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  • 1990

    • 90-85 SIPC Trustee Appointed for Carolina First Securities Group

      SUGGESTED ROUTING*

      Senior Management
      Municipal
      Operations
      Systems

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

      On October 31, 1990, the United States District Court for the Middle District of North Carolina appointed a Securities Investor Protection Corporation (SIPC) trustee for:

      Carolina First Securities Group
      514 South Stratford Road
      Winston-Salem, North Carolina 27103

      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.

      Questions regarding the firm should be directed to SIPC trustee:

      L. Bruce McDaniel, Esquire
      DeBank McDaniel Holbrook & Anderson
      Lafayette Square
      4942 Windy Hill Drive
      P.O. Box 58186
      Raleigh, North Carolina 27658
      (919) 872-3000.

    • 90-84 NASDAQ National Market System (NASDAQ/NMS) Additions, Changes, and Deletions As of November 13, 1990

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading

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

      As of November 13, 1990, the following 13 issues joined Nasdaq/NMS, bringing the total number of issues to 2,609:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      UNIV

      Universal International, Inc.

      10/12/90

      1000

      GLBCW

      Great Lakes Bancorp, A Federal Savings Bank (Wts)

      10/15/90

      500

      HLIX

      Helix BioCore, Inc.

      10/16/90

      1000

      NEOZZ

      Neozyme Corporation

      10/24/90

      1000

      PTMLY

      Palmer Tube Mills Limited

      10/24/90

      200

      RATNZ

      Ratners Group plc (Pfd)

      10/29/90

      500

      BOSP

      Bank of San Pedro

      11/6/90

      500

      FSEI

      FIRST SEISMIC Corporation

      11/6/90

      1000

      LUFK

      Lufkin Industries, Inc.

      11/6/90

      200

      SHOEW

      Millfeld Trading Co., Inc. (1/22/94 Wts)

      11/6/90

      500

      SHOEZ

      Millfeld Trading Co., Inc. (7/22/92 Wts)

      11/6/90

      500

      RADFD

      Rada Electronics Industries Limited

      11/6/90

      1000

      VCRT

      VideOcart, Inc.

      11/6/90

      1000

      Nasdaq/NMS Symbol and/or Name Changes

      The following changes to the list of Nasdaq/NMS securities occurred since October 12, 1990:

      New/Old Symbol

      New/Old Security

      Date of Change

      NUCOL/NUCOL

      Nucorp, Inc. (10/31/92 Wts)/Nucorp, Inc. (10/30/90 Wts)

      10/23/90

      NUCOW/NUCOW

      Nucorp, Inc. (6/30/93 Wts)/Nucorp, Inc. (6/30/91 Wts)

      10/23/90

      EROQ/ISEC

      ENVIROQ Corp./InsituformSoutheast Corp.

      11/1/90

      JHSL/JHSL

      John Hanson Bancorp, Inc./John Hanson Savings Bank, F.S.B.

      11/1/90

      SEAB/SEAB

      Seaboard Bancorp, Inc./Seaboard Savings & Loan Association

      11/1/90

      APPN/ZMOS

      ZyMOS Corporation/ZyMOS Corporation

      11/1/90

      IMATW/IMATW

      Imatron, Inc. (2/10/91 Wts)/Imatron, Inc. (11/12/90 Wts)

      11/6/90

      FSVA/FSVA

      Fidelity Savings Bank/Fidelity Savings Association

      11/7/90

      Nasdaq/NMS Deletions

      Symbol

      Security

      Date

      TLAM

      Tony Lama Company, Inc.

      10/16/90

      NIKE

      NIKE, Inc. (Cl B)

      10/17/90

      ASKI

      ASK Computer Systems, Inc.

      10/23/90

      ARIG

      American Reliance Group, Inc.

      10/23/90

      FAMB

      1st American Bancorp Inc.

      10/25/90

      GNEX

      Genex Corporation

      10/30/90

      GNEXP

      Genex Corporation (Pfd)

      10/30/90

      IRON

      Ironstone Group, Inc.

      10/30/90

      PAHC

      Pioneer American Holding Corp.

      10/30/90

      TONE

      One Bancorp (The)

      10/31/90

      CODSE

      Corporate Data Sciences, Inc.

      11/1/90

      DRTK

      Duratek Corporation

      11/2/90

      RELY

      Ingres Corporation

      11/2/90

      PNBT

      Planters Corporation (The)

      11/5/90

      CALLA

      Cellular Information Systems, Inc. (Cl A)

      11/9/90

      NWNL

      NWNL Companies, Inc. (The)

      11/12/90

      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.

    • 90-83 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.

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Christmas Day, Tuesday, December 25, 1990, and New Year's Day, Tuesday, January 1, 1991. All securities markets will be closed on Tuesday, December 25, 1990, and Tuesday, January 1, 1991.

      Trade Date

      Settlement Date

      Reg. T Date*

      Dec. 17, 1990

      24

      27

      18

      26

      28

      19

      27

      31

      20

      28

      Jan. 2, 1991

      21

      31

      3

      24

      Jan. 2, 1991

      4

      25

      Markets Closed

      26

      3

      7

      27

      4

      8

      28

      7

      9

      31

      8

      10

      Jan. 1, 1991

      Markets Closed

      2

      9

      11

      These settlement dates should be used by brokers, dealers, and municipal securities dealers 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)(l) 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)(l), make application to extend the time period specified. The date by which members must take such action is shown in the column titled "Reg. T Date."


    • 90-82 Inclusion of Non-SRO Arbitration Forum as an Alternative Forum in Predispute Arbitration Agreements.

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance

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

      EXECUTIVE SUMMARY

      The NASD Board of Governors has approved a resolution recommending that members consider including a non-SRO arbitration forum in predispute arbitration agreements with customers.

      BACKGROUND

      In a letter dated May 10, 1990, Richard G. Ketchum, Director of the Division of Market Regulation of the Securities and Exchange Commission (SEC), requested that the NASD, as well as other securities industry self-regulatory organizations (SROs), consider whether the industry's SROs should amend their rules to require broker-dealers' predispute arbitration contracts with investors to include arbitration fora in addition to those administered by the securities industry.

      At the recommendation of the NASD National Arbitration Committee and in response to the SEC's request, the NASD Board of Governors approved a resolution at its September 1990 meeting recommending that members consider including a non-SRO arbitration forum in predispute arbitration agreements with customers. Consistent with its view that SRO rules should not mandate contractual terms between members and their customers, the Board's recommendation in this regard is not mandatory. But it is intended to alert members to the existence and availability of non-SRO arbitration fora which, although not subject to oversight by the SEC, are available for the resolution of controversies arising in the securities industry.

      Questions concerning this notice may be directed to Norman Sue, Jr., Office of General Counsel, at (202) 728-8117.

    • 90-81 Amendments to the Code of Procedure to Change the Disciplinary Process and Provide That Decisions of the National Business Conduct Committee Are Final Actions of the NASD

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) has approved amendments to the NASD Code of Procedure that make two changes in the Code to the disciplinary process that reduce the burden that this process imposes on the National Business Conduct Committee (NBCC) and the Board of Governors. The amendments provide that the decisions of the NBCC are the final decisions of the NASD in disciplinary cases and do not require action of the full Board to become effective. The amendments also provide that hearings panels (unless the parties otherwise agree) consist exclusively of current or former Governors associated with members, and they eliminate the requirements that a current Governor serve on every hearing panel.

      The text of the amendments follows this notice.

      BACKGROUND

      The amendments were approved for solicitation of member comment by the NASD Board of Governors (Board) at its meeting on March 16, 1990. The proposed amendments were published for comment as part of Notice to Members 90-19 on April 1, 1990. After consideration of member comment, the Board at its meeting May 14, 1990, adopted the proposed amendments and authorized their filing with the SEC.

      The SEC approved the amendments on October 18, 1990. The amendments make two substantive changes to the Code: NASD National Business Conduct Committee (NBCC) hearing panels can consist exclusively of current or former Governors associated with members. Decisions of the NBCC will be final decisions of the NASD, unless called for review by the Board, at the request of one or more Governors. Miscellaneous amendments to Articles I, II, III, IV, IX, and X to the Code of Procedure are also included.

      SUMMARY OF AMENDMENTS

      The NBCC, a committee of the Board composed solely of Governors, is responsible for reviewing actions of the District Business Conduct Committees (DBCCs) and the Market Surveillance Committee (MSC), developing enforcement policy and recommending to the Board the adoption or amendment of rules relating to the business conduct of NASD members.

      As amended, Article III, Section 2(d) of the NASD Code of Procedure requires that hearing panels (unless the parties otherwise agree) consist exclusively of current or former Governors associated with members, and eliminates the requirement that a current Governor serve on every hearing panel. This will permit the NBCC, in the cases it deems appropriate, to appoint hearing panels consisting of a current Governor and a former Governor and to appoint hearing panels consisting exclusively of former Governors. Panels so constituted would continue to provide respondents a hearing before experienced and respected members of the industry. All cases before the NBCC, regardless of the composition of the hearing panel, would continue to be reviewed by the full NBCC.

      As amended, Article III, Sections 6 and 7 provides that the decisions of the NBCC are the final decisions of the NASD in disciplinary cases and do not require action of the full Board to become effective. Under this amendment, the Board will review only those specific decisions of the NBCC that it calls for review on the request of one or more Governors1. This limits the time commitment required from all Governors with respect to decisions by the NBCC without limiting the right of the Board to review an NBCC decision when one or more Governors believe such review is appropriate.

      This change reflects the importance of the NBCC and recognizes the quality and consistency of its decision making. It makes appeals to the SEC the sole recourse of respondents seeking to challenge a decision of the NBCC unless one or more Governors request review by the Board.

      MISCELLANEOUS CHANGES

      Article I, Section 2 of the Code of Procedure (which defines terms used in the Code) has been amended by adding definitions of "Extended Proceedings" and "Extended Proceeding Committee" to conform to definitional changes made to Article III, Section 2 that were previously approved by the Commission. Minor amendments have been made to Sections 2(c), (e), and (f) of Article III of the Code of Procedure to clarify that NBCC review includes written briefs, if submitted. The text of the amendments contains further miscellaneous technical changes that the NASD encourages members to review.

      Questions regarding this notice may be directed to Norman Sue, Jr., Assistant General Counsel, Office of General Counsel, at (202) 728-8117.

      AMENDMENTS TO THE CODE OF PROCEDURE

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

      ARTICLE I

      Application and Purpose of Code Definitions

      Sec. 2. (a) Unless otherwise provided, terms used in the Code of Procedure shall have the meaning as defined in Article I of the By-Laws and Article II, Section 1. [I] of the Rules of Fair Practice.

      * * * * *

      (c) The term "Market Surveillance Committee" means the [is a standing] committee of the Corporation or Board [of Governors] which is responsible for handling alleged violations of applicable rules of the Corporation concerning trading of securities, including applicable rules involving quotations, transaction execution and reporting, trading practices and insider trading as well as other such matters assigned [delegated] to it by the Board [of Governors].
      (d) The term "National Business Conduct Committee" means the [is a standing] committee of the Board [of Governors] which is authorized to exercise powers assigned [delegated] to it by the Board in connection with disciplinary and other matters.
      (e) An "Extended Hearing" is a hearing under Article II, Section 4 [or Article III, Section 2(a)] of the Code of Procedure that is so designated by a District Business Conduct Committee[,] or the Market Surveillance Committee[,]. An "Extended Proceeding" is a proceeding under Article III, Sections 2(h) and (i) of the Code of Procedure that is so designated by [or] the National Business Conduct Committee.
      (f) An "Extended Hearing Committee" is a committee constituted as provided in the Code of Procedure to sit as a hearing panel for an Extended Hearing. An "Extended Proceeding Committee" is a committee constituted as provided in the Code of Procedure to sit as a panel for an Extended Proceeding.
      (g) The term "NASDAQ Hearing Review Committee" means the committee of the Corporation or the Board which is responsible for handling matters regarding persons aggrieved by the operations of the NASDAQ System, NASDAQ qualifications and related issues.

      ARTICLE II

      Disciplinary Actions by the District Business Conduct Committees, the Market Surveillance Committee and Others Venue

      Sec. 5. (c) In the event the Committee considering a complaint is changed, the complaint shall be processed to completion by the Committee to which the complaint was transferred. In the event the boundaries [of one or more] or number of districts should be changed, any complaint pending in a district shall be processed to completion by the District Business Conduct Committee for the newly constituted district which would have had jurisdiction had the complaint been filed subsequent to the effective date of the number or boundary changes.

      * * * * *

      Acceptance, Waiver and Consent and Summary Complaint Procedures

      Sec. 10. A Committee may, prior to issuance of a complaint under Section 1 of this Article, impose disciplinary penalties pursuant to the procedures set forth under this Section 10.

      Acceptance, Waiver and Consent of the Respondent

      (a) If the Committee has reason to believe a violation has occurred and the member or associated person does not dispute the violation, the Committee may suggest that the member or associated person submit a letter containing an acceptance of a finding of violations, a waiver of all rights of appeal to the National Business Conduct Committee (and any review thereof by the Board of Governors), the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the Order issued if the letter is accepted, and a consent to the imposition of sanctions. The letter shall describe the act or practice engaged in or omitted; the rule, regulation or statutory provision violated; and the sanction to be imposed therefore. If the Committee then concludes that the Letter of Acceptance, Waiver and Consent is appropriate and should be accepted, it shall be submitted to the National Business Conduct Committee. If the letter is accepted by the National Business Conduct Committee, it shall become final and shall constitute the complaint, answer and decision in the matter. If the letter is rejected by [either] the Committee or the National Business Conduct Committee, any acceptances, waivers and consents contained therein shall not be considered in any further complaint action which may be taken against the member or associated person.

