pursuant to section 13 or 15(d) of the Act, or, in the case of an insurance company exempted from section 12(g) of the Act by reason of section 12(g)(2)(G) thereof, the annual statement referred to in section 12(g)(2)(G)(i) of the Act; or
      (4) The information furnished to the Commission pursuant to § 240.12*g3-2(b) since the beginning of the issuer's last fiscal year, in the case of an issuer exempt from section 12(g) of the Act by reason of compliance with the provisions of § 24O.12g3-2(b), which information the broker or dealer shall make reasonably available upon request to any person expressing an interest in a proposed transaction in the security with such broker or dealer; or
      (5) The following information, which shall be reasonably current in relation to the day the quotation is submitted and which the broker or dealer shall make reasonably available upon request to any person expressing an interest in a proposed transaction in the security with such broker or dealer;
      (xvi) * * *

      If such information is made available to others upon request pursuant to this paragraph, such delivery, unless otherwise represented, shall not constitute a representation by such broker or dealer that such information is accurate, but shall constitute a representation by such broker or dealer that the information is reasonably current in relation to the day the quotation is submitted, that the broker or dealer has a reasonable basis under the circumstances for believing the information is accurate in all material respects, and that the information was obtained from sources which the broker or dealer has a reasonable basis for believing are reliable, This paragraph (a)(5) shall not apply to any security of an issuer included in paragraph (a)(3) of this section unless a report or statement of such issuer described in paragraph (a)(3) of this section is not reasonably available to the broker or dealer. A report or statement of an issuer described in paragraph (a)(3) of this section shall be "reasonably available" when such report or statement is filed with the Commission.
      (b) With respect to any security the quotation of which is within the provisions of this section, the broker or dealer submitting or publishing such quotation shall have in its records the following documents and information:
      (1) A record of the circumstances involved in the submission of publication of such quotation, including the identity of the person or persons for whom the quotation is being submitted or published and any information regarding the transactions provided to the broker or dealer by such person or persons;
      (2) A copy of any trading suspension order issued by the Commission pursuant to section 12(k) of the Act respecting any securities of the issuer or its predecessor (if any) during the 12 months preceding the date of the publication or submission of the quotation, or a copy of the public release issued by the Commission announcing such trading suspension order; and
      (3) A copy or a written record of any other material information (including adverse information) regarding the issuer which comes to the broker's or dealer's knowledge or possession before the publication or submission of the quotation.
      (c) The broker or dealer shall preserve the documents and information required under paragraphs (a) and (b) of this section for a period of not less than three years, the first two years in an easily accessible place.
      (d)
      (1) For any security of an issuer included in paragraph (a)(5) of this section, the broker or dealer submitting the quotation shall furnish to the interdealer quotation system (as defined in paragraph (e)(2) of this section), in such form as such system shall prescribe, at least 3 business days before the quotation is published or submitted, the information regarding the security and the issuer which such broker or dealer is required to maintain pursuant to said paragraph (a)(5) of this section.
      (2) For any security of an issuer included in paragraph (a) (3) of this section,
      (i) a broker-dealer shall be in compliance with the requirement to obtain current reports filed by the issuer if the broker-dealer obtains all current reports filed with the Commission by the issuer as of a date up to five business days in advance of the earlier of the date of submission of the quotation to the quotation medium and the date of submission of the paragraph (a) information pursuant to Schedule H of the By-Laws of the National Association of Securities Dealers, Inc.; and
      (ii) a broker-dealer shall be in compliance with the requirement to obtain the annual, quarterly, and current reports filed by the issuer, if the broker-dealer has made arrangements to receive all such reports when filed by the issuer and it has regularly received reports from the issuer on a timely basis, unless the broker-dealer has a reasonable basis under the circumstances for believing that the issuer has failed to file a required report or has filed a report but has not sent it to the broker-dealer.
      * * * * *
      (f) * * *
      (5) The publication or submission of a quotation respecting a security that is authorized for quotation in the NASDAQ system (as defined in § 240.11 Ac1-2(a) (3) of this chapter), and such authorization is not suspended, terminated, or prohibited.
      * * * * *

      By the Commission.

      Dated: April 17, 1991.

      Margaret H. McFarland,

      Deputy Secretary.

      [FR Doc. 91-9415 Filed 4-24-91; 8:45 am]

      BILLING CODE 8010-01-M


      1 17 CFR 240.15c2-11.

      2 15 U.S.C. 78a et seq.

      3 See paragraph (e)(1) of the Rule. 17 CFR Z40.15c2-11(e)(1).

      4 See, e.g., paragraph (f)(i) (excluding over-the-counter quotations for exchange-listed securities), paragraph (f)(3) (the "piggyback" exception), and paragraph (f)(5) (excluding quotations for securities authorized for quotation in the NASDAQ system operated by the National Association of Securities Dealers, Inc. ("NASD")) of the Rule, 17 CFR 24O.15c2-11(f)(1),(3), and (5).

      5 In this release, the term "non-NASDAQ market" means the market for those securities traded in the over-the-counter market which are neither exchange-listed nor quoted on NASDAQ; the term "non-NASDAQ securities" means those securities traded in the non-NASDAQ market.

      Currently, the principal interdealer quotation-media for non-NASDAQ securities are the National Daily Quotation Service (commonly referred to as the "pink sheets"), published and distributed by the National Quotation Bureau, Inc. and the OTC Bulletin Board Display Service ("OTC Service"), operated by the NASD. See Securities Exchange Act Release No. 27975A (May 30, 1990), 55 FR 23161 ("Release No. 34-27975A"). The OTC Service and the "pink sheets," as well as certain similar quotation media of a more limited geographic scope, such as Metro Data Company's "white sheets," reflect markets for securities of lesser-known issuers. These markets are generally characterized by low levels of trading activity and dealer competition. Information concerning these issuers often is not readily available to the marketplace, and few analysts regularly follow their securities.

      6 See "Beware of Penny Stock Fraud" (November 1986), SEC Press Release 88-111; "Penny Stock Telephone Fraud" (June 1989), SEC Pres3 Release 89-58; and "New Penny Stock Cold Calling Rule" (December 1989), SEC Press Release 90-3.

      7 See Securities Exchange Act Release No. 29093 (April 17, 1991) (proposing penny stock disclosure rules'); Securities Act Release No. 5891 (April 17, 1991) (proposing Rule 419 under the Securities Act of 1833); Securities Exchange Act-Release No. 27160 (August 22, 1989), 54 FR 35468 (adopting Rule 15c2-6 under the Exchange Act, 17 CFR 240.15c2-6).

      8 See, e.g., SEC v. Brownstone-Smith Securities Corp., No. 69-6249-CIV-GONZALEZ (S.D, Fla. permanent injunction entered May 25, 1989), summarized in Litigation Release Nos. 12126 [June 12, 1989), 43 SEC Docket (CCH) 1748, and No. 12132 (June 16, 1989), 43 SEC Docket (CCH) 1841; SSC v. Kimmes, No. 89-C-5942 (N.D. 111. permanent injunctions entered Sept. 13, 1989, Oct. 13, 1989. July 27, 1990, Sept. 13, 1990 and Oct. 2, 1990), summarized in Litigation Release Nos. 12210 (Aug. 9,1889), 44 SEC Docket (CCH) 467, No. 12254 (Sept 25, 1989), 44 SEC Docket (CCH) 1162, No. 12290 (Oct. 13, 1989), 44 SEC Docket (CCH) 1571, No. 12582 (Aug. 15, 1990), 46 SEC Docket (CCH) 1442, No. 12832 (Sept. 24, 1990), 47 SEC Docket (CCH) 270, and No. 12635 (Oct. 26, 1990), 47 SEC Docket (CCH) 829; SEC v. Stoneridge Securities, Inc., No. CV-S-89-096 PMP (D. Nev. permanent injunctions entered Feb. 2 and March 1, 1989), summarized in Litigation Release Nos. 11995 (Feb. 13, 1989), 42 SEC Docket (CCH) 1280 and No. 12048 (March 29, 1989), 43 SEC Docket (CCH) 912.

      9 See, e.g.. U.S. Assurance Corp., Securities Exchange Act Release No. 27354 (October 11, 1989). 44 SEC Docket (CCH) 1280; Novaferon Labs, Inc., Securities Exchange Act Release No. 26797 (May 9, 1989), 43 SEC Docket (CCH) 1245; Westminster Financial Corp., Securities Exchange Act Release No. 26791 (May 8, 1989), 43 SEC Docket (CCH) 1237. See also note 70 infra.

      10 See Bagley Securities, Inc., Securities Exchange Act Release No. 27673 (February 5, 1990), 45 SEC Docket (CCH) 590; William v. Frankel & Company, Securities Exchange Act Release No. 27649 (January 28, 1990), 45 SEC Docket (CCH) 529; Richfield Securities, Inc., Securities Exchange Act Release No. 28129 (September 29, 1988), 41 SEC Docket (CCH) 1235.

      11 See Securities Exchange Act Release No. 27247 (September 14, 1989), 54 FR 39194 ("Proposing Release").

      12 The Proposing Release also set forth the Commission's interpretive position regarding a broker-dealer's obligations under the Rule following the expiration of a trading suspension. See Proposing Release, 54 FR at 39197-39198.

      13 See paragraph (f)(3) of the Rule, 17 CFR 240.15c2-11(f)(3). The "piggyback" exception is the subject of a companion release issued today by the Commission. See Section III infra.

      14 See Release 34-9310, 36 FR at 18641.

      15 Copies of these letters, as well as a Summary of Comments prepared by the staff, are contained in File No. S7-27-89 and are available for public inspection and copying at the Commission's Public Reference Room.

      16 See former paragraphs (a)(4) and (a)(5) of the Rule.

      17 See Securities Exchange Act Release No. 21470 (November 15, 1984), 49 FR 45117,45118 ("Release 34-21470").

      18 That is, with respect to the items of information to be obtained and maintained by broker-dealers and with respect to the reliability of their sources of that information.

      19 17 CFR 240.15c2-11(c) (1990). As discussed infra, the Commission has restructured former paragraph (b) of the Rule, 17 CFR 240.15c2-11(b) (1990), and former paragraph (c) to simplify the Rule's structure and to reflect the amendments to the Rule. The content of former paragraph (b) is unchanged. Former paragraph (c) provided in part that "broker-dealer shall maintain in writing as part of his records * * * any other information (including adverse information) regarding the issuer which comes to his knowledge or possession before the publication or submission of the quotation * * *."

      20 A market maker is defined in section 3(a)(38) of the Exchange Act as "any dealer who, with respect to a security, holds himself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy and set! such security for his own account on a regular or continuous basis." 15 U.S.C. 78c(a)(38). A wholesale market maker holds himself out primarily to other broker-dealers and professionals as being willing to buy and sell securities. See generally Report of Special Study of the Securities Markets of the Securities and Exchange Commission, reprinted in H.R. Doc. No. 95, 88th Cong., 1st Sess., pt. 2 at 554-555 (1983) ("Special Study").

      21 A retail firm engages in purchasing and selling securities with public investors, generally involving direct solicitation of buy and sell interest In essence, the commenters suggest that the Rule should apply only to "integrated" firms, i.e., broker-dealers that act as market makers and transact business with the public. See generally Special Study, pt 2, 554-555.

      22 Under the general antifraud provisions of the federal securities laws, a broker-dealer that recommends securities to its customers, i.e.. a retail firm, is required to have a reasonable basis for those recommendations. See Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969), affirming Richard J. Buck & Co., 43 S.E.C. 998 (1968).

      23 The phrase "under the circumstances" relates to the circumstances surrounding the broker-dealer's formation of a reasonable belief that the information is accurate, and not to the particular circumstances of the broker-dealer publishing or submitting quotations for a covered security. For example, a market maker who customarily trades solely on the basis of perceived supply and demand (i.e., trades "by the numbers"), or who lacks the personnel to conduct a reasonable review, could not avoid its obligations under Rule 15c2-11 by asserting that under its circumstances, it was not required to obtain and review the Rule's specified information and have a reasonable basis for believing in the accuracy of the information and the reliability of the source of the information.

      24 Solely for clarity and conciseness, the Commission is replacing the phrase "true and correct" with the word "accurate."

      25 In response to a commenter's recommendation, amended paragraph (a) combines the separate review requirements contained in the Rule as proposed to be amended. Specifically, paragraph (a) incorporates proposed paragraph (h), which pertained to the information review obligations of a broker-dealer publishing or submitting a quotation for a security of an issuer that had been the subject of a trading suspension order issued by the Commission during the twelve months preceding publication or submission of the quotation. See section II.A.2. infra.

      26 See, e.g., Section II.A.2. infra.

      27 With respect to registration statements that incorporate other documents by reference, e.g., Form S-3 under the Securities Act of 1933 ("Securities Act"), 17 CFR 239.13, the broker-dealer may be required to obtain some of the incorporated documents in order to satisfy the information gathering and review requirements. For example, where the registration statement required by paragraph (a)(1) incorporates another document containing a description of "the nature of the issuer's business" (see paragraph (a)(5)(x)) or "the name of the chief executive officer and members of the board of directors" (see paragraph (a)(5)(xi)), the broker-dealer would have to obtain that other document.

      28 The Commission has amended paragraph (b) to require the broker-dealer to maintain as part of its written records any other material information about the issuer, including adverse information, that comes to its knowledge or possession that would be considered important in determining whether there is a reasonable basis for believing in the accuracy (and the reliability of the source) of the paragraph (a) information. However, paragraph (b) does not require the broker-dealer to maintain trivial information or information from an uncertain source. Also, paragraph (b) does not require a broker-dealer routinely to affirmatively seek additional information about the issuer. However, if material information about the issuer comes to the broker-dealer's knowledge or possession (orally or in writing) from an authoritative source, the broker-dealer must include that information in its files (i.e.. documents should be retained, and oral information should be recorded and maintained).

      29 Because of the liabilities attaching to documents filed with the Commission, see, e.g., sections 11 and 24 of the Securities Act 15 U.S.C. 77k and 77x, and sections IB and 32 of the Exchange Act 15 O.S.C. 78r and 78ff, a broker-dealer generally could reasonably have stronger belief as to the accuracy of information contained in such documents than information in documents not so filed. Of course, the presence of "red flags," as discussed herein, must be considered in the review of any information.

      30 Moreover, the presence of "red flags" can alert the broker-dealer that fraudulent or manipulative activities are taking place in the market for the security. See Bunker Securities Corporation, 48 S.E.C. 859, 865 (1987).

      31 As suggested by a commenter, the phrase "in all material respects" has been added to paragraph (a). Consistent with the prior operation of the Rule, broker-dealers may have a reasonable basis for believing that the paragraph (a) information is accurate despite the presence of insignificant errors or discrepancies in the information. Cf. Basic Inc. versus Levinson, 108 S.Ct 97ft 983 (1988).

      32 Cf. Bunker Securities Corporation, 48 S.E.C. 858,865 (1987).

      33 Pursuant to recent amendments to Schedule H of the NASD By-Laws, prior to initiating or resuming quotations, NASD member firms are required to provide the NASD with a copy of the paragraph (a) information. See Section II.C. infra. The NASD reviews the furnished information before a member firm may publish the quotation. This NASD review does not alter a broker-dealer's obligations to have a reasonable belief as to the accuracy of the information and the reliability of its source, i.e.. a broker-dealer may not claim to have any such reasonable belief on the basis that the NASD reviewed the Rule 15c2-11 information and did not raise any objection to such information prior to the broker-dealer's publication of the quotation. Cf. Melvin Y. Zucker, 48 S.E.C. 731,733 (1976).

      34 See, e.g., Securities Act Release No. 5275 (July 26, 1972), 37 FR16011 ("The Obligations of Underwriters, Brokers and Dealers in Distributing and Trading Securities, Particularly of New High Risk Ventures"), and Securities Exchange Act Release No. 26100 (September 22, 1988), 53 FR 37778 (providing the Commission's interpretation of underwriter responsibilities under the antifraud provisions of the securities laws, with particular reference to offerings of municipal securities) and cases cited therein. See also Klinges, "Expanding the Liability of Managing Underwriters Under the Securities Act of 1933," 53 Fordham L. Rev. 1083 (1985); NASD, Due Diligence Seminars: Special Report (1981).

      35 It should be noted that a possible source of confusion in this area is the fact that the material gathered to satisfy the requirements of Rule 15c2-11 often is referred to as a "due diligence file." The Commission believes that this is a misnomer.

      36 See Proposing Release, 54 FR at 39199.

      37 Cf. Special Study, pt. 2, at 605-609; Halsey, Stuart & Co., Inc., 30 S.E.C. 106,126-129 (1949).

      38 See Proposing Release, 54 FR at 39196.

      39 See id. at 39197; NASD Rules of Fair Practice Article III, section 2, NASD Guide (CCH) H 2152.

      40 See, e.g., Special Study, pt. 2, at 569.

      41 See Proposing Release, 54 FR at 39202.

      42 The addition of the phrase "in all material respects" to paragraph (a) of the Rule, see note 31 supra, does not alter any broker-dealer's obligation to gather and review the required information.

      43 Rule 15c2-11 was adopted under Section 15(c)(2) of the Exchange Act, 15 U.S.C. 78o(c)(2), among other sections. Section 15(c)(2) provides the Commission with broad authority to promulgate rules that prescribe means reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices in the over-the-counter securities markets. The Commission is amending paragraph (a) to reflect that it has employed its full authority under section 15(c)(2).

      44 The Commission is authorized under section 12(k) of the Exchange Act, 15 U.S.C. 78/(k), to suspend summarily trading in any security, other than an exempted security, for a period not exceeding 10 days. The Commission may issue such an order if in its opinion the public interest and the protection of investors so require.

      The situation in which broker-dealers may be precluded from publishing quotations for a security because they lack the information required by the Rule should be distinguished from a trading suspension in the security. See Proposing Release, 54 FR at 39198 n.51.

      45 See Bagley Securities, Inc. and William V. Frankel & Company, note 10 supra (firms consented to findings without admitting or denying the allegations contained therein).

      46 15 U.S.C. 77a et seq.

      47 See William V. Frankel & Company, note 10 supra.

      48 See Bagley Securities Inc. and William V. Frankel & Company, note 10 supra,

      49 Cf. Securities Act Release No. 5128 (July 7. 1971), 3 Fed. Sec. L. Rep. (CCH) ¶ 22.780.

      50 54 FR at 39196.

      50 54 FR at 39198.

      51 17 CFR 240.15c2-11(a)(1)-(a)(5).

      52 See 17 CFR 249.310.

      53 See 17 CFR 249.308a.

      54 In the event the issuer should change its fiscal year, the broker-dealer must also obtain and review any transitional reports filed with the Commission pursuant to Rule 15d-10 under the Exchange Act 17 CFR 240.15d-10.

      55 17 CFR 240.15c2-11(a)(5). Paragraph (a)(5) specifies the information, including financial information, that a broker-dealer must have in its records before initiating or resuming a quotation for a covered security that does not fall within the other provisions of paragraph (a).

      56 Paragraph (a)(1) of the Rule permits a broker-dealer to initiate or resume quotations based on a registration statement that became effective less than 90 days before publication or submission of the quotation. Under amended paragraph (a)(3), the broker-dealer could enter quotations based on a registration statement during the period between 90 days after effectiveness of the registration statement and the filing of the first annual report

      57 17 CFR 249.210.

      58 This would include quarterly reports and current reports. See Section II.B.1.b infra.

      59 17 CFR 249.308.

      60 For example, a report on Form 8-K must he filed upon the occurrence of a change in control (Item 1); acquisition or disposition of assets (Item 2); bankruptcy or receivership (Item 3); change in accountants (Item 4); and resignations of directors (Item*). A reporting issuer also may file voluntarily a Form 8-K to report other events that the issuer "deems of importance to security holders" (Item 5).

      61 The Commission's Public Reference Room, telephone (202) 272-7450, can advise a broker dealer whether an issuer has filed a report under the Exchange Act. Also, the daily SEC News Digest includes a listing of issuers that recently filed Form 8-K reports, including the Form 8-K Item Number pursuant to which the report is filed and the date of the event triggering the report. See note 87 infra.

      There are three principal means for a broker-dealer to obtain a copy of a report filed with the Commission by an issuer: from the issuer itself; from one of the user organizations that reproduce and distribute reports filed with the Commission; and from the Commission's Public Reference Room. Market makers frequently are on an issuer's mailing list and regularly receive copies of issuer filings. User organizations provide copies of reports for a fee, on a subscription basis, or usually within a short time from the date of a telephone or written request. The Public Reference Room will provide copies for a fee in response to written requests (the response time can be significantly longer than that of the user organizations).

      62 The Commission also notes that reporting issuers file an average of one Form 8-K per issuer per year. See Proposing Release, 54 FR at 39201 n.84.

      Also, the Commission recognizes that the requirement to obtain current reports could be viewed as burdensome if the Commission should adopt a proposal to abolish the Rule's piggyback exception, as recommended in Securities Exchange Act Release No. 29095 (April 17, 1991) ("Release 34-29095"), published today. See section 115 infra. The Commission seeks comment in Release 34-29095 whether any difficulties are posed by requiring a broker-dealer to obtain current reports on a regular basis in order to publish quotations.