      * * * * *

      Summary Complaint Procedure

      (b)
      (4) Acceptance by a respondent of an offer as described above shall constitute the respondent's admission of the violations, acceptance of the sanction and a waiver of all rights of appeal to the National Business Conduct Committee (and any review thereof by the Board of Governors), the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the decision, and the complaint and related documents shall constitute the Committee's decision and the record in the case. Receipt of respondent's acceptance by the Committee shall conclude the proceedings as of the date the acceptance is received, without further notice to the respondent, under the conditions stated in the offer, subject to paragraphs (5) and (6).

      * * * * *

      Settlement Procedure

      Sec. 11. (c) Every Offer of Settlement shall be in writing and shall contain in reasonable detail:

      * * * * *

      (5) a waiver of all rights of appeal to the National Business Conduct Committee (and any review thereof by the Board of Governors), the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the Order issued if the Offer of Settlement is accepted.

      * * * * *

      Complaints Directed by the Board [of Governors] or the National Business Conduct Committee

      Sec. 12. The National Business Conduct Committee and the Board [of Governors] shall each have the authority when (on the basis of information and belief) [it is] of the opinion that any act, practice or omission of any member of the Corporation or of any person associated with a member of the Corporation is in violation of any rule, regulation or statutory provision, to file a complaint with a Committee against such member or such person associated with a member or to instruct any Committee to do so, and any such complaint shall be handled in accordance with this Article.

      ARTICLE III

      Review of Disciplinary Actions [and Proceedings Before] by the National Business Conduct Committee and the Board [of Governors]

      Sec. 1.(a) If a Committee shall take any disciplinary action against any member, or shall dismiss any complaint, as herein provided, such action or dismissal shall be subject to review by the National Business Conduct Committee [Board of Governors] on its own motion within 45 calendar days after the date of the decision. Any such action or dismissal shall also be subject to review upon application by any person aggrieved thereby, filed within 15 calendar days after the date of the decision. Application to the National Business Conduct Committee [Board of Governors] for review, or the institution of review by the National Business Conduct Committee [Board of Governors] on its own motion, shall operate as a stay of any such action or dismissal, until a decision is rendered by the National Business Conduct Committee pursuant to Section 6 of this Article or by the Board in cases of discretionary review pursuant to Section 7 of this Article [of Governors upon such review as hereinafter provided].

      (b) If a respondent or any aggrieved person who has made application to the National Business Conduct Committee [Board of Governors] for a review shall withdraw the appeal without a determination by the National Business Conduct Committee [Board of Governors] on the merits there of, the National Business Conduct Committee [Board of Governors] shall have an additional period of 45 calendar days subsequent to the withdrawal in which to determine whether it shall review the matter on its own motion.

      Proceedings [Before the Board]

      Sec. 2.(a) In the case of an appeal or call for review, the party seeking review may request a hearing. If a party desires a hearing, it should be requested in his application for review. A party subject to a call for review may request a hearing within fifteen (15) calendar days of notification of the call for review. If a request is made, a hearing shall be granted, subject to the limitations of Section 2(f) below. In the absence of a request for a hearing, the National Business Conduct Committee [Board of Governors] may have any matter set down for a hearing.

      * * * * *

      (c) If a hearing is not held, the matter shall be considered on the basis of the record before the Committee, and written briefs, if submitted [as applicable]. For purposes of this section, the record before the Committee shall include the complaint, respondent's answer, the transcript of the Committee hearing, any exhibits reviewed by the Committee, and the Committee decision.
      (d) Unless otherwise consented to by the parties, all hearings shall be held before a hearing panel, and all on-the-record reviews shall be conducted by a review panel, appointed by the National Business Conduct Committee consisting of two or more persons, all of whom are current or former Governors associated with members of the Corporation[, at least one of whom shall also be a current or former member of the Board of Governors].
      (e) A hearing on review by the National Business Conduct Committee [Board] shall consist of oral arguments limited to a total period of thirty (30) minutes each for argument and response by respondent and for argument and response by complainant, unless extended by the hearing panel in its discretion for good cause shown. The National Business Conduct Committee's [Board's] review shall be limited to consideration of oral arguments, written briefs, if submitted [as applicable], and the record before the Committee. A record of the hearing shall be kept in all cases.
      (f) Any application for review of a matter in which the party seeking review did not participate in the proceedings before the Committee but shows good cause for the failure to participate, shall normally be dismissed by the National Business Conduct Committee [Board] and remanded to the Committee for further proceedings. If the party seeking review did not participate in the proceedings before the Committee and does not show good cause for failure to participate, the matter shall be considered by the National Business Conduct Committee [Board] on the basis of the record before the Committee, including written briefs if submitted to the National Business Conduct Committee [Board, as applicable]. For purposes of this paragraph, failure to participate shall mean failure to file an answer or otherwise respond to a complaint or failure to appear at a hearing pursuant to Article II, Section 4 of this Code. A party seeking review who failed to request a hearing before a Committee pursuant to Article II, Section 4 of this Code, shall be permitted to have a hearing on review as provided in this section.
      (g) Any application for review as to which the party seeking review fails to advise the National Business Conduct Committee [Board] of the basis for seeking review, or otherwise fails to provide information or submit a written brief in response to a request, may be dismissed as abandoned and the decision of the Committee shall become the final disciplinary action of the Corporation for purposes of Section 8 of this Article [Association action].

      * * * * *

      (j[l]) The hearing or on-the-record review panel shall present its recommended findings and sanctions to the National Business Conduct Committee,[.] [The National Business Conduct Committee shall make its recommended findings and sanctions to the Board of Governors] which shall make the final determination.

      Evidence in National Business Conduct Committee Proceedings

      Sec. 3.(a) A party to the National Business Conduct Committee's [Board's] review may apply to the National Business Conduct Committee [Board] for leave to adduce additional evidence. If the party provides notice of the intention to introduce such evidence no later than ten (10) days prior to the date of the hearing, identifies and describes the evidence, and satisfies the burden of demonstrating that there was good cause for failing to adduce it before the Committee and that the evidence is material to the proceeding, the National Business Conduct Committee [Board] may, in its discretion, permit the evidence to be introduced into the record on review or may remand the case to the Committee for further proceedings in whatever manner and subject to whatever conditions the National Business Conduct Committee [Board] considers appropriate. On its own motion, the National Business Conduct Committee [Board] may direct that the record on review be supplemented with such additional evidence as it may deem relevant.

      (b) Where leave to adduce additional evidence is granted, the Corporation staff or the complainant, if other than a Committee, and the respondent shall make available to the National Business Conduct Committee [Board] hearing or review panel and to the parties all documentary evidence which was not part of the record before the Committee no later than five (5) business days before the hearing.

      * * * * *

      Powers of the National Business Conduct Committee [Board] on Review

      Sec. 4. In any proceeding to review any disciplinary action taken or dismissed by a Committee, the National Business Conduct Committee [Board of Governors] may affirm, dismiss, modify or reverse dismissals with respect to each of the Committee findings or remand the matter with appropriate instructions to the Committee. The National Business Conduct Committee [Board of Governors] may affirm, increase, or reduce any sanction, or impose any other fitting sanction.

      Decision of the National Business Conduct Committee [Board]

      Sec. 5.(a) In any proceeding to review any disciplinary action taken by a Committee or a dismissal by a Committee if the National Business Conduct Committee [Board of Governors] determines that a violation alleged in the complaint has occurred, it shall issue a written decision which shall set forth:

      (1) the act or practice which the respondent has been found to have engaged in or omitted;
      (2) the rule, regulation, or statutory provision which such act or omission to act is deemed to violate;
      (3) the basis upon which the findings are made; and
      (4) the sanction imposed and the reason there for.

      Notification of Decision; Final Disciplinary Action

      Sec. 6. Unless a matter is called for discretionary review by the Board pursuant to Section 7 of this Article, the decision of the National Business Conduct Committee shall constitute final disciplinary action for purposes of Section 8 of this Article, and t[T]he complainant, the respondent and the member of the Corporation with whom the respondent is presently an associated person shall be promptly notified and sent a copy of any written decision rendered by the National Business Conduct Committee [Board of Governors]. In the event of discretionary review by the Board, the decision of the Board shall constitute final disciplinary action for purposes of Section 8 of this Article, and the complainant, the respondent and the member of the Corporation with whom the respondent is presently an associated person shall be promptly notified and sent a copy of any written decision rendered by the Board.

      Discretionary Review by the Board

      Sec. 7. Determinations of the National Business Conduct Committee may be reviewed by the Board solely upon the request of one or more Governors. Such review, which may be undertaken solely at the discretion of the Board, shall be in accordance with resolutions of the Board governing the review of National Business Conduct Committee determinations. In reviewing any determination of the National Business Conduct Committee, the Board may affirm, dismiss, modify or reverse dismissals with respect to each of the National Business Conduct Committee determinations or remand the matter with appropriate instructions to the National Business Conduct Committee or any Committee. The Board may affirm, increase, or reduce any sanction, or impose any other fitting sanction. Discretionary review by the Board shall operate as a stay of any action or dismissal by the Committee and any determinations of the National Business Conduct Committee, until a decision is rendered by the Board.

      Application to SEC for Review

      Sec. 8[7]. In any case where either the complainant or the respondent feels aggrieved by any final disciplinary action taken by the National Business Conduct Committee or Board [of Governors], such person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended. The member of the Corporation with whom the respondent is presently an associated person shall be notified promptly of any application for review to the Securities and Exchange Commission.

      ARTICLE IV

      Imposition of Sanctions and Costs Sanctions

      Sec. 1. In any proceeding relating to disciplinary actions involving members and associated persons, a Committee, the National Business Conduct Committee or the Board of Governors may impose any sanction it deems appropriate as set forth in Article V, Section 1, of the Rules of Fair Practice or in the applicable By-Law or rule of the Corporation which was the subject of the complaint.

      Costs of Proceedings

      Sec. 2. In any disciplinary action, the member or associated person shall bear such part of the costs of the proceedings as the Committee, the National Business Conduct Committee or Board of Governors deems fair and appropriate under the circumstances.

      * * * * *

      ARTICLE IX

      Procedures on Grievances Concerning the Automated Systems Review by the NASDAQ Hearing Review Committee [Board]

      Sec. 6. The decision shall be subject to review by the NASDAQ Hearing Review Committee [Board of Governors] on its own motion within 45 calendar days after issuance of the written decision. Any such decision shall also be subject to review upon application of any person aggrieved thereby, filed within 15 calendar days after issuance. The institution of a review, whether on application or on the initiative of the NASDAQ Hearing Review Committee [Board], shall not operate as a stay of the decision.

      Findings of the NASDAQ Hearing Review Committee [Board] on Review

      Sec. 7. Upon consideration of the record, and after such further hearings as it shall order, the NASDAQ Hearing Review Committee [Board] shall affirm, modify, reverse, dismiss, or remand the decision. The NASDAQ Hearing Review Committee [Board] shall set forth specific grounds upon which its determination is based.

      Discretionary Review by the Board

      Sec. 8. Determinations of the NASDAQ Hearing Review Committee may be reviewed by the Board solely upon the request of one or more Governors. Such review, which may be undertaken solely at the discretion of the Board, shall be in accordance with resolutions of the Board governing the review of NASDAQ Hearing Review Committee determinations. The Board shall affirm, modify or reverse the determinations of the NASDAQ Hearing Review Committee or remand the matter to the NASDAQ Hearing Review Committee with appropriate instructions. The institution of discretionary review by the Board shall not operate as a stay of the decision.

      Application to Commission for Review

      Sec. 9[8]. In any case where a person feels aggrieved by any decision [of the Board of Governors taken] issued pursuant to Section 7 or Section 8 of this Article, the person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended.

      ARTICLE X

      Miscellaneous

      Grounds of Disqualification to Participate in Proceedings

      Sec. 1. No member of the Board [of Governors], National Business Conduct Committee, any Committee or [any] other committee or subcommittee governed by this Code shall in any manner, directly or indirectly, participate in the determination of any matter substantially affecting his interest or the interests of any person in whom he is directly or indirectly interested. In any such case the particular member shall disqualify himself, or shall be disqualified by the Chairman of the [any such] Board, National Business Conduct Committee, or any such Committee or other committee or subcommittee governed by this Code.

      Reports and Examination of Books and Records

      Sec. 2. For the purpose of any examination[,] or determination as to any proceeding pursuant to this Code, any hearing panel, Committee, other committee or subcommittee governed by this Code, the National Business Conduct Committee or the Board [of Governors], and [or] any duly authorized agent or agents thereof [of any such hearing panel, Committee or Board], shall have the right to require any member, [or] person associated with a member, or person no longer associated with a member when such person is subject to the Corporation's jurisdiction, to report, either informally or on the record, orally or in writing with regard to any examination, determination or hearing, and to examine the books and records of any such member or person [associated with a member].

      Rulings on Procedural Matters

      Sec. 3. Except as otherwise provided by this Code, the Board, National Business Conduct Committee or any hearing panel, Committee or [Board] other committee or subcommittee governed by this Code shall have discretion to make rulings on all motions and other matters arising during the course of its proceedings (including without limitation, the presence of witnesses after completion of their testimony and of other persons not parties to the proceeding) which require resolution during the proceeding.


      1The amendments make parallel amendments to Article IX with respect to the decisions of the Nasdaq Hearing Review Committee.