      63 See Section II.C. infra.

      64 However, if prior to the publication of the quotation in a quotation medium, information comes to the knowledge or possession of the broker-dealer that an issuer has filed a more recent Form 8-K, the broker-dealer would have to obtain and review that report.

      65 Any such statement or report is deemed to be "reasonably available" when it is filed with the Commission. Paragraph (a)(5) is not applicable to the quotations for securities of an issuer included in paragraph (a)(3) where a statement or report of that issuer which is required under paragraph (a)(3) is reasonably available to the broker-dealer.

      66 See Securities Exchange Act Release No. 21914 (November 15, 1984), 49 FR 45117. The Commission observes that a broker-dealer's knowledge that an issuer is delinquent in its filing obligations is a significant fact concerning the issuer that must be recorded pursuant to paragraph (b), and considered in reviewing other Rule 15c2-11 information and satisfying the "reasonable basis" requirements of amended paragraph (a). See Section IIA, supra.

      67 SEC Today, published by the Washington Service Bureau, Inc., contains the SEC News Digest, which includes information about trading suspensions recently ordered by the Commission.

      68 The Commission's Information Line, at (202) 272-3100, offers the public general information about the Commission. Callers are directed to press "95" to obtain information concerning trading suspensions. After pressing that number, they will receive further instructions on how to reach a recorded message detailing recent trading suspensions and how to obtain from the Commission's Public Reference Room a list of all trading suspensions ordered during the previous twelve months.

      69 Since the broker-dealer must obtain and review specified information regarding a trading suspension for any of the issuer's securities ordered during the twelve months prior to publication or submission of the quotation, it must remain alert to the Commission's issuance of any trading suspension order regarding the issuer's securities after the time it requests the list of trading suspensions from the Commission.

      70 As an atypical but relevant example, within a six-month period in 1988, the Commission suspended trading in the securities of more than 100 pink sheet issuers. See Securities Exchange Act Release No. 25550 (April 15, 1988), 40 SEC Docket (CCH) 841; Securities Exchange Act Release No. 25813 (June 21, 1988). 41 SEC Docket (CCH) 276; Securities Exchange Act Release No. 26084 (September 7, 1988), 41 SEC Docket (CCH) 1021.

      71 17 CFR 240.17a-4.

      72 NASD By-Laws, Schedule H, Section 4, NASD Manual (CCH) 11935.

      73 See Securities Exchange Act Release No. 27968 (May 1, 1990), 55 FR 19132.

      74 See Release No. 34-27975A. See also Letter regarding OTC Bulletin Board Display Service, Securities Exchange Act Release No. 27976 (May 1, 1990) (granting exemptions from the information gathering and furnishing requirements of Rule 15c2— 11 for certain securities eligible for quotation in the OTC Service during its first 60 days of operation).

      75 See Securities Exchange Act Release No. 27928, (April 19, 1990), 55 FR 17933 (approving the PORTAL System). See also Letter regarding the Private Offering, Resale and Trading through Automated Linkages ("PORTAL") System, Securities Exchange Act Release No. 27964 (April 30, 1990), (granting an exemption from the information gathering and furnishing requirements of Rule 15c2-11 for certain securities eligible for quotation in the PORTAL System).

      76 The Commission in adopting paragraph (f)(5) stated that an "exception from the Rule has been established for the publication of quotations for securities authorized to be quoted in the NASDAQ system * * *." Securities Exchange Act Release No. 21470 (November 15, 1984). 49 FR 45117,45119 ("Release 34-21470").

      77 Release No. 34-21470,49 FR at 45118-45119. Unlike the NASDAQ system, the OTC Service and the PORTAL System will not impose any substantive qualification criteria concerning the issuer or the security quoted.

      78 Because the Commission did not propose to exclude reporting issuers' securities from the Rule, it does not believe that it would be appropriate to consider adopting this recommendation at this time. The Commission notes, however, that the Rule has never excepted from its coverage securities solely based on the fact that the issuers were reporting issuers. Cf. Rule 15c2-11(a)(3).

      79 See Proposing Release, 54 FR at 39202-39204.

      80 Release 34-29095.

      8115 U.S.C. 78w(a)(2).

    • 91-35 Proposed SEC "Penny Stock" Disclosure Rules

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Operations
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC or "the Commission") recently issued Release No. 34-29093 proposing for public comment the so-called "Penny Stock Disclosure Rules" to implement certain provisions of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. These proposed rules further define the term "penny stock" and provide certain exemptions from the definition. They also would require broker-dealers selling penny stocks to their customers to provide the customers with (1) a risk disclosure document; (2) monthly statements giving the market value of penny stocks held for customers; (3) disclosure of current bid and ask quotations, if any; (4) disclosure of the compensation of the broker-dealer and the salesperson with respect to the trade; and (5) disclosure when the broker-dealer is acting as sole market maker in the security. Comments on the proposed rules may be submitted to the SEC until July 19, 1991.

      BACKGROUND

      In its Release 34-29093, the Securities and Exchange Commission (SEC) proposed for public comment rules under the Securities Exchange Act of 1934 to implement certain provisions of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. The Penny Stock Reform Act grants the SEC broad rule-making authority to address serious abuses and misconduct identified in the distribution and secondary trading of penny stocks.

      The NASD continues to aggressively pursue its regulatory and enforcement efforts to eliminate fraud in the penny-stock market. Working on its own as well as with other enforcement agencies, the NASD remains focused on NASD members and associated persons who use high-pressure tactics and other fraudulent and deceptive practices to sell penny stocks to the public. Certain of these cooperative efforts with federal law enforcement agencies have resulted in criminal prosecution relating to securities fraud.

      SUMMARY OF PROPOSED SEC RULES 3a51-1 AND 15g-1 THROUGH 15g-7 ("PENNY STOCK DISCLOSURE RULES")

      Proposed SEC Rule 3a51-1 (Definition of "Penny Stock")

      Proposed SEC Rule 3a51-1 would exclude securities from the definition of penny stock that are: (1) "reported securities" (i.e., securities for which last-sale reports are collected and made available pursuant to an effective transaction reporting plan). Reported securities generally consist of securities quoted on the Nasdaq system that are designated as Nasdaq National Market System securities (Nasdaq/NMS securities), New York Stock Exchange, Inc. (NYSE) and American Stock Exchange, Inc. (Amex) listed securities, and certain regional exchange-listed securities that meet NYSE or Amex listing standards; (2) securities that have a price of $5 per share or more; (3) securities issued by an investment company registered under the Investment Company Act of 1940; (4) put or call options issued by the Options Clearing Corporation; and (5) securities registered or approved for registration on a national securities exchange that has maintenance criteria authorizing, at a minimum, the delisting of a security whose issuer has less than $2 million in net tangible assets or in stockholder equity.

      Proposed SEC Rule 15g-1 (Exemptions)

      Proposed Rule 15g-1 would exempt selected transactions from the proposed disclosure obligations to customers as follows: (1) transactions in penny stocks by a broker-dealer that does less than 5 percent of its securities business in penny stocks and that has not been a market maker, during the past year, in the penny stock that is the subject of the transactions; (2) transactions in securities the issuer of which has net tangible assets exceeding $2 million, if that issuer has been in continuous operation for at least three years, or $5 million, if the issuer has been in continuous operation for less than three years; (3) transactions in securities where the customer is an institutional accredited investor; (4) transactions that are not recommended by the broker-dealer; and (5) transactions in which the purchaser is the issuer of the penny stock that is the subject of the transaction.

      Separately, proposed Rule 15g-1 would exempt two categories of penny-stock transactions from proposed Rules 15g-2 (requiring provision of a risk disclosure document), 15g-3 (requiring disclosure of bid/ask prices), and 15g-6 (requiring provision of monthly account statements), as follows: (1) transactions in securities that are registered and that are executed on a national securities exchange that disseminates transaction reports pursuant to an effective reporting plan; and (2) transactions in Nasdaq securities qualifying as penny stocks that involve a Nasdaq market maker registered in that security, a broker crossing two orders on an agency basis, or an underwriter or any syndicate or selling-group member that is participating in a distribution of the affected penny stock.

      Proposed SEC Rule 15g-2 (Risk Disclosure Document)

      Proposed Rule 15g-2 would make it unlawful for a broker-dealer to effect transactions in penny stocks without first providing to the customer a standardized disclosure document as contained in proposed Schedule 15G. The document required by the proposed rule explains the risks of investing in penny stocks; important concepts associated with the penny-stock market, such as the meaning of the "bid" and "ask" prices and the significance of the spread between those prices; the broker-dealer's duties to the customers, including disclosures required by each of the proposed rules; a toll-free telephone number through which a customer may inquire about the disciplinary history of a broker-dealer; the customer's rights and remedies in cases of fraud or abuse in connection with transactions in penny stocks; and other significant information of which the investor should be aware.

      Proposed SEC Rule 15g-3 (Bid-Offer Quotations Disclosure)

      Proposed Rule 15g-3 would make it unlawful for a broker-dealer to effect a transaction in any penny stock without first disclosing and subsequently confirming to the customer current quotation prices or similar market information.

      Proposed Rule 15g-4 (Broker-Dealer Compensation Disclosure)

      Proposed Rule 15g-4 would make it unlawful for a broker-dealer to effect a penny-stock transaction for a customer unless the broker-dealer first discloses to the customer the amount of any compensation received in connection with that penny-stock transaction. "Compensation" is defined as (1) in an agency transaction, the amount of any remuneration received or to be received from a customer in connection with the transaction; (2) in a "riskless principal" transaction, the difference between the price to the customer and the contemporaneous purchase or sale price; and (3) in any other principal transaction, the difference between the price to the customer and the prevailing market price in the security.

      Proposed Rule 15g-5 (Associated Person Compensation Disclosure)

      Proposed Rule 15g-5 would make it unlawful for a broker-dealer to effect a transaction in any penny stock for a customer unless the broker-dealer first discloses and subsequently confirms to the customer (1) the aggregate or per-share amount of cash compensation that the associated person of the broker-dealer has received or will receive from any source in connection with the transaction, in cases where the firm determines compensation on a transactional or per-share basis; and (2) the amount of cash or other compensation that the associated person has received from any source during the preceding calendar year in connection with all penny-stock transactions, if this amount exceeds 25 percent of the total compensation that the associated person received during that year in connection with all securities transactions.

      Proposed Rule 15g-6 (Monthly Account Statements)

      Proposed Rule 15g-6 would make it unlawful for a broker-dealer that has effected a penny-stock sale to a customer to fail to furnish to that customer a monthly statement disclosing the identity and number of shares of each penny stock in the customer's account, the transaction dates, the purchase price, and the estimated market value of the security, based on the broker-dealer's recent purchase prices or recent dealer bids. The statement must also contain a standardized explanation of the limited market for the securities and the nature of an estimated market value in such a limited market. If the broker-dealer has not effected any penny-stock transactions for the customer for six consecutive months, the rule would provide a limited exemption to permit account statements to be provided on a quarterly basis.

      Proposed Rule 15g-7 (Sole Market Maker Disclosure)

      Proposed Rule 15g-7 would make it unlawful for a broker-dealer that is the sole market maker in a penny stock, or an affiliated broker-dealer, to effect transactions in the stock unless the broker-dealer has disclosed to the customer that it or its affiliate is the sole market maker and that, by virtue of such status, it or its affiliate exercises substantial influence over the market for the security.

      Moreover, the proposed rule makes it unlawful for a broker-dealer or an affiliate that is a market maker in a penny stock to represent directly or indirectly to a customer that a transaction in the stock is being effected "at the market" or at a price related to the market unless the broker-dealer knows, or has reasonable grounds to believe, that a market exists outside the broker-dealer's control. Exempt transactions under proposed Rule 15g-1 would not be exempt from the disclosure required by proposed Rule 15g-7.

      Members and other interested parties are urged to contact the SEC to obtain a copy of the full text of the Commission's proposed rules. Comments, in triplicate, on the proposed rule should be sent to Jonathan G. Katz, Secretary, SEC, 450 5th Street, NW, Mail Stop 6-9, Washington, DC 20549. Refer to file no. S7-8-91.

    • 91-34 Request for Comments on Amendments to the Filing Requirements of the Interpretation of the Board of Governors — Review of Corporate Financing; Last Date for Comments: July 1, 1991

      SUGGESTED ROUTING:*

      Corporate Finance
      Legal & Compliance
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD requests comment on amending the filing requirements of the Interpretation of the Board of Governors — Review of Corporate Financing to exempt offerings of Canadian issuers filed on proposed SEC Form F-9, and on Form F-10 if the securities are distributed pursuant to SEC Rule 415. The text of the proposed amendment follows this notice.

      BACKGROUND

      The Securities and Exchange Commission, (SEC or "Commission") has published a proposal intended to facilitate cross-border offerings of securities. The proposal is referred to as the "Multi-Jurisdictional Disclosure and Modification to the Current Registration and Reporting System for Canadian Issuers" ("MJDS"). Under MJDS, the SEC has proposed four new registration statement forms (F-7, F-8, F-9, and F-10) and has developed criteria regarding both the issuers that may utilize the registration statements and the types of securities that may be offered. The NASD's Corporate Financing Committee considered the SEC's proposal and recommended to the Board of Governors that it would be appropriate to amend the NASD's filing requirements to exempt offerings by Canadian companies in the United States on Forms F-9 and F-10 from review by the Corporate Financing Department ("Department").

      BACKGROUND ON MJDS

      The Commission states that the purpose of MJDS is to remove unnecessary impediments to transnational capital formation by creating a disclosure system that would permit Canadian issuers meeting certain eligibility criteria to satisfy securities registration and reporting requirements in the United States by providing disclosure documents prepared in accordance with the requirements of Canadian regulatory authorities. The Ontario Securities Commission and the Commission des Valeurs Mobilieres du Quebec have also issued for comment proposals that would establish MJDS in Canada.

      MJDS is a hybrid of two approaches — mutual recognition and harmonization of disclosure standards — designed to enhance the efficiency of multinational capital formation. Canada was chosen as the first partner for MJDS, in part, because of the similarities in United States and Canadian investor protection mandates and disclosure requirements. MJDS would permit single jurisdiction regulation of certain security offerings (due to the fact that the SEC will not review the registration statements) so that cross-border security offerings in the United States and Canada could be made more efficient and less expensive.

      Initially, MJDS will be limited to large Canadian issuers or to certain types of offerings, rather than providing for multi-jurisdictional registration and disclosure for any offering by a Canadian issuer. MJDS would extend to two general categories of registered public offerings: (1) rights offerings, exchange offers, and business combinations by Canadian foreign private issuers and crown corporations; and (2) "substantial" Canadian foreign private issuers and crown corporations. In addition, a Canadian issuer would generally be required to have a three-year reporting history as a public company in Canada and be in compliance, at the time of filing, with the Canadian reporting requirements as administered by Canadian securities regulatory authorities.1

      BACKGROUND ON FILING REQUIREMENTS

      The NASD requires members to file most public offerings with the Corporate Financing Department for review of the fairness and reasonableness of the underwriting terms and arrangements. Historically, the NASD has tried to identify offerings in which review of the underwriting terms and arrangements would be most meaningful. The NASD has exempted from the filing requirements certain issuers and offerings of certain securities based on the premise that factors inherent in the securities markets tend to competitively limit the underwriting compensation to levels acceptable to the NASD.

      The NASD believes that it is appropriate to facilitate cross-border offerings of securities of Canadian issuers so long as the NASD is certain that the securities markets will act to similarly limit the underwriting compensation and terms and arrangements entered into by NASD members with Canadian issuers. Therefore, the Board of Governors has decided that the NASD should seek comment on exempting certain offerings of securities of Canadian issuers from NASD review.

      REQUEST FOR COMMENTS

      Registration Statement Form F-10

      The NASD is requesting comment on an exemption from the filing requirements of the Interpretation for any public offering of securities registered with the SEC by Canadian issuers on Registration Statement Form F-10. The NASD believes that requirements for Form F-10, which is restricted to those issuers with a common stock market value of at least (CN) $360 million and a public float of (CN) $75 million, ensures that the Canadian company utilizing the form will be a seasoned company with experience in raising capital from a public market. Additionally, such issuers are likely to be followed by a number of research analysts and have a number of investment banking relationships with NASD members. These factors should act to ensure that an issuer will be able to negotiate fair and reasonable terms with an underwriter in connection with any public distribution.

      The NASD also requests comment on extension of the current exemptions from the filing requirements for securities registered on Forms S-3 and F-3 to securities registered by Canadian issuers on Registration Statement Form F-10. The terms of the exemption would be limited to those offerings to be distributed on a delayed or continuous basis pursuant to SEC Rule 415. This would have the effect of treating securities registered by Canadian issuers on the same basis as securities offered by domestic companies on Form S-3 that are offered pursuant to SEC Rule 415.

      The NASD also seeks comment on a proposed exemption for securities offered pursuant to a redemption standby firm-commitment underwriting arrangement. This would extend the exemption currently contained within the Interpretation for redemption standby firm-commitment underwriting arrangements for issuers utilizing Form S-3 to Canadian issuers eligible to offer securities registered pursuant to Form F-10.

      In connection with the proposed amendments, the NASD is clarifying that foreign companies registering an offering of securities pursuant to Registration Statement Form F-3 to be distributed by a member pursuant to SEC Rule 415, or in connection with a "firm commitment" redemption standby obligation, are exempt from the filing requirements of the Interpretation. The NASD has over the years consistently indicated that members that propose to distribute securities of foreign issuers registered on the Form F-3 may utilize the exemptions contained within the Interpretation for domestic companies utilizing Form S-3.

      Registration Statement Form F-9

      The NASD is also requesting comment on an exemption from filing for issuers utilizing Form F-9. Registration Statement Form F-9 is available to Canadian issuers that are offering nonconvertible debt and nonconvertible preferred stock that, at the time of effectiveness of the registration statement, is rated investment grade by at least one nationally recognized statistical rating organization as that term is used by the SEC in Rule 15c3-1.

      In addition, a Canadian issuer will be permitted to utilize Form F-9 to issue debt or preferred stock that is convertible if such convertibility cannot occur prior to one year from the date of issuance. The issuer also must have a total market value for its common stock of at least (CN) $180 million and have a public float of (CN) $75 million.

      In requesting comment, the NASD recognizes that a current exemption from the filing requirements of the Interpretation for securities offered by a corporate issuer that has nonconvertible debt with a term of issue of at least four years, or non-convertible preferred securities rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories, may presently be utilized by foreign corporate issuers distributing securities in this country. When the NASD amended the Interpretation to include this exemption in 1984, it made clear that foreign private issuers could rely on this exemption.2 The NASD has also interpreted this exemption to cover a current offering of investment-grade-rated debt or preferred securities.

      In soliciting comment on an exemption for debt and preferred securities registered by a Canadian issuer on Form F-9, the NASD recognizes that the exception would realistically expand the scope of an existing exemption only to include investment-grade-rated convertible debt and convertible preferred securities.

      * * * * *

      The NASD notes that MJDS may be extended in the future to foreign issuers of jurisdictions other than Canada. While the NASD generally believes that it is appropriate to extend to foreign issuers the same exemptions from the filing requirements enjoyed by domestic issuers, it is not yet prepared to extend the exemptions contained in the Interpretation to issuers of jurisdictions other than Canada. The NASD believes that it is appropriate to carefully scrutinize any expansion of MJDS to determine if the same treatment can be accorded to issuers of other countries.

      It should also be noted that the NASD has decided not to amend the provisions of Schedule E to the By-Laws as it may relate to foreign offerings. Schedule E is meant to address potential conflicts of interest that exist when a member participates in the public distribution of its own securities or those of an affiliate. The NASD believes that the comprehensive protections against conflicts of interest under Schedule E continue to be appropriate. Therefore, Schedule E would be applicable to offerings filed on Forms F-7, F-8, F-9, and F-10.

      REQUESTS FOR COMMENTS

      The Board of Governors asks all members and interested persons to comment on the proposed amendment. Comments should be directed to:

      Stephen D. Hickman,
      Secretary National Association of
      Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Comments must be received no later than July 1, 1991. Comments received by this date will be considered by the NASD's Corporate Financing Committee, other appropriate standing committees, and the NASD Board of Governors. If the Board approves the proposed amendments to the filing requirement of the Interpretation of the Board of Governors — Review of Corporate Financing, it must be filed with and approved by the SEC before it can become effective.

      Questions concerning this notice may be directed to Richard J. Fortwengler, Associate Director, or Carl R. Sperapani, Assistant Director, NASD Corporate Financing Department, at (202) 728-8258.

      INTERPRETATION OF THE BOARD OF GOVERNORS — REVIEW OF CORPORATE FINANCING

      * * * * *

      Filing Requirements (Note: New language is underlined.)