    • 90-80 SEC Approval of Risk Management Functions of the Automated Confirmation Transaction Service

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Systems
      Trading

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

      EXECUTIVE SUMMARY

      On October 26, 1990, the Securities and Exchange Commission (SEC) approved the risk management functions of the Automated Confirmation Transaction (ACT) service. ACT risk management began operating Monday, October 29, and allows clearing firms to set daily purchase and sale trading thresholds for their correspondent executing broker-dealers, establishes a "super cap" calculation and "blockbuster" trade value, and allows clearing firms to monitor more closely the activities of their correspondents. The NASD also filed service charges for the risk management service with the SEC; those fees became effective November 1, 1990. Starting the week of November 26, 1990, the ACT service also began comparing trades in listed or Consolidated Quotation Service (COS) stocks.

      BACKGROUND

      For the past few months, self-clearing firms have been participating in the NASD Automated Confirmation Transaction (ACT) service. The ACT service provides for on-line comparison of telephone-negotiated trades within minutes of executing the trade. In addition, ACT reports eligible trades to the tape and, at the end of the trading day, sends all locked-in trades to the National Securities Clearing Corporation (NSCC).

      In order to establish ACT as the industry standard for reporting and comparing equity transactions in The Nasdaq Stock Market, the SEC has mandated that all broker-dealers participate in the service.

      ACT same-day comparison provides many benefits to all parties concerned — clearing firms and their correspondents (introducing brokers), market makers, and order-entry firms.

      Among the features ACT provides are same-day comparison for matching of purchases and sales; on-line browsing of open and locked-in trades; ability to clean up open trades directly from a browse screen; off-line, end-of-day aggregate match processes; T+l "as of" trade entry; and clearing-firm risk management capabilities. The NASD also offers access to the ACT Service Desk for firms executing an average of five or fewer trades per day.

      Finally, on November 26, 1990, over-the-counter transactions in listed stocks began being compared through ACT.

      HOW ACT OPERATES

      After completing a trade in a Nasdaq/NMS, other Nasdaq, or listed CQS security, each participant reports trades to the ACT system through a Nasdaq WorkstationSM terminal or Computer-to-Computer Interface (CTCI). The custom-designed ACT menu leads the Workstation user through entry (via a short form entry in the dynamic quote partition or a longer entry format in a separate ACT partition) as the trade report is entered as either a market maker or an order-entry firm. These entries are explained in detail in the ACT User Guide.

      Reported trades are subject to continuous attempts to match with the other side. When two sides match, they are locked in and sent at the end of the day to NSCC, where contract sheets are produced.

      All market makers are required to submit Nasdaq/NMS and listed trades within 90 seconds, and all other Nasdaq trades within 15 minutes after execution of the trade.

      Order-entry firms must respond within 20 minutes of execution either by entering their version of the trade or by using the "Accept" or "Decline" functions available on the ACT browse screen.

      Open trades may be canceled by using the browse screen or by CTCI entry, and Iocked-in trades may be broken using the browse screen. However, in order to break a locked-in trade, "break" entries must be submitted by both the buyer and seller.

      At the end of the trading day, all locked-in trades are sent to the NSCC, and all open trades become eligible for the end-of-day aggregate match. Trades with the same parties, security identifier, and price, but with different volumes are combined, matched, and sent to the NSCC. At times, this aggregate process may result in one or more locked-in trades being sent to clearing and another open trade with the unmatched volume remaining in the ACT system. This open trade then becomes available for reconciliation through ACT on T+l.

      The ACT 2 (T+l) cycle allows a final cleanup of all open trades remaining from trade day. Firms may use the ACT 2 browse function to enter "as of" entries in order to effect a match, or they may "Accept," "Decline," or "Cancel" trades from the previous day. Entry of ACT 2 "as of" trades can be accomplished until 1 p.m., and ACT browse up-dates until 2:30 p.m. on T+l.

      At the end of the ACT 2 cycle, a second aggregate match is attempted on the remaining open trades. When this is completed, all remaining open trades that were entered into the ACT system on trade date are automatically locked in and sent, as such, to NSCC. All open "as of" trades, however, are deleted from the ACT file.

      ACT RISK MANAGEMENT

      Since ACT accelerates the comparison cycle and creates locked-in trades, clearing firms gain extensive risk management capabilities to monitor the activities of their correspondents.

      Using ACT Risk Management, clearing firms can choose to monitor purchase and sale activity, establish dollar thresholds for the trading day, examine large trades, establish and delete clearing relationships, and develop an internal data base through a real-time data feed of correspondent activity.

      Thresholds

      ACT calculates separate purchase and sale dollar totals for each executing broker. These running totals are compared against a purchase and sale threshold established by the clearing firm for each of its correspondents. When executing brokers' totals reach 70 percent of the assigned threshold, an alert message is transmitted to the clearing and executing firms. A second message is sent if an executing broker exceeds its threshold. The clearing firm can reset thresholds any time during the trading day and has the option of setting unlimited thresholds.

      Super Cap Limits

      As an additional feature, the ACT Risk Management process calculates the totals of compared locked-in trades for each correspondent. This figure will be related to a "Super Cap" total, which is twice the assigned threshold but never less than $1 million.

      If a correspondent broker's locked-in trades exceed the Super Cap amount, the ACT system will place a designated mark next to all of its quotes (if the firm is a market maker), and will cause all trades greater than $200,000 to be held for 15 minutes for clearing-firm approval. Trades not approved in this 15-minute time period will be rejected and sent back to the contra party.

      Once the Super Cap is penetrated, it is the responsibility of the clearing firm to either raise the threshold, thus resetting the Super Cap for that correspondent, or to delete the clearing arrangement, thereby ceasing to act for that correspondent.

      Blockbuster Trades

      As an additional feature, all trades of $1 million or more so-called "blockbuster trades" will be subject to clearing-firm approval. The trade report will be held for a 15-minute time frame in order to allow the clearing broker an opportunity to examine the trade details. If during the 15-minute "held" period the clearing firm does not actively reject the trade, it will be processed and matched like any other ACT trade report. Clearing firms, however, have the option of bypassing blockbuster trade processing for designated correspondents.

      ACT Risk Management Features for Clearing Firms

      All correspondent trade activity may be monitored from a special Clearing Firm Browse screen designed specifically to allow these firms the ability to "see" locked-in and open trade reports entered into the ACT system. A separate display permits the clearing firm to monitor and update correspondent threshold limits and also provides the means to cancel a specific clearing relationship.

      An additional feature is available to clearing firms with a CTCI interface. These firms are able to receive a real-time data feed of all trade detail and comparison activity of its correspondents. This will allow the clearing firm to create an internal data base if the clearing firm is interested in developing more intensive risk management procedures for its correspondents.

      ACT FEE STRUCTURE

      The following fee structure applies to the ACT service:

      • Compared Trades — $.0125 per 100 shares (minimum 400 shares or $.05 and maximum 7,500 shares or $.9375).
      • Query Charge — $.25 per query. The first accept or decline processed is free, and a query is defined as entering a new parameter (i.e., stock symbol or market-maker identifier).
      • Late Fees will not be charged.
      • ACT 2 Input Fees — $.25 per trade, in addition to comparison charge.
      • ACT Only Terminal Fees — $50 per month. (Defined as a terminal set-up for ACT only usage; that is, it is not being charged for any other Nasdaq service, such as Level 2/3 or Trade Acceptance and Reconciliation Service.
      • CTCI Fee — $500 per month per line.
      • Service Desk — $50 per month.
      • Clearing-Firm Risk Management — $.02 per side and $15 per month per correspondent.

    • 90-79 Receipt of Differential Compensation for Soliciting Proxies in Partnership Roll-Ups; Last Date for Comments: January 15, 1991

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate

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

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to Appendix F under Article III, Section 34 of the Rules of Fair Practice ("Appendix F") that would prohibit member firms from receiving differential compensation contingent on investor votes in connection with their solicitation of consents in partnership roll-up transactions. The text of the proposed amendment follows this notice. The NASD is also interested in receiving comment on any regulatory alternatives to the proposed amendment.

      BACKGROUND

      The NASD's Direct Participation Programs/Real Estate Committee, a national standing committee of the Board of Governors, has reviewed certain issues relating to NASD members' activities in connection with the roll-up of existing limited partnerships into new publicly traded limited partnerships, real estate investment trusts, or corporations.

      In particular, the Committee reviewed the use of differential compensation plans that provide for NASD members soliciting limited partners in a roll-up to receive a commission only when the investor votes "yes" on the proposed transaction. The NASD is concerned that the payment for "yes" votes raises a conflict of interest, or appearance of a conflict of interest, since such a compensation arrangement may give members an incentive to recommend approval of the transaction.

      A typical differential compensation arrangement provides for members to receive a commission, generally around 2 percent, for soliciting "yes" votes from limited partners to approve a roll-up transaction. No payments are made for "no" votes. In addition, members do not receive these commissions if a sufficient number of "yes" votes is not received to consummate the transaction. Members also sometimes receive engagement fees, financial advisory fees, and/or fees for providing fairness opinions in connection with roll-up transactions.

      On October 3, 1990, the House Subcommittee on Telecommunications and Finance opened hearings in Washington, D.C., on various investor protection, fairness, and disclosure issues related to the roll-up of limited partnerships.

      The subcommittee indicated its intention to convene a series of hearings to determine whether legislative or regulatory action is necessary to curb perceived abuses in the roll-up area.

      Such perceived abuses relate to the fees earned by general partners and their affiliates in connection with roll-up transactions, poor after-market performance of entities resulting from a roll-up, the lack of dissenters' rights for limited partners opposed to a roll-up, the accuracy and adequacy of disclosure documents provided to investors considering a roll-up, as well as differential compensation arrangements providing payment to brokers only when soliciting "yes" votes.

      The NASD believes that the appropriate legislative or regulatory bodies should address concerns relating to investor protection, aftermarket performance, fairness, and disclosure in connection with roll-ups. The issue of differential compensation, however, presents an immediate issue to the NASD. The Board of Governors is concerned about members' receipt of payment only for "yes" votes when soliciting limited partners considering approval of a roll-up transaction, particularly in light of the above-referenced investor protection, aftermarket performance, fairness, and disclosure concerns relating to these transactions.

      The Board questioned whether members should be paid only for soliciting "yes" votes when it is unclear whether such "yes" votes are in the best interests of investors. The Board determined that it may be more appropriate for members to receive a solicitation fee based on delivering any vote, "yes" or "no," as compensation for their solicitation efforts.

      Therefore, the Board of Governors accepted the Direct Participation Programs/Real Estate Committee's recommendation to request membership comment on a proposed amendment to Appendix F under Article III, Section 34 of the Rules of Fair Practice. The proposed amendment would prohibit the receipt by a member of differential compensation in a roll-up transaction that is tied to the solicitation of "yes" votes only from limited partners, irrespective of the form of entity resulting from the roll-up (i.e., a partnership, real estate investment trust, or corporation).

      REQUEST FOR COMMENT

      The NASD is requesting comment on the proposed amendment itself as well as specific comment on several unresolved issues relating to the proposed amendment and roll-ups.

      First is the question of whether the 2 percent commission creates a conflict of interest sufficient to sway members to solicit "yes" votes when the member believes the roll-up transaction is inappropriate or disadvantageous to its clients.

      Second, if payments for "yes" votes are prohibited, should members be permitted to receive commissions contingent on a sufficient number of "yes" votes being received to approve the transaction? If members know they will be compensated only if the transaction is approved, despite the fact that they can receive compensation for "yes" and "no" votes, there might still exist an incentive to recommend that limited partners vote "yes."

      Third, members are requested to comment on whether viable alternatives exist that would address the differential compensation question without adopting a prohibition on its receipt. Commenters are encouraged to propose other methods of regulating this practice. Alternatives include (1) expanding or modifying the disclosure requirements relating to differential compensation and (2) requiring the soliciting broker-dealer to affirmatively inform the limited partner of the potential receipt of differential compensation.

      * * * * *

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

      Mr. Lynn Nellius, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Comments must be received no later than January 15, 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 Appendix F, it must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to Richard J. Fortwengler, Associate Director, or Carl R. Sperapani, Assistant Director, Corporate Financing at (202) 728-8258.

      PROPOSED AMENDMENT TO APPENDIX F UNDER ARTICLE III, SECTION 34 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New language is underlined.)

      Appendix F

      Sec. 1.



      Sec. 6.

      Solicitation of Consents

      No member shall be permitted to receive differential compensation based upon a limited partner's approval of the transaction in connection with a member's solicitation efforts in a reorganization or roll-up of a direct participation program, irrespective of the form of entity resulting from the roll-up (i.e., a partnership, real estate investment trust or corporation).

    • 90-78 NASDAQ National Market System (NASDAQ/NMS) Additions, Changes, and Deletions As of October 11, 1990

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading

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

      As of October 11, 1990, the following 10 issues joined NASDAQ/NMS, bringing the total number of issues to 2,613

      Symbol

      Company

      Entry Date

      SOES Execution Level

      HIPC

      High Plains Corporation

      9/18/90

      1000

      SSVB

      Security Savings Bank, F.S.B.

      9/18/90

      200

      URIX

      Uranium Resources, Inc.

      9/18/90

      1000

      URIXW

      Uranium Resources, Inc. (Wts)

      9/18/90

      500

      WONEW

      Westwood One, Inc. (Wts)

      9/18/90

      500

      GRNT

      Grant-Norpac, Inc.

      9/19/90

      1000

      MTRX

      Matrix Service Company

      9/26/90

      500

      LONDY

      London International Group plc

      10/2/90

      200

      DOSKQ

      Doskocil Companies, Inc.

      10/4/90

      1000

      ACOM

      Astrocom Corporation

      10/5/90

      1000

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since September 13, 1990:

      New/Old Symbol

      New/Old Security

      Date of Change

      CFED/CFED

      Charter One Bancorp, Inc./Charter Federal Savings Bank

      9/18/90

      ITHB/CISA

      Ithaca Bancorp, Inc./Citizens Savings Bank, F.S.B.