      * * * * *

      Documents related to the following public offerings need not be filed with the Association for review, unless subject to the provisions of Schedule E to the By-Laws, provided, however, it shall be deemed a violation of Article III, Section 1 of the Rules of Fair Practice, or Appendix F to Article III, Section 34 of the Rules of Fair Practice if a direct participation program, for a member to participate in any way in such public offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this Interpretation or Appendix F, as applicable:

      (1) securities offered by a corporate, foreign government or foreign government agency issuer which has non-convertible debt with a term of issue of at least four years, or non-convertible preferred securities, rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories;
      (2) securities registered with the Securities and Exchange Commission on registration statement Forms S-3, and F-3 and securities registered by Canadian issuers on registration statement Form F-10 and offered pursuant to Rule 415 adopted under the Securities Act of 1933, as amended;
      (3) securities offered pursuant to a redemption standby "firm commitment" underwriting arrangement registered with the Securities and Exchange Commission on Forms S-3 and F-3 and securities offered pursuant to a redemption standby "firm commitment" underwriting arrangement registered by Canadian issuers on registration statement form F-10;
      (4) direct participation program interests in a pool of financing instruments which are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories. (NASD CCH 112151, page 2027); and
      (5) debt and preferred securities registered with the Securities and Exchange Commission by a Canadian issuer on registration statement Form F-9.

      1 For further details regarding MJDS, members may refer to Securities Act Release No. 6879, October 16, 1990.

      2 See Securities Act Release No. 34-21480, November 14, 1984.

    • 91-33 Request for Comments on Proposed Nonquantitative Designation Criteria for Partnerships Listed on the Nasdaq National Market System; Last Date for Comments: July 1, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to Part 111, Section 5 of Schedule D to the NASD By-Laws to provide nonquantitative designation criteria for limited partnerships that list on the Nasdaq National Market System (Nasdaq/NMS). The text of the proposed amendment follows this notice.

      BACKGROUND

      In the past, the NASD has considered the need to adopt nonquantitative designation criteria for limited partnerships. Such criteria have never been adopted due to the relatively small number of partnerships that list on and trade in the Nasdaq National Market System (Nasdaq/NMS). However, for the following reasons, the Direct Participation Programs/Real Estate Committee has recommended, and the Board of Governors has agreed, that comments should be solicited on proposed listing standards for partnerships that intend to list on Nasdaq/NMS.

      The NASD believes that limited partnership investors should be provided with certain protections analogous to those enjoyed by shareholders of corporations whose stock is listed on Nasdaq/NMS. The NASD's concern is prompted by a belief that the absence of "governance" standards leaves limited partners without the benefits and protections that corporate shareholders enjoy such as independent directors, annual and interim reports, an audit committee, and provisions for annual meetings. The NASD is also concerned that compliance with the current nonquantitative designation criteria required of companies whose securities trade in Nasdaq/NMS is not possible for partnerships.

      PROPOSED AMENDMENT

      Under the proposal, partnerships would be required to distribute an annual report containing audited financial statements to investors. The report would be distributed within a reasonable period of time after the close of the partnership's fiscal year. Similarly, interim reports detailing operating results or operational and financial position would be required.

      Partnerships would also be required to establish a corporate general partner and to have two independent directors on the board of the general partner. Partnerships could, however, be admitted to Nasdaq/NMS trading on the election of a single independent director to the board of the corporate general partner, provided they undertake to obtain a second independent director within a 12-month period.

      Partnerships would not generally be required to hold annual meetings unless a statute or regulation in the state under which the partnership is formed or does business requires a meeting or the partnership's limited partnership agreement prescribes meeting requirements. In the event of a meeting, a quorum of 33 1/3 percent of the limited partnership interests outstanding would be required, and proxy materials or information statements would be distributed. Proxies would be required to be solicited in connection with meetings in which a majority vote of limited partners would be necessary.

      It would be "strongly recommended" but not required that the partnership's corporate general partner maintain an audit committee, a majority of the members of which shall be independent directors.

      REQUEST FOR COMMENTS

      The Board of Governors asks all members and interested persons to comment on the proposed amendment. The Board also requests comment on the implementation procedures for any requirements that may be adopted. In particular, it must be determined whether partnerships that are currently listed would be exempt or grandfathered from any new requirements and, if not, how much time they would be granted to comply. Comments should be directed to:

      Stephen D. Hickman, Secretary
      National Association of
      Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Comments must be received no later than July 1, 1991. Comments received by this date will be considered by the NASD's Direct Participation Programs/Real Estate Committee, other appropriate standing committees, and the NASD Board of Governors. If the Board approves the proposed amendment to Schedule D, it must be filed with and approved by the Securities and Exchange Commission before it can become effective.

      Questions concerning this notice may be directed to Richard J. Fortwengler, Associate Director, or Carl R. Sperapani, Assistant Director, NASD Corporate Financing Department, at (202) 728-8258.

      AMENDMENTS TO SCHEDULE D TO NASD BY-LAWS

      (Note: New language is underlined.)

      Section 5. Non-Quantitative Designation Criteria (a) Applicability

      No provision of this Section 5 shall be construed to require any foreign issuer to do any act that is contrary to a law, rule, or regulation of any public authority exercising jurisdiction over such issuer or that is contrary to generally accepted business practices in the issuer's country of domicile. The Association shall have the ability to provide exemptions from applicability of these provisions as may be necessary or appropriate to carry out this intent.

      * * *

      (1) Requirements for Issuers That are Partnerships
      1. Distribution of Annual and Interim Reports
      (a) Each Nasdaq/NMS issuer shall distribute to limited partners copies of an annual report containing audited financial statements of the partnership. The report shall be distributed to limited partners within a reasonable period of time after the end of the partnership's fiscal year and shall be filed with the Association at the time it is distributed to limited partners.
      (b)
      (i) Each Nasdaq/NMS issuer which is subject to SEC Rule 13a-13 shall distribute copies of quarterly reports including statements of operating results to limited partners either prior to or as soon as practicable following the partnership's filing of its Form 10-Q with the Securities and Exchange Commission. If the form of such quarterly report differs from the Form 10-Q, the issuer shall file one copy of the report with the Association in addition to its Form 10-Q pursuant to Section l(c)(12) of Part II hereof. The statement of operations contained in quarterly re-ports shall disclose, at a minimum, any substantial items of an unusual or nonrecurrent nature and net income before and after estimated federal income taxes or net income and the amount of estimated federal taxes if any.
      (ii) Each Nasdaq/NMS issuer which is not subject to SEC Rule 13a-13 and which is required to file with the Securities and Exchange Commission, or another federal or state regulatory authority, interim reports relating primarily to operations and financial position shall distribute to limited partners reports which reflect the information contained in those interim reports. Such reports shall be distributed to limited partners either before or as soon as practicable following filing with the appropriate regulatory authority. If the form of the interim report provided to limited partners differs from that filed with the regulatory authority, the issuer shall file one copy of the report provided to limited partners with the Association in addition to the report to the regulatory authority that is filed with the Association pursuant to Section l(c)(12) of Part II hereof.
      2. Corporate General Partner: Independent Directors

      Each Nasdaq/NMS issuer which is a partnership shall maintain a corporate general partner or co-general partner and shall maintain two independent directors on the board of the general partner. An issuer which is a partnership may be designated for inclusion in Nasdaq/NMS upon demonstrating that the corporate general partner has one independent director and is undertaking to elect a second such director within 12 months of designation.
      3. Audit Committee

      It is strongly recommended that the corporate general partner of each Nasdaq/NMS issuer which is a partnership maintain an audit committee, a majority of the members of which shall be independent directors.
      4. Shareholder Meetings

      A Nasdaq/NMS issuer which is a partnership shall not be required to hold an annual meeting of shareholders unless required by statute or regulation in the state in which the partnership is formed or doing business or by the terms of the partnership's limited partnership agreement.
      5. Quorum

      In the event that a meeting of limited partners is required pursuant to paragraph (4), the quorum for such meeting shall be not less than 33 1/3 percent of the limited partnership interests outstanding.
      6. Solicitation of Proxies

      In the event that a meeting of limited partners is required pursuant to paragraph (4), the issuer shall provide all limited partners with proxy or information statements and, if a vote is required, shall solicit proxies thereon.

    • 91-32 Request for Comments on Compensation Arrangements for Activities of Registered Representatives Who Are Also Registered With the Securities and Exchange Commission as Investment Advisers; Last Date for Comments: July 1, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Internal Audit
      Legal & Compliance
      Registration
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD requests comments on the compensation arrangements for investment advisory activities of registered representatives who are also registered as investment advisers and are conducting their advisory activities outside the scope of their association with the employing member.

      BACKGROUND

      The NASD has recently received several requests from members seeking advice on the applicability of Article III, Sections 27, 40, and 43 of the Rules of Fair Practice to the investment advisory activities of registered representatives who are also registered with the Securities and Exchange Commission (SEC) as investment advisers ("RR/IA") where such activity is not undertaken through the member with which the RR/IA is registered.

      Article III, Section 40 provides that any person associated with a member who participates in a private securities transaction must, prior to such participation, provide written notice to the member with which the person is associated, describing the proposed transaction and stating whether he or she will receive selling compensation. The member must then respond in writing whether it approves or disapproves the proposed transaction. If the registered person is to receive selling compensation, the member, if it approves the transaction, must record the transaction on its books and records and supervise this transaction under Article III, Section 27 of the Rules of Fair Practice as if the transaction were its own. If the registered person will not receive selling compensation and the member approves the transaction, the member may, at its discretion, require the registered person to adhere to specified conditions in connection with his or her participation in the transaction.

      Section 40 defines "private securities transaction" as any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities that are not registered with the SEC. Selling compensation is defined as any compensation paid directly or indirectly, from whatever source, in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

      In Notice to Members 85-84, which announced the approval of Article III, Section 40, attention was directed to what constitutes selling compensation. The notice stated that this definition was deliberately broad in its scope and was meant to include the receipt of any item of value whether directly or indirectly from the execution of any such securities transaction. The notice also discussed the fact that Article III, Section 40 was specifically designed to apply not only to situations where registered persons were acting in a sales capacity outside of their association with the member but also to any situations where the registered person was involved in securities transactions including but not limited to acting in the capacity of a general partner.

      The NASD's National Business Conduct Committee (NBCC), at its May 1991 meeting, considered the applicability of Article III, Section 40 to investment advisory activities. The NBCC concluded that Section 40, consistent with the policy announced when this section was adopted, should be applied in such a manner as to cover these situations. The NBCC believes that Section 40 should apply to all investment advisory activities conducted by registered representatives other than their activities on behalf of the member that result in the purchase or sale of securities by the associated person's advisory clients. The NBCC believes that if the RR/IA receives no compensation from any source whatever in connection with the outside activities, the books, records, and supervisory obligations of Article III, Section 40 would not apply. If, however, the RR/IA receives compensation for, or as a result of, such advisory activities, from a person or entity other than the member, the books, records, and supervision requirements of Section 40 would apply. The Committee believes that to conclude otherwise would permit registered persons to participate in securities transactions outside the scope of the oversight and supervision of the employer member and of a self-regulatory organization to the potential detriment of customers.

      The NBCC also examined the issue of whether the receipt of management or advisory fees for activities conducted away from the member would constitute the receipt of selling compensation under the rule. The Committee determined that the receipt of any compensation by RR/IAs outside the scope of their employment with a member, whether that compensation is directly related to the transactions (e.g., a portion of the commission) or in the form of an asset- or performance-based advisory fee, constitutes the receipt of selling compensation. Members that allow their registered persons to conduct such activities are fully subject to the requirements of Section 40 and must, therefore, record all such transactions on their books and records and supervise them as if these transactions had occurred at the member.

      The NBCC believes that Article III, Section 43 is inapplicable to these situations since this section specifically excludes from its coverage activities subject to the requirements of Article III, Section 40.

      The NBCC is concerned that there may be compensation arrangements including "wrap" fees other than those discussed above that have not been considered, and solicits comments on any such compensation arrangements to help it determine which, if any, of the provisions of Article III, Section 40 should be applied to those arrangements. In addition, the NBCC would like to receive comments on whether broader-based amendments to the NASD's supervision rule (Article III, Section 27) should be considered in addition to the application of Article III, Section 40. Prior to making any final determinations on these other arrangements, the Committee believes that it should have information concerning other arrangements that may be affected by its conclusions.

      The NASD encourages all members and other interested parties to comment on these compensation arrangements. Comments should be forwarded to:

      Stephen D. Hickman,
      Secretary National Association of
      Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Comments should be received by July 1, 1991.

      Questions concerning this notice should be directed to John E. Pinto, Executive Vice President, at (202) 728-8233, T. Grant Callery, Vice President and Deputy General Counsel, at (202) 728-8285, or Craig L. Landauer, Assistant General Counsel, at (202) 728-8291.

    • 91-31 Solicitation of Members' Comments on Proposals to Curb SOES Abuse; Last Date for Comments: June 21, 1991

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Operations
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD Board of Governors has approved two additional proposals to curb Small Order Execution System (SOES) abuse — expanding the definition of "day trading" and permitting a short period between executions (such as 15 seconds) for market makers to update their quotations. The Securities and Exchange Commission (SEC) has published these proposals in the Federal Register (SEC Release No. 34-29181 and 34-29182), and we urge members that use SOES to comment on the proposals. Send your comments before June 21, 1991 to the SEC addressed to:

      Jonathan G. Katz, Secretary
      Securities and Exchange Commission
      450 Fifth Street, NW
      Washington, DC 20549.

      BACKGROUND

      The NASD's Small Order Execution System (SOES) is designed to improve the efficiency of executing small-sized customer orders in Nasdaq securities by offering an alternative to traditional telephone contact and negotiation with market makers. SOES provides automated execution of small customer orders with Nasdaq market makers at the best available market price. Since the exclusive purpose of the service is to facilitate the execution of small customer orders, the Association has taken steps in the past to ensure market-maker presence in the service1 and to prohibit misuse of the service by professional traders.2 In furtherance of that purpose, the Association is proposing amendments to curb further misuse of the SOES system by professional traders.

      The NASD is proposing to define professional trading accounts to include accounts with day trades that have one or both sides executed through SOES. This rule change would prevent professional traders using SOES from automatically executing one side of a day trade against a market maker while executing the other side of the day trade outside of SOES to elude the "five day trade" criteria currently in the SOES rules. The term "professional trading account" in the SOES rules includes accounts in which there have been five or more day trades executed through SOES.

      Second, the NASD is proposing a period of time (i.e., 15 seconds) following an execution to allow a market maker to update a quotation before being obliged to execute a second transaction in the same security on the same side through SOES. Currently, the SOES service can almost instantaneously execute multiple orders against a market maker until the market maker's exposure limit in the security is exhausted. Exposure limits assure liquidity in the Nasdaq issues traded through SOES, but currently do not allow time for market makers to update their quotations in response to executions occurring through the system.

      This proposal for a quotation update period would not diminish market makers' responsibilities to participate in SOES or to post mandatory size in quotations; the update period would give market makers time to react to executions and adjust their markets, if appropriate, to reflect an execution or altered market conditions.

      SEC Rule 11 Ac1-1, the "firm quote rule," requires brokers and dealers to execute orders to buy and sell securities at their published quotations unless the broker-dealer is communicating a revised bid or offer to the NASD or has effected a transaction in the security and is updating its quotation.3 Nasdaq market makers are required to maintain firm quotes and be willing to execute trades at their quotations. Allowing time in between these automated executions of SOES, while still retaining the automated features of the SOES service, strikes an appropriate balance between the small customer's desire for efficiency and immediacy in executions and the NASD's responsibilities to operate a system that provides a fair, responsive trading environment for the parties extending the capital commitment to the Nasdaq market.

      Following receipt of an execution report of a purchase or sale through SOES, a market maker would have a period of time (15 seconds) to update its quote prior to executing any subsequent purchase or sale at the same quote. If a market maker has executed a sale, and subsequently receives a purchase order, SOES would execute that order. If a customer order is executed against the market maker's bid and the market maker subsequently updates its offer or its size in the security, the quotation update period would expire immediately because any update to the market maker's quotation terminates the update period. If an update is accomplished before the period expires, executions would resume immediately after the update. Executions would also resume against the market maker after the update period has elapsed, regardless of whether the quote has been changed.

      Comments on these rule proposals should be sent to the SEC at the address referenced in the Executive Summary. Questions on the proposals may be directed to Beth E. Mastro, Assistant General Counsel, at (202) 728-6998.


      1 See SR-NASD-88-01, Release 34-25791, 53 FR 22594, approved June 16, 1988, mandating participation in SOES by Nasdaq market makers in Nasdaq National Market System securities.

      2 See SR-NASD 88-43, Release No. 34-26361, 53 FR 51605, approved December 22, 1988.

      3 SEC Rule

    • 91-30 Nasdaq National Market System (Nasdaq/NMS) Additions, Changes, and Deletions As of April 12, 1991

      SUGGESTED ROUTING:*

      Internal Audit
      Operations
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      As of April 12, 1991, the following 19 issues joined Nasdaq/NMS, bringing the total number of issues to 2,535:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      ASKI

      ASK Computer Systems, Inc.

      3/18/91

      1000

      ATML

      Atmel Corporation

      3/19/91

      1000

      GVGC

      Grand Valley Gas Company

      3/19/91

      1000

      SBEI

      SBE, Inc.

      3/19/91

      1000

      BCHXF

      IAF BioChem International Inc.

      3/20/91

      1000

      TKCR

      TakeCare, Inc.

      3/20/91

      1000

      CITN

      Citation Insurance Group

      3/21/91

      1000

      FSVBW

      Franklin Savings Bank, FSB (Wts)

      3/21/91

      200

      SYMX

      Symix Systems, Inc.

      3/22/91

      200

      CRNT

      CareNetwork, Inc.

      3/26/91

      1000

      MMGI

      Medical Marketing Group, Inc.

      3/26/91

      1000

      FFBS

      FedFirst Bancshares, Inc.

      3/28/91

      1000

      ICBK

      Intercontinental Bank

      4/1/91

      200

      IPOP

      Input/Output, Inc.

      4/2/91

      1000

      REGN

      Regeneron Pharmaceuticals, Inc.

      4/2/91

      1000

      BONEO

      Bane One Corporation (Ser. C Pfd)

      4/4/91

      500

      VHII

      Value Health, Inc.

      4/4/91

      1000

      AHLDY

      Ahold Limited

      4/8/91

      200

      LXEI

      LXE, Inc.

      4/11/91

      1000

      Nasdaq/NMS Symbol and/or Name Changes

      The following changes to the list of Nasdaq/NMS securities occurred since March 13, 1991:

      New/Old Symbol

      New/Old Security

      Date of Change

      VMLPZ/VMLPZ

      Banyan Mortgage Investors L.P./Mortgage Investors L.P.

      3/13/91

      VMTGZ/VMTGZ

      Banyan Mortgage Investors L.P. II/VMS Mortgage Investors L.P. II

      3/13/91

      VMORZ/VMORZ

      Banyan Mortgage Investors L.P. Ill/VMS Mortgage Investors L.P. Ill

      3/13/91

      VLANS/VLANS

      Banyan Strategic Land Trust/VMS Strategic Land Trust

      3/13/91

      SOMA/HANA

      Somatix Therapy Corp./Hana Biologies, Inc.

      3/18/91

      ABKR/ABKR

      Anchor Bancorp, Inc./Anchor Savings Bank, F.S.B.

      4/1/91

      CCLRA/CCLR

      Commerce Clearing House, Inc. (Cl A)/Commerce Clearing House, Inc.

      4/1/91

      GMRK/GATS

      Gulfmark International, Inc./Gulf Applied Technologies, Inc.

      4/2/91

      ISLI/SGSI

      Sage Software, Inc. (INTERSOLV)/Sage Software, Inc.

      4/9/91

      NECC/NECC

      Critical Care America, Inc./New England Critical Care, Incorporated

      4/10/91

      Nasdaq/NMS Deletions

      Symbol

      Security

      Date

      FSBG

      First Federal Savings Bank of Georgia

      3/14/91

      FLEX

      Flextronics, Inc.

      3/14/91

      BARTE

      Barton Industries, Inc.

      3/15/91

      GEOD

      Geodyne Resources, Inc.

      3/18/91

      HSLD

      Home Savings and Loan Association, Inc.

      3/18/91

      TERX

      Terex Corporation

      3/19/91

      INDX

      Index Technology Corporation

      3/20/91

      ACIG

      Academy Insurance Group, Inc.

      3/27/91

      IMMCO

      International Mobile Machines Corporation (Pfd)

      3/27/91

      TMAS

      TriMas Corporation

      3/27/91

      KUST

      Kustom Electronics, Inc.

      3/28/91

      ATFC

      Atico Financial Corporation

      4/1/91

      CNBA

      County Bank, F.S.B.

      4/1/91

      HFED

      HeartFed Financial Corporation

      4/1/91

      MGNC

      MEDIAGENIC

      4/1/91

      WWIN

      Western Waste Industries

      4/1/91

      CMCA

      Comerica Incorporated

      4/2/91

      CMCAP

      Comerica Incorporated (Pfd)

      4/2/91

      ERCE

      ERC Environmental and Energy Services Co., Inc.

      4/2/91

      BSBX

      Bell Savings Holdings, Inc.

      4/3/91

      ICRR

      Illinois Central Corporation

      4/3/91

      MAWS

      Mid-American Waste Systems, Inc.