      9/18/90

      SDYN/SDYN

      Staodyn, Inc./Staodynamics, Inc.

      9/21/90

      MNRTA/MNRTS

      Monmouth Real Estate Investment Corp. (Cl A)/Monmouth Real Estate Investment Trust

      10/1/90

      NSEC/NSIC

      National Security Group, Inc./National Security Insurance Company

      10/1/90

      HROK/HROK

      Home Federal Savings Bank/Home Federal Savings & Loan Association of the Rockies

      10/5/90

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      NMCO

      National Media Corporation

      9/14/90

      CDNC

      Cadence Design Systems, Inc.

      9/17/90

      FNNG

      Finnigan Corporation

      9/17/90

      PHABY

      Pharmacia AB

      9/17/90

      MABC

      Mid-America Bancorp

      9/18/90

      FPUT

      Florida Public Utilities Company

      9/19/90

      OLDR

      Old Republic International Corporation

      9/19/90

      UTLC

      UTL Corporation

      9/19/90

      DXTK

      Diagnostek, Inc.

      9/20/90

      SSIAA

      Stockholder Systems, Inc. (Cl A)

      9/20/90

      WOTK

      World-Wide Technology Inc.

      9/21/90

      AFTIW

      American Film Technologies, Inc. (Wts)

      9/24/90

      BMDS

      Bio-Medicus, Inc.

      9/24/90

      FFMA

      Fidelity Federal Savings Bank

      9/24/90

      CWTS

      Country-Wide Transport Services, Inc.

      9/25/90

      ICPYE

      Institute of Clinical Pharmacology plc

      9/25/90

      JGRPC

      Jesup Group Inc. (The)

      9/25/90

      MWAV

      Microwave Laboratories, Inc.

      9/25/90

      SFEM

      SFE Technologies

      9/25/90

      AIRSY

      Airship Industries Limited

      9/26/90

      FCNCB

      First Citizens Bancshares, Inc. (Cl B)

      9/26/90

      FSEB

      First Home Federal Savings and Loan Association

      9/28/90

      BFBS

      Brookfield Bancshares Corporation

      10/1/90

      JMBRS

      JMB Realty Trust

      10/1/90

      SHLB

      Shelby Federal Savings Bank

      10/1/90

      MLLE

      Martin Lawrence Limited Editions, Inc.

      10/3/90

      MACK

      Mack Trucks, Inc.

      10/5/90

      WEBS

      Webster Clothes, Inc.

      10/5/90

      FEXCW

      First Executive Corporation (11/15/90 Wts)

      10/8/90

      TVOPZ

      Vista Organization Partnership, L.P. (The)

      10/8/90

      CAPB

      Capitol Bancorporation

      10/10/90

      FFSB

      Fulton Federal Savings Bank

      10/10/90

      GBLD

      General Building Products Corporation

      10/10/90

      OSIC

      Osicom Technologies, Inc.

      10/10/90

      UMED

      Unimed, Inc.

      10/10/90

      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.

    • 90-77 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 Thanksgiving Day, Thursday, November 22, 1990. All securities markets will be closed on Thursday, November 22, in observance of Thanksgiving Day.

      Trade Date

      Settlement Date

      Reg. T Date*

      November 12

      19

      21

      13

      20

      23

      14

      21

      26

      15

      23

      27

      16

      26

      28

      19

      27

      29

      20

      28

      30

      21

      29

      December 3

      22

      Markets Closed

      23

      30

      4

      These settlement dates should be used by brokers, dealers, and municipal securities dealers 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)(l) 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)(l), 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."


    • 90-76 Broker-Dealer and Agent Renewals for 1991

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Registration

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

      EXECUTIVE SUMMARY

      The 1990-91 NASD broker-dealer and agent registration renewal cycle will begin in early November. This program allows for simplification of the renewal process through the payment of one invoice amount that includes fees for NASD personnel assessments, NASD branch-office fees, New York Stock Exchange (NYSE) and American Stock Exchange (ASE) maintenance fees, state agent renewal fees, and state broker-dealer renewal fees. Assessments for NASD fees will differ slightly from those in past years as the Association converts from a fiscal year to a calendar year for financial and billing purposes. Members should read this Notice and the instruction materials included in the forthcoming invoice package to ensure continued eligibility to do business in the states on January 1, 1991.

      INITIAL RENEWAL INVOICES

      On or about November 9, 1990, the NASD will mail initial renewal invoices to all member firms. The invoices will include fees for NASD personnel assessments, NASD branch-office fees, New York Stock Exchange (NYSE) and American Stock Exchange (ASE) 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, 1990.

      This year, NASD assessments for personnel and branch-office fees will cover a 15-month period from October 1990 through December 1991, as the Association converts from a fiscal year to a calendar year. The NASD personnel assessment is set at $12.50 per person. All registered personnel with an approved NASD license as of December 31, 1990, will be assessed this fee. A fee will not be assessed for any agent whose NASD registration terminates on or before December 31.

      The NASD will base its branch-office assessments on the effective opening date of the branch. Any branch that is active as of October 1, 1990, will be assessed a partial fee of $12.50 for the fourth quarter of 1990. If this branch remains active into 1991, an additional $50 fee will be assessed for this calendar year. If this branch closes on or before December 31, 1990, only the fourth quarter fee will be assessed. Any new branch that opens during the fourth quarter of 1990 will be assessed only the partial fee of $12.50, because the NASD will consider the initial $50 branch registration fee as the assessment for calendar year 1991.

      NYSE AND ASE MAINTENANCE FEES AS WELL AS STATE RENEWAL FEES WILL CONTINUE TO BE BASED ON A CALENDAR YEAR. NO ADDITIONAL PARTIAL FEES FOR FOURTH-QUARTER 1990 WILL BE ASSESSED FOR THESE JURISDICTIONS.

      Agent renewal fees for NYSE, ASE, and state affiliations will be listed in a table enclosed with each invoice. The table includes a list of state broker-dealer renewal fees for states that are participating in this year's broker-dealer renewal program. NYSE and ASE maintenance fees — collected by the NASD for firms that are registered with NYSE/ASE as well as the NASD — are based on the number of NYSE- and ASE-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, 1990, deadline will mean a loss of eligibility to do business in the states effective January 1, 1991.

      FILING FORM U-5

      Members may wish to avoid unwanted renewals by filing Form U-5 for agent terminations in one or more affiliations. Because of the increased convenience and flexibility reported by members that used predated Form U-5 for renewals in the previous three 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, 1990, 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, 1990. Also, predated U-5s cannot be processed if the date of termination indicated is January 1, 1991, 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 nondisciplinary Forms U-5. 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 call costs. 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 1990. The system will be operational from 9 a.m. to 11 p.m., Eastern Time (ET) Monday through Friday and will also be available on Saturdays from 9 a.m. to 5 p.m., ET.

      FILING FORMS BDW

      The CRD Phase II program, now in its second 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 seven jurisdictions or entities that are not participating in Phase II. They are:

      Arizona
      Arkansas
      Michigan
      New Jersey
      Puerto Rico
      American Stock 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 1990 is December 18, 1990. 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 fourth 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 such firms in their internal research and allocation of fees.

      FINAL ADJUSTED INVOICES

      On or about January 11, 1991, 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, 1990. 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, ASE, 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. In addition, the roster indicates year-end branch status, which serves as the basis for the branch assessment fee amount.

      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 1991 issue of 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.

    • 90-75 New Requirement for Market Makers to Display Size in Quotations

      SUGGESTED ROUTING*

      Senior Management
      Institutional
      Legal & Compliance
      Operations
      Systems
      Trading
      Training

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

      EXECUTIVE SUMMARY

      On September 18, 1990, the Securities and Exchange Commission (SEC) approved an NASD proposal to require market makers in NASDAQ to display quotation size greater than or equal to the appropriate SOES tier size in their quotes on NASDAQ. The rule takes effect December 1, 1990. At the same time, the SEC granted a six-month exception to the firm-quote rule so that market makers are not obliged to execute more than 100 shares against competing market makers in the same issues. This exception also begins December 1 and expires June 1, 1991.

      BACKGROUND AND DISCUSSION

      In response to a recommendation by the NASD's Quality of Markets Committee, the NASD Board of Governors in 1989 approved a proposal to amend Schedule D to require market makers in NASDAQ securities that are also market makers in the Small Order Execution System (SOES) to display size in NASDAQ at least equal to the maximum size of an order eligible for automatic execution in SOES, and to extend such size to all parties except firms that are also market makers in the same security. The NASD believes that the new rule will enhance the quality, liquidity, and depth of NASDAQ and provide greater information to the investing public.

      Under current practice, few market makers display quotations in excess of the normal unit of trading, 100 shares. Under the Rules of Practice and Procedure for SOES (SOES Rules), however, NASDAQ market makers that are also market makers in SOES are required to execute orders through SOES in sizes equal to or smaller than the "maximum order size" as published periodically by the NASD. These order-size limits are currently set at 1000 shares, 500 shares, and 200 shares, depending on the trading characteristics of the security. The NASD believes that mandatory size display would provide a realistic picture of the actual size of execution available and the depth of the market in each security. Display of size would enhance investor knowledge and would also be beneficial to issuers by publicizing the liquidity and depth of the market for their securities.

      The new rule applies to all market makers that participate in SOES, and thus applies to National Market System (NASDAQ/NMS) securities as well as regular NASDAQ securities.

      The new rule also has an impact on market makers using other NASD systems, such as the Order Confirmation Transaction (OCT) service and the Computer Assisted Execution System (CAES). For the most part, the application of the rule to OCT and CAES, as well as to telephone orders, should not result in multiple order exposure commitments. Under the SEC's "firm quote rule," Rule llAcl-1, a broker-dealer is relieved from the obligation of honoring its published quotation size if, prior to the presentation of an order, the broker-dealer has communicated to the NASD a revised quotation or if, at the time the order is presented, the broker-dealer is effecting a transaction and is about to send in a quote update. In most cases, therefore, the maximum exposure for market makers should be the maximum tier size for SOES, provided the market maker complies with the requirements of the firm-quote rule in revising its quote size.

      There may be cases, however, in which a market maker will face multiple order exposure commitments due to the automated nature of SOES and the fact that the market maker is obliged to execute orders in SOES in amounts of up to five times the applicable maximum tier size. For example, if a phone order is followed by a SOES order that occurs during the course of the phone call, the market maker will be obligated to execute both orders. Likewise, a market maker could receive simultaneous orders through SOES and OCT and would be obligated to execute both up to the size displayed. Conversely, if a SOES order is received first, followed by either a phone order or an OCT order, if the market maker is revising its quotation, the market maker would not be obligated to fill the incoming phone or OCT order.

      Finally, the new rule also contains an exception from filling sized orders from competing market makers in the same security. Although the SEC's firm-quote rule obligates a market maker to execute any order presented at its quoted price and size, the NASD has received an exception from the rule because extension of quote size to competing market makers would increase market-making risk to the extent a competitor may fail to honor its side of a transaction. Higher net capital standards are currently under consideration by the SEC, and the NASD believes that those higher standards may significantly reduce the risk that would be assumed by market makers if required to honor quote size to competitors. Accordingly, the exception to the firm-quote rule for competing market makers will last for six months, from December 1, 1990, to June 1, 1991. Afterwards, if higher net capital requirements have been adopted, this provision will be reexamined. Therefore, from December 1, 1990, until June 1, 1991, NASDAQ market makers will be required to execute only 100 shares of stock for competing market makers.

      Questions concerning this notice may be addressed to Jeff Englander, Market Surveillance at (301) 590-6450.

      (Note: New language is underlined.)

      Schedule D

      Part VI

      Sec. 2 Character of Quotations

      (a) Two-sided Quotations. For each security in which a member is registered as a market maker, the member shall be willing to buy and sell such security for its own account on a continuous basis and shall enter and maintain two-sided quotations in the NASDAQ system, subject to the provisions for excused withdrawal set forth in Section 7 below. Each member registered as a NASDAQ market maker in SOES shall display the size for each quotation which size shall be no less than the maximum order size for such security eligible for execution through SOES, as shall be published from time to time by the Association pursuant to paragraph (a)(7) of the SOES Rules.
      (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 quotations 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.

    • 90-74 Proposed Amendment to Article IV, Section 1 of the NASD Rules of Fair Practice Re: the Suspension of the Membership of Any Member or of the Registration of a Person Associated With a Member for a Definite Period Assessed As a Penalty For a Rule Violation;

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      Registration
      Trading
      Training

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

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to Article IV, Section 1 of the NASD Rules of Fair Practice. The amendment to Section 1 would exclude from the rule the requirement that suspensions of membership or suspensions of the registration of associated persons be for a specific length of time. The amendment would allow the NASD to impose, as a penalty for a rule violation involving losses to customers, a suspension, either of membership or of the registration of an associated person. The suspension would remain effective until such person or member proves he or she has made restitution to the customer. The text of the proposed amendment follows this notice.

      BACKGROUND

      Section 15A(b)(7) of the Securities Exchange Act of 1934 provides in part that, in order for an association to be registered as a national securities association, its rules must provide that its members and persons associated with its members will be appropriately disciplined by expulsion, suspension, limitation of activities, or other fitting sanctions. Article V, Section 1 of the NASD Rules of Fair Practice sets forth the penalties that may be imposed by the NASD Board of Governors ("Board") or any District Business Conduct Committee (DBCC) or Market Surveillance Committee (MSC) for rule violations. It states in part that the Committees or the Board may "suspend the membership of any member or suspend the registration of a person associated with a member, if any, for a definite period ..." (emphasis added). The proposed amendment would delete the words "for a definite period," thereby allowing the Board and any DBCC or MSC to impose a suspension without specifying a definite period for the duration of the suspension.