      4/3/91

      YESS

      Yankee Energy System, Inc.

      4/3/91

      PCTLW

      PictureTel Corporation (Wts)

      4/5/91

      XYVI

      Xyvision, Inc.

      4/10/91

      OCLB

      Office Club, Inc. (The)

      4/11/91

      ATTWY

      Attwoods pic

      4/12/91

      CSAV

      Continental Savings of America

      4/12/91

      LEXI

      Lexicon Corporation

      4/12/91

      SBTC

      SBT Corp.

      4/12/91

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, Market Listing Qualifications, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (301) 590-6429.

    • 91-29 Memorial Day — Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING:*

      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Systems
      Trading
      *These are suggested departments only. Others may be appropriate for your firm.

      Securities markets and the Nasdaq system will be closed on Monday, May 27, 1991, in observance of Memorial Day. "Regular way" transactions made on the preceding business days will be subject to the settlement-date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date*

      May 17

      May 24

      May 29

      20

      28

      30

      21

      29

      31

      22

      30

      June 3

      23

      31

      4

      24

      June 3

      5

      27

      Markets Closed

      -

      28

      4

      6

      Brokers, dealers, and municipal securities dealers should use these settlement dates for purposes of clearing and settling transactions pursuant to the NASD Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at (212) 858-4341.

      * Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)m, make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Reg. T Date."

    • 91-28 Availability of the Series 17 Limited Registered Representative Examination to Qualify Persons Registered With The Securities Association of the United Kingdom As NASD General Securities Representatives

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Operations
      Registration
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      Members may now opt to use a new test, the Series 17 Limited Registered Representative Examination, to qualify some candidates as NASD General Securities Representatives. To be eligible, a candidate must hold a registration in good standing as a representative with The Securities Association of the United Kingdom (TSA). In a cooperative effort with the NASD and TSA, the New York Stock Exchange (NYSE) based the development of the Series 17 on the Series 7 exam. The 90-question 120-minute Series 17 examination drops the duplicate test questions formerly present for a TSA registrant. Up to now, TSA registrants had to pass the Series 7 examination to become registered in the United States.

      EXPLANATION

      NASD Notice to Members 90-69 in October 1990 announced Securities and Exchange Commission approval of an amendment to Schedule C of the NASD By-Laws. That amendment allows a person registered and in good standing with The Securities Association of the United Kingdom (TSA) to opt to more efficiently qualify as a NASD General Securities Representative. To do so, the candidate must pass a modified general securities representative qualification examination. The New York Stock Exchange (NYSE) has completed development of the modified test, the Series 17 Limited Registered Representative Examination.

      The Series 17 is a 90-question, 120-minute shortened version of the full Series 7 examination. It drops the duplicate questions present on the TSA examination. Note that neither the Series 17 nor the TSA examination covers municipal securities activity. Therefore, before the representative engages in the solicitation, purchase, and/or sale of municipal securities as defined in Section 3(a)(29) of the Securities Exchange Act of 1934, a General Securities Representative who qualifies using the new Series 17 examination must apply for registration as a Municipal Securities Representative and pass the Series 52 Municipal Securities Representative Examination.

      The Central Registration Depository (CRD) system employs the status code "IE" for International Examination, for a registered General Securities Representative using the Series 17 as a qualifying examination. Only NASD or NYSE affiliates may hold "IE" status. A member may request the "IE" position code and the Series 17 examination by filling in the "Other" line in question 11 on page 1 of Form U-4. The testing fee for the Series 17 is $65.

      When CRD processes the request, it will create a status line for the candidate within the employment record of the requesting firm. CRD will initially flag the registration request as deficient for the Series 17 ("S17") and as deficient for a foreign exam ("FOR"). This is in addition to any other filing deficiencies that may exist on the status line. CRD will communicate directly with TSA to receive test scores and verify disciplinary history. CRD must post passing grades for the Series 17 and the TSA exams to the candidate's exam history. The member must clear all other filing deficiencies. Only then may the NASD or NYSE manually approve the registration.

      The NASD's PLATO Professional Development Centers now offer the Series 17 examination through the normal appointment-making process. The NASD's non-U.S. paper and pencil centers will offer the Series 17 exam by appointment beginning with the regular (third-Saturday) May administrations.

      Members may order a study outline for the Series 17 examination by telephoning the NASD Book Order Department at (301) 590-6578. Please direct questions on the application process to the Member Services Phone Center at (301) 590-6500. Members may direct other questions on the Series 17 Limited Registered Representative Examination program to David Uthe in the Qualifications Department at (301) 590-6695.

    • 91-27 SEC Approval of Amendment to Article III, Section 28 of the Rules of Fair Practice Re: Associated Person Notifying Employer Prior to Opening Securities Account With Another Member

      SUGGESTED ROUTING:*

      Senior Management
      Internal Audit
      Legal & Compliance
      Registration
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) has approved an amendment to Article III, Section 28 of the NASD Rules of Fair Practice requiring an associated person to notify the employer member in writing prior to opening an account or placing an initial order with the executing member and to notify the executing member in writing of the employment relationship that exists with the employer member. The text of the amendment, which takes effect June 1, 1991, follows this notice.

      BACKGROUND

      Prior to the approval of this amendment by the SEC, Article III, Section 28(c) required a registered representative, before opening an account or executing trades at a firm other than his or her employer, to inform the executing member firm of his or her status as an associated person. This provision did not, however, require the notice to be in writing. In addition, there was no specific provision in the Association's Rules of Fair Practice that required the registered representative to inform his or her employer member that he or she was executing trades through another firm.1 Section 28(c) placed the burden on the executing member to notify the employer member and to provide duplicate confirmations or such other information as is required by the employer member.

      The NASD believes that requiring such notification by the associated person will provide additional assurances that the registered representative, the employer member firm, and the executing member firm have satisfied their respective obligations under the federal securities laws and the Rules of Fair Practice. Furthermore, the NASD believes that placing the burden of notification on the employee will prevent the likelihood that the notification inadvertently will be overlooked by the executing member in light of other existing regulatory obligations. The NASD acknowledges that there may be circumstances dictating that an associated person hold an account with someone other than his or her employer member, and this amendment would not serve to prevent that. On the contrary, it would merely require notification of the existence of such an account.

      EXPLANATION

      The amendment requires an associated person to provide notice in writing (1) to his or her employer prior to opening or placing an initial order in a securities account with another member, and (2) to the executing member of his or her association with the employer member. This amendment will require notice only prior to the opening of an account and the execution of the initial order. Written notification will not be required for any subsequent trades.

      The NASD believes that the amendment will prevent instances in which trades may be made by associated persons on inside information because the employer member was not aware of the existence of the account with another member. The amendment will assist in lessening the occurrence of insider trading by providing the employer member with more complete knowledge of its associated persons' trading activities and consequently an enhanced ability to protect material nonpublic information. The amended notification requirement will assist employer members in creating and enforcing internal compliance procedures and will facilitate more direct and early detection of the existence of potential rule violations.

      The SEC approved the amendment on March 6, 1991, in SEC Release No. 34-28945. However, in order to provide sufficient time for members to establish internal procedures to process the information provided in the written notification, the NASD is delaying implementation of the amended notification requirement. Therefore, an associated person's obligation to comply with the amended notification requirement will not start until June 1, 1991. Any accounts opened prior to that date will be subject to the requirements of Section 28(c) prior to this amendment.

      Questions concerning this notice may be directed to P. William Hotchkiss, Director, Surveillance, at (202) 728-8235.

      SECTION 28 TO ARTICLE III OF THE NASD RULES OF FAIR PRACTICE

      (Note: New text is underlined; deleted text is in brackets.)

      Transactions for or by Associated Persons Sec. 28

      * * * * *

      Obligations of Associated Persons Concerning an Account with a Member.

      (c) A person associated with a member, prior to opening [who opens] an account or placing [places] an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the [employer] other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both [the executing] members in writing promptly after becoming so associated.

      1 The transactions subject to Section 28 are not considered to be private securities transactions that need to be approved by the employing member pursuant to Article III, Section 40 of the Rules of Fair Practice.

    • 91-26 SEC Approval of Amendment Re: Use and Disclosure of Member Names

      SUGGESTED ROUTING:*

      Senior Management
      Legal & Compliance
      Mutual Fund
      Registration
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC or "Commission") has approved an amendment to Article 111, Section 35 of the NASD Rules of Fair Practice that establishes standards regarding the use and disclosure of member names in public communications, including business cards and letterhead. The amendment reflects the NASD's concern that members of the public may be confused by public communications that either fail to refer to an NASD member firm by its registered name or include unclear references to both NASD member firms and entities that are not NASD members. Unless the identity of and the products offered by an NASD member firm are made clear in such communications, there is a possibility that the public will be confused or misled regarding which entity is, in fact, offering securities. The amendment seeks to address this problem by establishing both general and specific standards governing the manner in which member names must be disclosed in communications with the public. The text of the amendment follows this notice.

      BACKGROUND AND SUMMARY

      The amendment establishes standards regarding the use and disclosure of member names in public communications, including business cards and letterhead. The change reflects the concern of the Board of Governors that members of the public may be confused by public communications that either fail to refer to an NASD member firm by its registered name or include unclear references to both NASD member firms and entities that are not NASD members. The amendment is based on the premise that, unless the identity of and the products offered by an NASD member firm are made clear in such communications, there is a possibility that the public will be confused or misled regarding which entity is, in fact, offering securities. The revision seeks to address this problem by establishing both general and specific standards governing the manner in which member names must be disclosed in communications with the public.

      The proposed amendment was submitted to the membership for comment in 1988. In response to the comment letters received, significant modifications were made to the proposed amendment. Consult Notice to Members 88-65 and 89-22 regarding the differences between the amendment as originally proposed and as approved by the membership. The proposed amendment was filed with the SEC April 25, 1990, and was published for comment in the Federal Register. In response to comment letters received by the SEC, the NASD made further modifications to the amendment that were approved by the membership. Consult Notice to Members 90-62 regarding these modifications. The revised version of the amendment was filed with the SEC January 28, 1991. The SEC approved the amendment March 27, 1991, in Exchange Act Release No. 34-29016.

      The general standards contained in the amendment require, among other things, that the names of NASD members be disclosed clearly and prominently; that when multiple entities are named in one communication, the nature of the relationships, if any, between the NASD member and the named entities, and the products offered by each entity be clear; and that when an individual and multiple entities are named in one communication, the nature of the individual's relationship with the NASD member be clearly identified. The general standards also prohibit communications from including references to nonexistent degrees or designations, and bar the use of bona fide degrees or designations in a misleading manner when referring to individuals.