      Currently, Article V, Section 1 limits the imposition of suspensions in that it requires that all suspensions imposed by any DBCC, MSC, or the Board specify the term of the suspension. The requirement effectively precludes the imposition of a suspension that is of indefinite duration, such as a suspension ordered to remain effective until the respondent proves restitution or a suspension for a definite period that will continue if restitution is not made within that period. In appeals of NASD disciplinary actions, the SEC has rejected suspensions imposed under similar circumstances, stating that the suspensions violated Article V, Section 1 in that their lengths were indefinite.

      A significant number of disciplinary actions brought by the DBCCs or MSCs involve losses to customers. Often, the customer whose funds have been misused is readily identifiable and sometimes involved as a witness in the disciplinary action. In imposing penalties, the Committees have sought to ensure that the wronged individual is made whole frequently through the imposition of bars and the requirement of restitution. The Board is interested in providing the NASD with an opportunity to require the respondents in disciplinary actions to refund the client's money in cases where a bar is not considered an appropriate sanction. A suspension contingent upon proof of restitution is a sanction alternative that would allow the Committees and the Board to require customer remuneration under such circumstances. In order to provide the flexibility needed to include restitution as part of the penalty imposed on respondents, this rule revision is necessary.

      The proposed amendment seeks to eliminate the self-imposed prohibition and provide the Board and the DBCCs and MSCs with greater leeway in crafting sanctions, in appropriate cases, that assist customers in the recovery of their losses.

      SUMMARY OF PROPOSED AMENDMENTS

      ARTICLE III, SECTION 1 OF THE NASD RULES OF FAIR PRACTICE

      The NASD is proposing to amend Article III, Section 1 of the Rules of Fair Practice to provide the NASD with the ability to impose suspensions of membership and of the registration of associated persons until the member or associated person proves restitution. The change would be accomplished by deleting from the rule the requirement that all sanctions imposed by the Board of Governors or any District Business Conduct Committee or Market Surveillance Committee be for a definite period of time. The NASD believes it is essential that the Committees and the Board have the ability to require, as part of a disciplinary penalty, that the respondent refund his or her customer's money or otherwise make the customer financially whole.

      The NASD encourages all members and other interested persons to comment on the proposed amendment to Article V, Section 1 of the Rules of Fair Practice. Comments should be directed to:

      Mr. Lynn Nellius
      Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, D.C. 20006-1506.

      Comments must be received no later than December 5, 1990. All comments will be made available for public inspection. Comments received by this date will be considered by the NASD Board of Governors. If approved by the Board, the amendment must be submitted for member vote and filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this Notice to Members may be directed to Carla J. Carloni, Attorney, Office of General Counsel, at (202) 728-8019.

      PROPOSED AMENDMENT TO NASD RULES OF FAIR PRACTICE

      (Note: Deleted text is in brackets.)

      ARTICLE V

      Penalties

      Penalties for Violations of the Rules

      Section 1. Any District Business Conduct Committee, Market Surveillance Committee or the Board of Governors, in the administration and enforcement of these Rules, and after compliance with the Code of Procedure, may (1) censure any member or person associated with a member and/or (2) impose a fine upon any member or person associated with a member and/or (3) suspend the membership of any member or suspend the registration of a person associated with a member, if any, [for a definite period,] and/or (4) expel any member or revoke the registration of any person associated with a member, if any, and/or (5) suspend or bar a member or a person associated with a member from association with all members, or (6) impose any other fitting penalty deemed appropriate under the circumstances, for each or any violation of any of these Rules by a member or person associated with a member or for any neglect or any refusal to comply with any orders, directions or decisions issued by any District Conduct Committee, Market Surveillance Committee or the Board of Governors in the enforcement of these Rules, including any interpretative ruling made by the Board of Governors, as any such Committee or Board, in its discretion, may deem to be just; provided, however, that no such sanction imposed by any District Business Conduct Committee or Market Surveillance Committee shall take effect until the period for appeal therefrom or review has expired, as provided in Article III, Section 1 of the Code of Procedure; and provided, further, that all parties to any proceeding resulting in a sanction shall be deemed to have assented to or to have acquiesced in the imposition of such sanction unless any party aggrieved thereby shall have made application to the Board of Governors for review pursuant to the Code of Procedure, within fifteen (15) days after the date of such notice.

    • 90-73 Proposed 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; Last Voting Date: December 5, 1990

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      Registration

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

      MAIL VOTE

      EXECUTIVE SUMMARY

      NASD members are invited to vote on a proposed amendment to Article III, Section 28 of the NASD Rules of Fair Practice that would require an associated person to notify the executing member in writing of the employment relationship that exists with the employer member, and to notify the employer member in writing prior to opening an account or placing an initial order with the executing member.

      BACKGROUND

      Article III, Section 28(c) currently requires a registered representative, prior to 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 does not, however, require the notice to be in writing. In addition, there is no specific provision in the Association's Rules of Fair Practice that requires the registered representative to inform his or her employer member that he or she is executing trades through another firm.1 The rule, as it stands, places the burden on the executing member to notify the employer member and to provide duplicate confirmations or such other information as the employer member may require. At present, many, but not all firms have internal compliance procedures requiring that notice be given to the employer. If such notification were required, the Board of Governors believes that it might allow member firms to more directly detect the existence of possible rule violations, including potential insider trading by associated persons.

      PROPOSED AMENDMENT

      The Board, therefore, proposes to amend Section 28 to require 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.

      COMMENTS RECEIVED

      This amendment was published for comment in Notice to Members 90-50 (August 1990), and differed slightly from the version published for vote here. The NASD received 17 comment letters on the amendment as originally proposed. Nine were generally in favor, six were generally opposed, and two were opposed due to misunderstandings.

      The initial version included a provision that would have required the employer member to approve the initial trade or opening of the account. Based on comments received, the Board of Governors decided to amend the proposal to eliminate the approval requirement.

      A number of comments submitted by members with limited securities businesses recommended that the proposed amendment be limited to member firms with general securities licenses and firms conducting a traditional retail brokerage business, and that exemptions be created for specialty firms such as life insurance companies and broker-dealers engaged exclusively in the sale of variable products or limited partnership interests. They argued that the amendment's impact was unduly harsh on the limited broker-dealers without the justification of a reasonable benefit to the industry.

      After consideration of these comments, the NASD Board of Governors felt that the elimination of the approval requirement would reduce the responsibility of limited broker-dealers, thereby alleviating what may have been interpreted as an onerous burden. The Board decided that notification of each firm of the opening of an account should still be required, while allowing the firms to decide independently in what manner to respond. The requirement that an employer member receive notification is far less burdensome, in the Board's opinion, than the requirement that the employer member approve the opening of the account or initial trade.

      Furthermore, the amendment would 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. The Board believes that the amendment would also, among other things, prevent instances in which trades may be made on inside information because the employer member was not aware of the existence of the account with another member. For these reasons, the Board believes that the rule amendment, as currently proposed for member vote, is necessary and appropriate.

      Several comment letters raised the concern that all trades by an associated person through a nonemployer member would be subject to Section 28. That is not the intention of the Board of Governors. This amendment will require notice only prior to the opening of an account or, in the event an associated person makes a trade without opening an account, prior to the execution of the initial order. Written notification will not be required for any subsequent trades.

      REQUEST FOR VOTE

      The NASD Board of Governors therefore believes that this change to the 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 5, 1990.

      Questions concerning this notice may be directed to T. Grant Callery, Vice President and Deputy General Counsel, or Maureen Eisenberg, Attorney, Office of General Counsel, at (202) 728-8285 or (202) 728-8245, respectively.

      PROPOSED 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.

      1The 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.


    • 90-72 SIPC Trustee Appointed for DFW Clearing, Inc.

      SUGGESTED ROUTING*

      Senior Management
      Municipal
      Operations
      Systems

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

      On September 17, 1990, the United States District Court for the Northern District of Texas, Fort Worth Division, appointed a SIPC trustee for:

      DFW Clearing, Inc.
      3200 City Center II
      301 Commerce Street
      Ft. Worth, Texas 76102.

      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.

      Questions regarding the firm should be directed to the SIPC trustee:

      Robert G. Richardson, Esquire
      Hutcheson & Grundy
      6200 NCNB Plaza
      901 Main Street
      Dallas, Texas 75202-3714
      (214) 761-2828.

    • 90-71 NASDAQ National Market System (NASDAQ/NMS) Additions, Changes, and Deletions As of September 13, 1990

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading

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

      As of September 13, 1990, the following 17 issues joined NASDAQ/NMS, bringing the total number of issues to 2,640:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      CYNRW

      Canyon Resources Corporation (Wts)

      8/14/90

      500

      LUNR

      Lunar Corporation

      8/14/90

      1000

      GOIL

      Gerrity Oil & Gas Corporation

      8/15/90

      1000

      MCAM

      Marcam Corporation

      8/16/90

      1000

      FAIL

      Failure Group, Inc. (The)

      8/17/90

      1000

      MMOA

      Medical Management of America, Inc.

      8/20/90

      500

      AALR

      Advanced Logic Research, Inc.

      8/21/90

      1000

      ICRR

      Illinois Central Corporation

      8/21/90

      1000

      SYLN

      Sylvan Foods Holdings, Inc.

      8/21/90

      1000

      VITL

      Vital Signs, Inc.

      8/29/90

      1000

      PARK

      Park National Corporation

      8/30/90

      200

      BIAC

      BI Incorporated

      9/4/90

      1000

      LAWR

      CMS/DATA Corporation

      9/4/90

      1000

      RDUS

      Radius Inc.

      9/4/90

      1000

      RWIN

      Republic Waste Industries, Inc.

      9/4/90

      1000

      WTEC

      Warrantech Corporation

      9/4/90

      1000

      RMHI

      Rocky Mountain Helicopters, Inc.

      9/11/90

      1000

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since August 13, 1990:

      New/Old Symbol

      New/Old Security

      Date of Change

      PROS/PROSZ

      Prospect Group, Inc. (The)/Prospect Group, Inc. (The) (Paired Cert.)

      8/21/90

      PFBK/PFBK

      Pioneer Savings Bank/Pioneer Federal Savings Bank

      8/22/90

      SHOW/SHOW

      Showscan Corp./Showscan Film Corp.

      8/22/90

      MSEL/SOFS

      Merisel, Inc./Softsel Computer Products, Inc.

      8/23/90

      HFSF/HFSF

      Home Federal Financial Corporation/Home Federal Savings & Loan Association of San Francisco

      9/4/90

      HRIZ/HRIZ

      Horizon Gold Corporation/Horizon Gold Shares, Inc.

      9/4/90

      SUNT/CCTC

      Sunward Technologies, Inc./Computer and Communications Technology Corporation

      9/4/90

      CBCX/CBCX

      Cambridge Biotech Corp./Cambridge BioScience Corp.

      9/10/90

      INHO/CGPS

      Independence Holding Company/Stamford Capital Group, Inc

      9/10/90

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      FLAI

      Fleet Aerospace, Inc.

      8/14/90

      RCOA

      Retailing Corporation of America

      8/14/90

      SYMB

      Symbion, Inc.

      8/14/90

      TOPT

      Tele-Optics, Inc.

      8/14/90

      CRCH

      Church & Dwight Co., Inc.

      8/15/90

      CIIF

      CII Financial, Inc.

      8/16/90

      FSBC

      First Savings Bank, F.S.B.

      8/16/90

      SUNF

      SUNF, Inc.

      8/16/90

      STRUE

      Structofab, Inc.

      8/16/90

      FFCA

      Carolina Bancorp, Inc.

      8/20/90

      EPSI

      Epsilon Data Management, Inc.

      8/21/90

      MWSB

      Mountain West Savings Bank, F.S.B.

      8/28/90

      QTEC

      QuesTech, Inc.

      8/28/90

      SPILF

      S.P.I.-Suspension and Parts Industries Limited

      8/28/90

      SYNEQ

      Syntech International, Inc.

      8/28/90

      VKSI

      Vikonics, Inc.

      8/28/90

      WTEL

      Walker Telecommunications Corporation

      8/28/90

      WMIC

      Western Microwave, Inc.

      8/28/90

      SBRU

      Subaru of America, Inc.

      8/31/90

      CODNW

      Codenoll Technologies Corporation (Wts)

      9/4/90

      ILFC

      International Lease Finance Corporation

      9/4/90

      ILFCW

      International Lease Finance Corporation (Wts)

      9/4/90

      MUTU

      Mutual Federal Savings and Loan Association

      9/4/90

      MFBZ

      Mutual Federal Savings Bank, A Stock Corporation

      9/4/90

      LABB

      Beauty Labs, Inc.

      9/6/90

      HINT

      Henley International, Inc.

      9/7/90

      ALTO

      Altos Computer Systems

      9/10/90

      BTRL

      Biotech Research Laboratories, Inc.

      9/10/90

      CSMO

      Cosmo Communications Corporation

      9/11/90

      IFSB

      Independence Federal Savings Bank

      9/11/90

      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.

    • 90-70 Veteran'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.

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Veteran's Day, Monday, November 12, 1990. On Monday, November 12, the NASDAQ system and the exchange markets 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.

      Trade Date

      Settlement Date

      Reg. T Date*

      November 1

      8

      12

      2

      9

      13

      5

      13

      14

      6

      14

      15

      7

      15

      16

      8

      16

      19

      9

      19

      20

      12

      19

      21

      Note: November 12, 1990, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on November 12 will be combined with transactions made on the previous business day, November 9, for settlement on November 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 November 12.

      These settlement dates should be used by brokers, dealers, and municipal securities dealers 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)(l) 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)(l), 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."


    • 90-69 Amendment to Schedule C of the NASD By-Laws Regarding Use of the Modified General Securities Representative Examination to Qualify Persons Registered With The Securities Association of the United Kingdom, Effective Immediately

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Registration
      Training

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) has approved, effective immediately, an amendment to Schedule C of the NASD By-Laws that would allow persons registered with The Securities Association of the United Kingdom to qualify as a general securities representative by passing a modified general securities representative examination.

      EXPLANATION

      It is the NASD's responsibility under Section 15A(g)(3) of the Securities Exchange Act of 1934 to prescribe standards of training, experience, and competence for persons associated with NASD members. Pursuant to this statutory obligation, the NASD has developed examinations and administers examinations developed by other self-regulatory organizations designed to establish that persons associated with NASD members have attained specified levels of competence and knowledge.

      The amendment to Part III, Section (2)(a)(ii) of Schedule C is intended to coordinate with the recent SEC approval of a New York Stock Exchange (NYSE) rule that allows a qualified registered representative in good standing with The Securities Association of the United Kingdom to become qualified as a general securities representative (Series 7) by passing a modified general securities representative examination developed by the NYSE. The NASD now has no rule that allows for NASD registration of a person who has passed the modified qualification examination.

      Questions concerning this notice may be directed to Frank McAuliffe, Vice President, Qualifications, at (301) 590-6694, or David Uthe, Senior Qualifications Analyst, at (301) 590-6695.

      TEXT OF RULE CHANGE

      (Note: New text is underlined.)

      Schedule C of the NASD By-Laws

      (2) Categories of Representative Registration
      (a) General Securities Representative
      (ii)
      (f) A person registered and in good standing with The Securities Association of the United Kingdom and having passed the Modified General Securities Representative Qualification Examination for United Kingdom Representatives shall be qualified to be registered as a General Securities Representative except that such person's activities in the investment banking or securities business may not involve the solicitation, purchase and/or sale of municipal securities as defined in Section 3(a)(29)of the Act.

    • 90-68 Amendment to Schedule C of the NASD By-Laws Regarding Requalification by Examination For Persons Whose Registration Has Been Revoked, Effective October 1, 1990

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      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 Schedule C of the NASD By-Laws that would require any person whose registration(s) has been revoked to re-qualify by examination prior to again becoming registered. The amendment became effective October 1, 1990.

      EXPLANATION

      The Securities and Exchange Commission has approved an amendment to Part II, Section (l)(c) and Part III, Section (l)(c) of Schedule C to the By-Laws to require any person whose registration(s) has been revoked, pursuant to Article V, Section 2 of the Rules of Fair Practice, to requalify by examination prior to again becoming registered. Article V, Section 2 of the Rules of Fair Practice authorizes the NASD to revoke the registration of a person associated with a member if such person fails promptly to pay any fine or monetary sanction or any costs assessed pursuant to Article V, Section 1 and Article V, Section 3, respectively, of the Rules of Fair Practice.

      The NASD's normal policy in attempting to collect fines is to send several requests for payment prior to revoking a person's registration. The NASD believes the requirement that a person requalify by examination if his or her registration(s) is revoked will serve to encourage the prompt payment of fines and costs levied in NASD disciplinary proceedings. Under the present provisions of Schedule C, a person whose registration has been terminated for any reason has two years from the date of such termination to again become registered with the NASD without taking the appropriate qualifying examinations.

      Questions concerning this notice may be directed to Craig L. Landauer, Assistant General Counsel, NASD Office of General Counsel, at (202)728-8291.

      TEXT OF RULE CHANGE

      (Note: New text is underlined.)

      Schedule C of the NASD By-Laws

      II

      REGISTRATION OF PRINCIPALS

      (1) Registration Requirements
      (c) Requirements for Examination on Lapse of Registration - Any person whose registration has been revoked pursuant to Article V, Section 2 of the Rules of Fair Practice or whose most recent registration as a principal has been terminated for a period of two or more years immediately preceding the date of receipt by the Corporation of a new application shall be required to pass a Qualification Examination for Principals appropriate to the category of registration as specified in Part II, Section (2) hereof.

      III

      REGISTRATION OF REPRESENTATIVES

      (1) Registration Requirements
      (c) Requirement for Examination on Lapse of Registration - Any person whose registration has been revoked pursuant to Article V, Section 2 of the Rules of Fair Practice or whose most recent registration as a representative or principal has been terminated for a period of two (2) or more years immediately preceding the date of receipt by the Corporation of a new application shall be required to pass a Qualification Examination for Representatives appropriate to the category of registration as specified in Part III, Section 2 hereof.

    • 90-67 SOES Tier Levels to Change for 450 Issues on October 15, 1990

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Operation
      Trading

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

      On June 30, 1988, the maximum 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 29, 1990, 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. Only 23 issues were affected by this change during the most recent review. 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 issue that will require a SOES tier-level change on October 15, 1990.

      NASDAQ/NMS SOES CHANGES

      All Issues in Alphabetical Order by Name

      Symbol

      Company Name

      Old Tier Level

      New Tier Level

      A

           

      ELUXY

      A B ELECTRLX ADR

      1000

      500

      SKFRY

      A B SKF ADR

      1000

      500

      ACMT

      A C MAT CORP

      500

      200

      ABBK

      ABINGTON BANCORP INC

      1000

      500

      ALFB

      ABRAHAM LINCOLN FSB

      1000

      500

      ACLE

      ACCEL INTL CORP

      1000

      500

      AROS

      ADVANCE ROSS CORP

      1000

      500

      ARVX

      AEROVOX INC

      500

      1000

      AMFI

      AMCORE FINANCIAL INC

      500

      1000

      AMJX

      AMER FSB DUVAL CNTY

      1000

      500

      AMPH

      AMER PHYSICIANS SVC

      1000

      500

      ARIG

      AMER RELIANCE GROUP INC

      1000

      500

      RICE

      AMER RICE INC

      1000

      500

      AMWD

      AMER WOODMARK CORP

      1000

      500

      FUND

      AMERICAS ALL SEAS FD

      500

      1000

      AMTA

      AMISTAR CORP

      200

      500

      AMOS

      AMOSKEAG CO

      500

      200

      AMPI

      AMPLICON INC

      1000

      500

      ANEN

      ANAREN MICROWAVE INC

      1000

      500

      ANDR

      ANDERSEN GROUP INC

      1000

      500

      ARDNA

      ARDEN GROUP CL A

      500

      200

      ALOT

      ASTRO MED INC

      1000

      500

      ATKM

      ATEK METALS CENTER

      1000

      500

      ATFC

      ATICO FINANCIAL CORP

      500

      200

      AFED

      ATLANFED BANCORP INC

      500

      200

      ATWD

      ATWOOD OCEANICS INC

      500

      1000

      ATTC

      AUTO-TROL TECH

      500

      200

      AUTR

      AUTOTROL CORP

      500

      1000

      B

           

      BFEN

      B F ENTERPRISES INC

      500

      200

      BFSI

      B F S BANKORP INC

      1000

      500

      BGSS

      B G S SYSTEMS INC

      500

      1000

      BNHB

      B N H BNSH INC

      1000

      500

      BTRI

      B T R REALTYINC

      1000

      500

      BTBTY

      B T SHIP ADR

      200

      500

      BAIB

      BAILEY CORP

      1000

      500

      BLCC

      BALCHEM CORP

      500

      200

      BWINB

      BALDWIN LYONS CL B

      1000

      500

      BTEK

      BALTEK CORP

      1000

      500

      BCNJ

      BANCORP NEW JERSEY

      1000

      500

      BNHC

      BANK OF NEW HAMP CORP

      1000

      500

      ASAL

      BANKATLANTIC FSB

      500

      200

      BNKF

      BANKERS FIRST CORP

      1000

      500

      BOMA

      BANKS OF MID AMER

      1000

      500

      BARY

      BARRY S JEWELERS INC

      500

      200

      BLLW

      BELL W AND CO INC

      1000

      500

      BNHN

      BENIHANA NATL CORP

      1000

      500

      BLSC

      BIO LOGIC SYS CORP

      500

      1000

      BLAK

      BLACK INDS INC

      200

      500

      BLIS

      BLISS LAUGHLIN INDS

      500

      200

      BRCOA

      BRADY W H COCLA

      500

      1000

      BRJS

      BRAJDAS CORP

      500

      200

      BSBC

      BRANFORD SAVINGS BANK

      1000

      500

      BRDL

      BRENDLE'S INC

      1000

      500

      BRID

      BRIDGFORD FOODS CORP

      500

      200

      BCKY

      BUCKEYE FIN CORP

      1000

      500

      C

           

      CERB

      C E R B C O INC

      500

      200

      CPST

      C P C REXCEL INC

      1000

      500

      CSPI

      C S P INC

      500

      1000

      CALGF

      CAL GRAPHITE CORP

      500

      1000

      CRBI

      CAL REP BANCORP INC

      200

      500

      CSTB

      CALIFORNIA STATE BANK

      500

      1000

      CBAM

      CAMBREX CORP

      1000

      500

      CCBT

      CAPE COD BANK TR CO

      500

      1000

      CAFS

      CARDINAL FINL GROUP

      500

      200

      CDRGW

      CEDAR GROUP WTS A

      1000

      500

      CELLW

      CELL TECH INC WTS 92

      500

      200

      CJFC

      CENTRAL JERSEY FINL

      500

      200

      CPSA

      CENTRAL PENN FIN CORP

      500

      200

      CSBC

      CENTRAL SOUTHERN HLD

      200

      500

      CSBI

      CENTURY SOUTH BANKS

      200

      500

      CHCR

      CHANCELLOR CORP

      200

      500

      CHER

      CHERRY CORP

      1000

      500

      CHPK

      CHESAPEAKE UTIL CORP

      500

      1000

      CVAL

      CHESTER VALLEY BANCORP

      500

      200

      DOCKS

      CHICAGO DOCK SBI

      1000

      500

      CDCRA

      CHILDREN'S DISCOVR A

      500

      200

      CPCI

      CIPRICO INC

      1000

      500

      CINS

      CIRCLE INCOME SHARES

      1000

      500

      CIZCF

      CITY RESOURCE CANADA

      1000

      500

      CIVC

      CIVIC BANCORP

      200

      500

      CTRIS

      CLEVETRUST RLTY SBI

      1000

      500

      CLDRP

      CLIFFS DRILLING PFD

      500

      200

      COCAW

      COCA MINES INC WTS

      500

      200

      CODN

      CODENOLL TECH CORP

      1000

      500

      CHTB

      COHASSET SAVINGS BANK

      500

      200

      CBNB

      COMMERCEBANCORP

      1000

      500

      CBOCA

      COMMERCIAL BANCORP COLO

      500

      200

      CTIA

      COMMUN TRANSMISSION

      1000

      500

      CBNH

      COMMUNITY BANKSHARES

      1000

      500

      CBSI

      COMMUNITY BANK SYSTEM

      200

      500

      CIDN

      COMPUTER IDENTICS CORP

      500

      1000

      CLRI

      COMPUTER LANGUAGE

      500

      1000

      COND

      CONDOR SVCS INC

      1000

      500

      CSTP

      CONGRESS STREET PROP

      500

      200

      CFIB

      CONS FIBRES INC

      500

      200

      CBNE

      CONSTITUTION BANCORP NE

      500

      200

      CONH

      CONTL HOMES HOLDING

      1000

      500

      CORC

      CORCOM INC

      1000

      500

      CSTN

      CORNERSTONE FIN CORP

      1000

      500

      CSMO

      COSMO COMMUN CORP

      1000

      500

      CSTR

      COSTAR CORP

      200

      500

      CLFI

      COUNTRY LAKE FOODS

      1000

      500

      CRRC

      COURIER CORP

      500

      200

      FYBR

      CRITICAL INDS INC

      1000

      500

      CRAN

      CROWN ANDERSEN INC

      500

      1000

      COILP

      CRYSTAL OIL CO PFD A

      500

      200

      CUNB

      CUPERTINO NATL BANCORP

      200

      500

      D

           

      DPHZ

      DATA PHAZ INC

      1000

      500

      DOCO

      DOC OPTICS CORP

      500

      200

      DMCVB

      DAIRY MART STORES B

      1000

      500

      DMCB

      DATA MEASUREMENT CORP

      500

      200

      DATM

      DATUM INC

      1000

      500

      DSH

      DECOM SYS INC

      500

      200

      DEVC

      DEVCON INTL CORP

      500

      1000

      DLOG

      DISTRIBUTED LOGIC CORP

      1000

      500

      DOUG

      DOUGLAS AND LOMASON

      500

      200

      DREW

      DREW INDS INC

      1000

      500

      E

           

      EBMI

      E AND B MARINE INC

      1000

      500

      ECLAY

      E C C PLC ADR

      1000

      500

      EBSI

      EAGLE BANCSHARES

      1000

      500

      VFBK

      EASTERN BANCORP INC

      1000

      500

      EASTS

      EASTOVER CORP SBI

      500

      200

      EAVN

      EATON VANCE CORP

      500

      1000

      ELCN

      ELCO INDS INC

      1000

      500

      ELRC

      ELECTRO RENT CORP

      1000

      500

      ETCIA

      ELECTRONIC TELECOM A

      200

      500

      EFSB

      ELMWOOD FED SAV BANK

      1000

      500

      ENVI

      ENVIROSAFE SERVICES

      1000

      500

      EQICB

      EQUITABLE OF IOWA B

      1000

      500

      XCOL

      EXPLORATION CO LOUIS

      1000

      500

      F

           