      SPECIFIC STANDARDS

      In addition to general standards, the amendment sets forth a number of specific standards to address certain recurring problem areas.

      • Fictional Names — Under the amendment, members may voluntarily use fictional or DBA designations in communications when the DBA name has been filed with the NASD and the SEC on the Form BD and is the only name under which the member is recognized. In cases in which a state or other regulatory authority requires a member to use a DBA (e.g., because the member's NASD-approved name was deemed too similar to that of another corporation registered in the state), the amendment permits the member to use the DBA only in the jurisdiction that requires its use. With respect to required use of DBA names, the amendment also requires that, whenever possible, the member use the same DBA name in every jurisdiction that requires the use of a DBA. In addition, the amendment requires, with respect to a required DBA, that members clearly disclose both the name of the member as set forth on the Form BD and the fact that the firm is using a DBA designation in the particular state or jurisdiction.

      • Generic Names — Under certain circumstances, the amendment permits members to use altered versions of the firm name to promote certain areas of a member firm's business or to use an "umbrella" tag line to promote name recognition. The amendment allows the use of generic names so long as the member name is clearly and prominently disclosed, the relationship between the generic name and the member is clear, and there is no implication that the generic is the name of the registered broker-dealer.

      • "Division of" Designations — With respect to use of "division of" and similar designations, the amendment permits members to designate a portion of their business in this manner only when the designation is used with respect to a bona fide division of the member (i.e., a division that results from a merger or acquisition, or a functional division that conducts a specialized aspect of the member's business). The amendment also requires that the member name be clearly and prominently disclosed, and that the division be clearly identified as a division of the member.

      • "Service of" and "Securities Offered Through" —With respect to the use by financial planners or other nonmember entities of phrases such as "service of" or "securities offered through" followed by the name of a member firm, the amendment requires that the name of the member be clearly and prominently disclosed. In addition, it mandates that the securities function be clearly identified as a function of the member rather than of the financial planning or other entity that also is named in the communication.

      • Derivative Names — Under certain limited circumstances, the amendment permits a member to use a "derivative" of its name, without also including the member's full name, if: (1) the derivative name is used to promote a specific area of the firm's business, and (2) use of the derivative would not be misleading in context. Thus, for example, if a member firm uses a "derivative" name to promote its investment banking business, the firm might be permitted to omit the full firm name from typical "tombstone" advertisements on the ground that the use of a derivative would not be misleading in the context of advertisements that are primarily directed to an institutional, nonretail audience that will not be confused by the absence of the full broker-dealer name.

      EFFECTIVE DATE

      In order to provide members with sufficient time to consume existing supplies of such business stationery as letterhead, business cards, confirmation forms, and similar printed material, the amendment will not take effect with respect to such printed business stationery until November 1, 1991. In all other respects, the amendment becomes effective June 1, 1991.

      Questions concerning this notice can be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330, or Anne H. Wright, Senior Attorney, NASD Office the of General Counsel, at (202) 728-8815.

      TEXT OF AMENDED ARTICLE III, SECTION 35 OF NASD RULES OF FAIR PRACTICE

      (Note: New language is underlined; deleted language is in brackets.)

      COMMUNICATIONS WITH THE PUBLIC

      Sec. 35.

      * * *

      (d) Standards Applicable to Communications with the Public
      (1) General Standards

      * * *
      (C) When sponsoring or participating in a seminar, forum, radio or television interview, or when otherwise engaged in public appearances or speaking activities which may not constitute advertisements, members and persons associated with members shall nevertheless follow the standards of [paragraph] subsections (d) and (g) of this [s]Section.
      (2) Specific Standards

      In addition to the foregoing general standards, the following specific standards apply:
      (A) Necessary Data: Advertisements and sales literature shall contain the name of the member, unless such advertisements and sales literature comply with subsection (g) of this Section. Sales literature shall contain the name of the person or firm preparing the material, if other than the member, and the date on which it is first published, circulated or distributed [(except that, in advertisements, only the name of the member need be stated and except also that, in any so-called "blind" advertisement used for recruiting personnel, the name of the member may be omitted)]. If the information in the material is not current, this fact should be stated.

      * * *

      (g) Standards Applicable to the Use and Disclosure of the NASD Member's Name
      (1) In addition to the provisions of subsection (d) of this Section, members' public communications shall conform to the following provisions concerning the use and disclosure of member names. The term "communication" as used herein shall include any item defined as either "advertising" or "sales literature" in subsection (a) of this Section. The term "communication" shall also include, among other things, business cards and letterhead.
      (2) General Standards
      (A) Any communication used in the promotion of a member's securities business must clearly and prominently set forth the name of the NASD member. This requirement shall not apply to so-called "blind" advertisements used for recruiting personnel or to those communications meeting the provisions of subsection (g)(3) of this Section.
      (B) If a nonmember entity is named in a communication in addition to the member, the relation ship, or lack of relationship, between the member and the entity shall be clear.
      (C) If a nonmember entity is named in a communication in addition to the member and products or services are identified, no confusion shall be created as to which entity is offering which products and services. Securities products and services shall be clearly identified as being offered by the member.
      (D) If an individual is named in a communication containing the names of the member and a non-member entity, the nature of the affiliation or relationship of the individual with the member shall be clear.
      (E) Communications that refer to individuals may not include, with respect to such individuals, references to nonexistent or self-conferred degrees or designations, nor may such communications make reference to bona fide degrees or designations in a misleading manner.
      (F) If a communication identifies a single company, the communication shall not be used in a manner which implies the offering of a product or service not available from the company named.
      (G) The positioning of disclosure can create confusion even if the disclosures or references are entirely accurate. To avoid confusion, a reference to an affiliation (e.g., registered representative) shall not be placed in proximity to the wrong entity.
      (H) Any reference to memberships (e.g., NASD, SIPC, etc.) shall be clearly identified as be-longing to the entity that is the actual member of the organization.
      (3) Specific Standards

      The foregoing standards set forth in subsections (g)(1) and (g)(2) shall apply to all communications unless at least one of the following special circumstances exists, in which case the standards set forth herein would supersede the standards in subsections (g)(1) and (g)(2).
      (A) Doing Business As: An NASD member may use a fictional name in communications provided that the following conditions are met:
      (i) Non-Required Fictional Name: A member may voluntarily use a fictional name provided that the name has been filed with the NASD and the SEC, all business is conducted under that name and it is the only name by which the firm is recognized.
      (ii) Required Fictional Name: If a state or other regulatory authority requires a member to use a fictional name, the following conditions shall be met:
      (1) The fictional name shall be used to conduct business only within the state or jurisdiction requiring its use.
      (2) If more than one state or jurisdiction requires a firm to use a fictional name, the same name shall be used in each, wherever possible.
      (3) Any communication shall disclose the name of the member and the fact that the firm is doing business in that state or jurisdiction under the fictional name, unless the regulatory authority prohibits such disclosure.
      (B) Generic Names: An NASD member may use an "umbrella" designation to promote name recognition, provided that the following conditions are met:
      (i) The name of the member shall be clearly and prominently disclosed;
      (ii) The relationship between the generic name and the member shall be clear; and
      (iii) There shall be no implication that the generic name is the name of a registered broker/dealer.
      (C) Derivative Names: An NASD member may use a derivative of the firm name to promote certain areas of the firm's business, provided that the name of the member is clearly and prominently disclosed. Absent such disclosure, the following conditions must be met:
      (i) The name used to promote a specific area of the firm's business shall be a derivative of the member name; and,
      (ii) The derivative name shall not be misleading in the context in which it is being used.
      (D) "Division of": An NASD member firm may designate an aspect of its business as a division of the firm, provided that the following conditions are met:
      (i) The designation shall only be used by a bona fide division of the member. This shall include:
      (1) a division resulting from a merger or acquisition that will continue the previous firm's business; or
      (2) a functional division that conducts or will conduct one specialized aspect of the firm's business.
      (ii) The name of the member shall be clearly and prominently disclosed. (iii) The division shall be clearly identified as a division of the member firm.
      (E) "Service of/Securities Offered Through": An NASD member firm may identify its brokerage service being offered through other institutions as a service of the member, provided that the following conditions are met:
      (i) The name of the member shall be clearly and prominently disclosed, (ii) The service shall be clearly identified as a service of the member firm.
      (F) Telephone Directory Line Listings, Business Cards and Letterhead: All such listings, cards or letterhead shall conform to the provisions of Article III, Section 27(g)(2) of the Rules of Fair Practice.

    • 91-25 Request for Comments on Proposed Amendments to Article III, Sections 26 and 29 of The NASD Rules of Fair Practice Re: Cash and Noncash Compensation Received by Members in Connection With the Sale of Investment Company Securities and Variable Cont

      SUGGESTED ROUTING:*

      Senior Management
      Internal Audit
      Legal & Compliance
      Mutual Fund
      Training
      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD requests comments on proposed amendments to Article III, Sections 26 and 29 of the NASD Rules of Fair Practice. The amendments would revise, simplify, and add a recordkeeping requirement to subsection (1) of Section 26 and add a similar requirement (new subsection (h)) to Section 29.

      BACKGROUND

      In July 1989, the NASD Board of Governors, in Notice to Members 89-51, requested comment on proposed amendments to subsection (1), Article III, Section 26 of the NASD Rules of Fair Practice that would have revised and simplified the rule and added a recordkeeping requirement. The NASD received six comment letters, and the Board decided not to proceed further with the adoption of the amendments at that time because it wished to give further consideration to the issue of whether members should be prohibited from receiving noncash sales incentives for the sale of investment company securities and variable contracts similar to the prohibitions contained in Section 5(e) to Appendix F, Article III, Section 34 of the Rules of Fair Practice, which applies to direct participation programs.

      The Board has now decided not to recommend prohibiting such noncash sales incentives and also considers, on the recommendation of the Variable Contracts Committee, that a requirement similar to subsection (1) of Article III, Section 26 should be added to the Variable Contracts Rule (Article III, Section 29 of the NASD Rules of Fair Practice).

      The proposed amendments in this notice are essentially the same as those contained in Notice to Members 89-51.

      PROPOSED AMENDMENTS

      Although the main purpose of the proposed amendments is to adopt a recordkeeping requirement for members with respect to noncash sales incentives, the amendments also provide an opportunity to revise the rule to reflect current practices in the offer of investment company securities.

      The major requirement of the current rule, which is prospectus disclosure of compensation, cash and noncash, is retained, as are the disclosure requirements with respect to "special deals."

      The requirement that a member must be given the opportunity to take cash in lieu of a noncash concession has been eliminated since experience indicates that it is rarely used.

      Subsection (b)(7) — Definitions

      The current rule governs the relationship between underwriters of and dealers in investment company securities with respect to concessions paid by the former to