      FMFS

      F AND M FINL SVC CORP

      500

      200

      FLSHP

      FLS HLDGS A PFD

      200

      500

      FMCO

      F M S FINANCIAL CORP

      1000

      500

      FNBR

      F N B ROCHESTER CORP

      500

      1000

      FNWB

      FNW BANCORP INC

      1000

      500

      FICI

      FAIR ISAAC AND CO

      200

      500

      FCBK

      FAIRFIELD COUNTY BANCORP

      1000

      500

      FLCP

      FALCON PRODUCTS INC

      500

      1000

      FAHSP

      FARM AND HOME PFD A

      1000

      500

      FARC

      FARR CO

      500

      1000

      FSCR

      FEDERAL SCREW WORKS

      500

      200

      FIGI

      FIGGIE INTL INC

      200

      500

      FAMA

      FIRST AMARILLO BANCORP

      500

      200

      FAMRB

      FIRST AMER FIN CORP B

      1000

      500

      FAMRA

      FIRST AMER FINL CORP A

      1000

      500

      FBNC

      FIRST BANCORP TROY NC

      500

      200

      FCTR

      FIRST CHARTER CORP

      500

      200

      FCHT

      FIRST CHATTANOOGA

      500

      1000

      FRFD

      FIRST COMM BANCORP IL

      200

      500

      HCEN

      FIRST FAMILY GROUP

      500

      200

      FFAL

      FIRST FED ALABAMA

      500

      200

      FFSW

      FIRST FEDERAL FINL

      500

      200

      FFMY

      FIRST FED S L FT MYR

      500

      1000

      FFSD

      FIRST FED SAV BANK AL

      1000

      500

      FSBG

      FIRST FED SAV BANK GA

      500

      200

      FLAG

      FIRST FED SAV BANK LAG

      500

      200

      FFSM

      FIRST FED SAV BANK MT

      200

      500

      FFWP

      FIRST FED WESTERN PA

      1000

      500

      FGHC

      FIRST GEORG HLDGS

      200

      500

      FSEB

      FIRST HOME FED SAV LOAN

      200

      500

      FSPG

      FIRST HOME SAV BANK

      500

      200

      FLFC

      FIRST LIBERTY FIN

      1000

      500

      FMSB

      FIRST MUTUAL SAV BANK

      500

      1000

      FPNJ

      FIRST PEOPLES FIN CORP

      1000

      500

      FSFI

      FIRST STATE FINL SVC

      1000

      500

      WOBS

      FIRST WOBURN BANCORP

      1000

      500

      FLGLA

      FLAGLER BANK CORP CL A

      500

      200

      FFPC

      FLORIDA FIRST FED

      1000

      500

      FOILP

      FOREST OIL CORP PFD

      500

      1000

      FELE

      FRANKLIN ELECTRIC CO

      1000

      500

      G

           

      GWCC

      G W C CORP

      500

      1000

      GATW

      GATEWAY FED CORP

      500

      1000

      GBLD

      GEN BLDG PRODS CORP

      500

      200

      GENIP

      GENETICS INSTIT PFD

      500

      1000

      GNBC

      GLENDALE BANCORP

      200

      500

      GLTX

      GOLDTEX INC

      500

      200

      GFGC

      GREAT FALLS GAS CO

      1000

      500

      GRIF

      GRIFFIN TECHNOLOGY

      1000

      500

      GROV

      GROVE BANK FOR SAV

      500

      200

      GULL

      GULL LABS INC

      1000

      500

      H

           

      HEH

      HEI INC

      1000

      500

      HALL

      HALL FIN GROUP INC

      1000

      500

      HWEC

      HALLWOOD ENERGY CORP

      1000

      500

      THCO

      HAMMOND CO THE

      1000

      500

      HATH

      HATHAWAY CORP

      500

      1000

      HVFD

      HAVERFIELD CORP

      200

      500

      CHHC

      HEIST C H CORP

      200

      500

      HELX

      HELIX TECHNOLOGY INC

      500

      1000

      HERS

      HERITAGE FINL SVC IL

      1000

      500

      HSBK

      HIBERNIA SAV BANK THE

      1000

      500

      HIWDF

      HIGHWOOD RESOURCES

      500

      200

      HIFS

      HINGHAM INSTI SAVING

      1000

      500

      HFGA

      HOME FED SAV BANK GA

      500

      200

      HFSF

      HOME FED SAV LN SF

      1000

      500

      HOMF

      HOME FED SAV SEYMOUR

      1000

      500

      HFIN

      HORIZON FIN SVC INC

      1000

      500

      HOSP

      HOSPOSABLE PROD INC

      500

      1000

      HYDE

      HYDE ATHLETIC INDS

      1000

      500

      I

           

      IIVI

      IIVI INC

      500

      1000

      INRD

      INRAD INC

      500

      200

      TIBI

      IMAGE BANK THE

      500

      1000

      IMATW

      IMATRON INC WTS 90

      500

      200

      IMGN

      IMMUNOGEN INC

      500

      1000

      INDB

      INDEP BANK CORP MA

      500

      1000

      MFD

      INFODATA SYSTEMS INC

      1000

      500

      IGSI

      INSITUFORM GULF SO

      500

      200

      ISEC

      INSITUFORM SOUTHEAST

      1000

      500

      INTS

      INTEGRATED SYS INC

      500

      1000

      IFED

      INTER FED SAV BANK

      500

      200

      INTL

      INTER TEL INC

      1000

      500

      INPH

      INTERPHASE CORP

      500

      000

      INTP

      INTERPOINT CORP

      1000

      500

      ICEYF

      INTL CAP EQUIP LTD

      1000

      500

      ILFCW

      INTL LEASE FIN WTS

      500

      1000

      IRON

      IRONSTONE GROUP INC

      1000

      500

      IROQ

      IROQUOIS BANCORP

      500

      200

      ISKO

      ISCO INC

      1000

      500

      IYCOY

      ITO YOKADO CO ADR

      200

      500

      J

           

      JGIN

      J G INDUSTRIES INC

      1000

      500

      JMLC

      JAMES MADISON LTD

      500

      200

      JASN

      JASON INC

      500

      1000

      JEFG

      JEFFERIES GROUP INC

      1000

      500

      JALC

      JOHN ADAMS LIFE CORP

      500

      200

      JOSL

      JOSLYN CORP

      1000

      500

      K

           

      KCSG

      K C S GROUP INC

      1000

      500

      KMSI

      K M S INDS INC

      1000

      500

      KTH

      K TRON INTL INC

      1000

      500

      KMCI

      KEEGAN MGMT CO

      200

      500

      KTCO

      KENAN TRANSPORT CO

      500

      200

      KNAP

      KNAPE AND VOGT MFG

      1000

      500

      KRUG

      KRUG INTL CORP

      1000

      500

      L

           

      LCSI

      L C S INDS INC

      500

      200

      LDBC

      L D B CORP

      500

      200

      LXBK

      L S B BANCS HARES NC

      200

      500

      LDMK

      LANDMARK BANK FOR SAV

      1000

      500

      LCBI

      LANDMARK COMM BANCORP

      1000

      500

      LSER

      LASER CORP

      500

      1000

      LFIN

      LINCOLN FINANCIAL CORP

      500

      1000

      LNSB

      LINCOLN SAVINGS BANK

      500

      200

      LNDL

      LINDAL CEDAR HOMES

      500

      1000

      LIND

      LINDBERG CORP

      1000

      500

      LEK

      LOWRANCE ELECTRONICS

      200

      500

      M

           

      MMIM

      M M I MEDICALINC

      1000

      500

      MACD

      MACDERMID INC

      200

      500

      MLRC

      MALLON RESOURCES CORP

      1000

      500

      MANA

      MANATRON INC

      200

      500

      MFAC

      MARKET FACTS INC

      500

      200

      MFLR

      MAYFLOWER CO-OP BANK

      1000

      500

      MFFC

      MAYFLOWER FIN CORP

      1000

      500

      MOIL

      MAYNARD OIL CO

      1000

      500

      MCFE

      MCFARLAND ENERGY INC

      1000

      500

      MTK

      MECHANICAL TECH INC

      500

      200

      MDIN

      MEDALIST INDS

      1000

      500

      MDXR

      MEDAR INC

      1000

      500

      MGCC

      MEDICAL GRAPHICS CORP

      1000

      500

      MRET

      MERET INC

      500

      200

      KITS

      MERIDIAN DIAGNOSTICS

      1000

      500

      MRMK

      MERRIMACK BANCORP

      1000

      500

      METS

      MET-COIL SYSTEMS CORP

      500

      1000

      MTRO

      METRO TEL CORP

      500

      200

      MFGR

      METRO BANK FIN GROUP INC

      1000

      500

      MWAV

      MICROWAVE LABS INC

      1000

      500

      MMSB

      MID MAINE SAV BANK FSB

      1000

      500

      MIDS

      MID-SOUTH INS CO

      500

      200

      MS SB

      MID-STATE FED SAV BANK

      1000

      500

      MIDC

      MIDCONN BANK

      1000

      500

      MAHI

      MONARCH AVALON INC

      500

      200

      MHCO

      MOORE HANDLEY INC

      500

      200

      MORP

      MOORE PRODUCTS CO

      200

      500

      MORF

      MOR-FLO INDS INC

      500

      200

      MOTR

      MOTOR CLUB OF AMER

      1000

      500

      MTNR

      MOUNTAINEER BKSHS WV

      200

      500

      MRGC

      MR GASKET CO

      1000

      500

      MUEL

      MUELLER PAUL CO

      200

      500

      LABL

      MULTI-COLOR CORP

      500

      1000

      N

           

      NIPNY

      N E C CORP ADR

      500

      1000

      NYCL

      N Y CAL CORP

      1000

      500

      NBCC

      NATL BANC COMMERCE

      500

      1000

      NBAK

      NATL BANCORP OF ALASKA

      500

      200

      NCMC

      NATL CAP MGT CORP

      1000

      500

      NCBM

      NATL CITY BANCORP

      500

      200

      NPBC

      NATL PENN BSCHS INC

      200

      500

      NTSC

      NATL TECH SYS INC

      1000

      500

      NWLIA

      NATL WESTERN LIFE A

      500

      1000

      NAVG

      NAVIGATORS GROUP INC

      1000

      500

      NGFCF

      NEVADA GOLDFIELDS CORP

      500

      200

      NHS

      NEW IMAGE INDS INC

      500

      1000

      NLON

      NEW LONDON INC

      500

      1000

      NEWE

      NEWPORT ELECTRONICS

      500

      200

      NNSL

      NEWPORT NEWS SAV BANK

      500

      200

      NIEX

      NIAGARAEXCHANGE CORP

      1000

      500

      NMDY

      NORMANDY OIL GAS CO

      500

      1000

      NCCB

      NORTHERN CA COMMUNTT

      200

      500

      NWIB

      NORTHWEST IL BNCORP

      500

      200

      NWTL

      NORTHWEST TELEPROD

      500

      200

      NOVXM

      NOVA PHARM CORP WTS C

      500

      200

      NYCOP

      NYCOR INC PFD

      500

      1000

      O

           

      OHSC

      OAK HILL SPORTSWEAR

      1000

      500

      OHBC

      OHIO BANCORP YOUNGSTOWN

      500

      200

      OLDB

      OLD NATL BANCORP

      500

      1000

      OVWV

      ONE VALLEY BANCORP W VA

      500

      1000

      OPTO

      OPTO MECHANIK INC

      1000

      500

      OFSB

      ORIENTAL FED SAV BANK

      500

      200

      OSHM

      OSHMANS SPORTING

      1000

      500

      P

           

      PTSI

      P A M TRANSPORT SVCS

      1000

      500

      PBSF

      PACIFIC BANK N A

      200

      500

      PISC

      PACIFIC INTL SVC CORP

      1000

      500

      PALM

      PALFED INC

      1000

      500

      PATL

      PAN ATLANTIC INC

      200

      500

      PATK

      PATRICK INDS INC

      1000

      500

      PMFG

      PEERLESS MFG CO

      200

      500

      PNTAP

      PENTAIR INC PFD 87

      200

      500

      PFDC

      PEOPLES FED DEKALB

      200

      500

      PBNB

      PEOPLES SAV FINL CORP

      1000

      500

      PETD

      PETROLEUM DEV CORP

      1000

      500

      PETT

      PETTIBONE CORP

      200

      500

      PHOC

      PHOTO CONTROL CORP

      500

      200

      PICOA

      PHYSICIANS INS OH A

      1000

      500

      PBGI

      PIEDMONT BKGP INC

      500

      200

      PMAN

      PIEDMONT MGMT CO INC

      1000

      500

      PSBN

      PIONEER BNCORP INC NC

      1000

      500

      PLEN

      PLENUM PUBLISHING CORP

      500

      1000

      POLK

      POLK AUDIO INC

      1000

      500

      POOL

      POSEIDON POOLS AMER

      1000

      500

      PENG

      PRIMA ENERGY CORP

      500

      1000

      PSAB

      PRIME BANCORP INC

      500

      1000

      PMSI

      PRIME MEDICAL SYS

      1000

      500

      PRFT

      PROFFITT'S INC

      200

      500

      PFNC

      PROGRESS FIN CORP

      200

      500

      PSBK

      PROGRESSIVE BANK INC

      1000

      500

      PRGR

      PRO GROUP INC

      1000

      500

      PLFC

      PULASKI FURNITURE CORP

      500

      1000

      PULS

      PULSE BANCORP INC

      1000

      500

      PTNM

      PUTNAM TRUST CO

      200

      500

      Q

           

      QTEC

      QUESTECH INC

      200

      500

      QUIP

      QUIPP INC

      500

      200

      R

           

      RMPO

      RAMAPO FINANCIAL CORP

      500

      200

      RARB

      RARITAN BANCORP INC

      500

      1000

      RDGCA

      READING CO CL A

      1000

      500

      RFTN

      REFLECTONE INC

      1000

      500

      RGEQ

      REGENCY EQUITIES CORP

      1000

      500

      REAL

      RELIABILITY INC

      500

      1000

      RAUT

      REPUBLIC AUTO PARTS

      1000

      500

      RBNC

      REPUBLIC BANCORP INC

      1000

      500

      RSLA

      REPUBLIC CAP GROUP INC

      1000

      500

      RSFC

      REPUBLIC SAV FIN CORP

      200

      500

      RESR

      RESEARCH INC

      500

      200

      ROIL

      RESERVE INDS CORP

      200

      500

      REXW

      REXWORKS INC

      1000

      500

      RHEM

      RHEOMETRICS INC

      500

      200

      RMCI

      RIGHT MGMT CONSUL

      500

      1000

      ROBN

      ROBBINS AND MYERS

      500

      1000

      RPCX

      ROBERTS PHARM CORP

      500

      1000

      RONC

      RONSON CORP

      500

      200

      RPCH

      ROSPATCH CORP

      1000

      500

      RCDC

      ROSS COSMETICS DIST

      1000

      500

      ROTO

      ROTO-ROOTER INC

      1000

      500

      RBPAA

      ROYAL BANK PENN A

      500

      1000

      ROYLW

      ROYALPAR INDS WTS A

      500

      200

      RBCO

      RYAN BECK CO INC

      1000

      500

      S

           

      SCOM

      S C S COMPUTE INC

      1000

      500

      SFEM

      S F E TECH MFG CO

      1000

      500

      SINE

      S J N B FINANCIAL CORP

      1000

      500

      SNLFA

      S N L FINANCIAL CORP A

      500

      200

      SUNF

      S U N F INC

      500

      200

      SNDS

      SANDS REGENT THE

      1000

      500

      SATI

      SATELLITE INFO SYS

      1000

      500

      SAVO

      SCHULTZ SAV-O STORES

      1000

      500

      STIZ

      SCIENTIFIC TECH INC

      200

      500

      SBCFA

      SEACOAST BKG CORP FL A

      500

      1000

      SSBA

      SEACOAST SAVINGS BANK

      1000

      500

      SLFX

      SELFEX INC

      1000

      500

      SLRV

      SELLERSVILLE SAV LOAN

      1000

      500

      SEQS

      SEQUOIA SYS INC

      500

      1000

      SHLB

      SHELBY FED SAVS BANK

      500

      200

      SSBC

      SHELTON BANCORP INC

      200

      500

      SHOP

      SHOPSMITH INC

      500

      1000

      SETC

      SIERRA RLESTTR 84

      1000

      500

      SMET

      SIMETCO INC

      1000

      500

      HAMS

      SMITHFIELD CO INC

      500

      200

      SOMR

      SOMERSET GROUP INC THE

      500

      200

      SMGS

      SOUTHEASTERN MI GAS

      500

      1000

      SMIN

      SOUTHERN MINERAL CORP

      500

      1000

      SPIR

      SPIRE CORP

      1000

      500

      STRC

      STRATFORD AMER CORP

      500

      1000

      SLMAJ

      STUDENT LOAN MKT VOTG

      1000

      500

      SUBBA

      SUBURBAN BANCORP A

      1000

      500

      SNRU

      SUN AIR ELECTRONICS

      1000

      500

      SNLT

      SUNLITE INC

      500

      200

      SRBC

      SUNRISE BANCORP

      1000

      500

      SUPX

      SUPERTEX INC

      1000

      500

      SUSQ

      SUSQUEHANNA BCSHS

      1000

      500

      SYMB

      S Y MBION INC

      1000

      500

      SYNL

      SYNTELLECT INC

      500

      1000

      T

           

      TTOI

      T E M P E S T TECH

      1000

      500

      tsh

      T S I INC

      500

      1000

      TDCX

      TECHNOLOGY DEV CORP

      500

      200

      TCOMB

      TELE COMMUN INC B

      500

      200

      TMTX

      TEMTEX INDS INC

      500

      200

      TANT

      TENNANT CO

      1000

      500

      TCSFY

      THOMSON C S F ADR

      500

      200

      TAVI

      THORN APPLE VALLEY

      500

      200

      TMBS

      TTMBERLINE SOFTWARE

      500

      1000

      TKIOY

      TOKIO MARINE ADR

      500

      1000

      TKOS

      TOKOS MED CORP DEL

      200

      500

      TLAM

      TONY LAMA CO INC

      1000

      500

      TGDGF

      TOTAL ENERGOLD CORP

      1000

      500

      TRNI

      TRANS INDS INC

      500

      1000

      TLII

      TRANS LEASING INTL

      1000

      500

      TRSL

      TRANSNATIONAL INDS

      500

      1000

      TRCR

      TRICARE INC

      500

      1000

      TMAS

      TRIMAS CORP

      500

      1000

      TRBK

      TRUSTBANK SAV FSB

      500

      1000

      TDRLF

      TUDOR CORP LTD

      500

      200

      TUES

      TUESDAY MORNING INC

      1000

      500

      U

           

      UNRI

      U N R ENDS INC

      500

      1000

      UNRIW

      U N R INDS INC WTS

      500

      1000

      UNSL

      U N S L FIN CORP

      200

      500

      USAB

      U S A BANCORP INC

      1000

      500

      UBSI

      UNITED BKSHS INC

      1000

      500

      UNCF

      UNITED COS FINANCIAL

      500

      1000

      UNSA

      UNITED FIN CORP SC

      500

      200

      UICI

      UNITED INS COS INC

      1000

      500

      UMSB

      UNITED MISSOURI BCSH

      500

      1000

      UNEWY

      UNITED NEWSPAPER ADR

      1000

      500

      UBMT

      UNITED SAV BANK F A MT

      1000

      500

      CETH

      UNITED THERMAL CORP

      1000

      500

      UPEN

      UPPER PENINSULA ERGY

      200

      500

      UBAN

      USBANCORPINCPA

      1000

      500

      UBANP

      U S BANCORP INC PFD A

      200

      500

      V

           

      VALN

      VALLEN CORP

      200

      500

      VALU

      VALUE LINE INC

      500

      200

      VANF

      VANFED BANCORP

      1000

      500

      VICT

      VICTORIA BKSHS

      1000

      500

      VLGEA

      VILLAGE SUPER MKT A

      1000

      500

      VIPTS

      VINLAND PROP TR SBI

      1000

      500

      W

           

      WAIN

      WAINWRIGHT BANK TR CO

      500

      200

      WALB

      W A L BRO CORP

      1000

      500

      WALS

      WALSHIRE ASSURANCE

      200

      500

      WBNC

      WASHINGTON BANCORP NJ

      1000

      500

      WSBX

      WASHINGTON SAV BANK

      500

      200

      WHOO

      WATERHOUSE INVESTOR

      200

      500

      WTRS

      WATERS INSTRUMENTS

      500

      200

      WFPR

      WESTERN FED SAV P R

      500

      200

      WTPR

      WETTERAU PROPERTIES

      200

      500

      WMSI

      WILLIAMS INDS INC

      1000

      500

      Y

           

      YFED

      YORK FINANCIAL CORP

      500

      1000

      Z

           

      ZEUS

      ZEUS COMPONENTS INC

      500

      200

    • 90-66 Proposed Amendments to SEC Rule 15c3-1 Regarding Withdrawals of Net Capital

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) has issued Release No. 34-28347, containing proposed amendments to Rule 15c3-1 (the "Rule") with respect to withdrawals of net capital. The proposal would expand the capital withdrawal limitations in subparagraph (e) of the Rule and would require, in certain instances, notification to the Commission prior to effecting the withdrawal(s) of capital directly or indirectly to benefit certain specified persons or entities related to the broker-dealer. The Commission, by order, could, in exceptional circumstances, prohibit such withdrawals if it determined that the withdrawal(s) could be detrimental to the financial integrity of the broker-dealer or affect the broker-dealer's ability to meet customer obligations. The SEC's comment period expires October 22, 1990. The text of the proposed amendments follows this notice.

      BACKGROUND

      The Securities and Exchange Commission (SEC) has proposed amendments to its Net Capital Rule designed to address the issues arising from the withdrawal of capital from a broker-dealer by a parent or affiliate. The amendments are intended to improve the Commission's ability to protect the customers and creditors of a broker-dealer in those circumstances where a financial problem in a holding company or other affiliate leads to withdrawals of capital from the broker-dealer.

      Subparagraph (e) of the Rule (limitation on withdrawal of equity capital) currently establishes certain prohibitions on the withdrawal of equity capital from a broker-dealer failing to maintain specified levels of net capital. The proposed amendment would expand the scope of this section by prohibiting capital withdrawals, directly or indirectly, by actions of a stockholder, partner, or affiliate of the broker-dealer (insiders) without first notifying the Commission and its designated examining authority at least two business days before the intended withdrawal of capital if:

      (i) the projected withdrawal, along with other withdrawals during the preceding thirty (30) days, would equal or exceed 20 percent of the firm's excess net capital; or
      (ii) 30 percent of excess net capital during the preceding 90 days.

      The notification requirement would apply to aggregate withdrawals in excess of $50,000.

      Under the proposal, once notification is given, the Commission could, in exceptional circumstances, prohibit the proposed capital withdrawal to insiders and affiliates by issuing an order that would prevent such withdrawal for a period of twenty (20) business days if the Commission believes the capital withdrawal "... may be detrimental to the financial integrity of the broker-dealer or which may unduly jeopardize its ability to repay its customer claims or other liabilities of the broker-dealer." This 20-day time period would enable the Commission and its staff to further examine the broker-dealer's financial condition so as to determine whether, and under what circumstances, to permit the withdrawal entirely or partially, or prohibit it for additional periods, each with a term no longer than 20 business days.

      In addition to the prohibitions currently in subparagraph (e) of the Rule, the Commission is proposing to include a new condition tied to proprietary "haircuts." If a projected capital withdrawal were to cause the firm's net capital to be less than 30 percent of the "haircut" deduction, the withdrawal would be prohibited.

      The term "capital withdrawals" is broadly defined to include not only return of capital contributions, but also dividend distributions, stock redemptions, unsecured advances or loans to stockholders, partners, sole proprietors, affiliates, or employees. But withdrawals would not include required tax payments or the payment of reasonable compensation to partners.

      In addition to comments on the proposed amendments, the Commission is soliciting comments on whether additional amendments to the financial responsibility rule are appropriate, especially as to larger broker-dealers with affiliated entities. The Commission is asking for alternative approaches regarding capital levels, such as net capital requirements based on haircuts, for large dealer firms that are able to achieve a significant degree of leverage under existing capital rules, particularly firms operating under the alternative method.

      NASD members that wish to comment on the proposed rule change should do so by October 22, 1990.

      Comment letters in triplicate should be sent to:

      Jonathan G. Katz
      Secretary
      Securities and Exchange Commission
      450 Fifth Street, NW
      Washington, DC 20549.

      Comment letters should refer to File No. S7-14-90. All comment letters received will be made available for public inspection and copying in the SEC's Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549.

      Members are requested to send copies of their comment letters to:

      Lynn Nellius, 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.

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-28347; File No. S7-14-90]

      RIN 3235-AD79

      Net Capital Rule; Prohibited Withdrawal by Registered Broker-Dealers

      AGENCY: Securities and Exchange Commission.

      ACTION: Proposed rule amendments.


      SUMMARY: The Securities and Exchange Commission proposes to amend its net capital rule under the Securities Exchange Act with respect to withdrawal of net capital. The proposal would, under certain circumstances, prohibit registered broker-dealers from withdrawing capital directly or indirectly to benefit certain described persons related to the broker-dealer, without first notifying the Commission at least two business days before the withdrawal of capital. The proposed amendments would also permit the Commission, by order, to prohibit any of these withdrawals of capital from the registered broker-dealer, if the Commission believed the withdrawal may be detrimental to the financial integrity of the broker-dealer or might affect the broker-dealer's ability to repay its customer claims or other liabilities. Finally, the proposed amendments would prohibit any of these withdrawals of capital if the effect of such withdrawals would cause the broker-dealer's net capital to be less than 30 percent of its deductions required by the net capital rule as to its readily marketable securities.

      The proposed amendments are designed to address the issues arising from the withdrawal of capital from a broker-dealer by a parent or affiliate, and they are intended to improve the Commission's ability to protect the customers and creditors of a broker-dealer in those circumstances where a financial problem in a holding company or other affiliate leads to withdrawals of capital from the broker-dealer. The Commission requests comment on the amendments set forth in the proposed rule. In addition, the Commission is requesting comment on whether additional amendments to the Commission's financial responsibility rules are appropriate in order to address the issues arising from the increased complexity of broker-dealer holding company structures and the higher incidence of proprietary risks undertaken by many broker-dealers.

      DATES: Comments to be received on or before October 22, 1990.

      ADDRESSES: Persons wishing to submit written comments should file three copies with Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. All comment letters should refer to File No. S7-14-90. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549.

      FOR FURTHER INFORMATION CONTACT:

      Michael A. Macchiaroli, (202) 272-2904, Michael P. Jamroz, (202) 272-2372 or Roger G. Coffin, (202) 272-2396. Division of Market Regulation, 450 Fifth Street, NW., Washington, DC 20549.

      SUPPLEMENTARY INFORMATION:

      I. Introduction

      The primary purpose of the net capital rule (Securities Exchange Act Rule 15c3-1; 17 CFR 240.15c3-l) is to protect customers and creditors of registered broker-dealers from monetary losses and delays that can occur when a registered broker-dealer fails. In this way, the Rule acts to prevent systemic risk from the failure of a financial intermediary. The Rule requires registered broker-dealers to maintain sufficient liquid assets to enable firms that fall below the minimum net capital requirements to liquidate in an orderly fashion without the need for a formal proceeding. Presently the net capital rule generally requires a registered broker-dealer to maintain net capital in excess of the greater of $25,000 or 6% percent of its liabilities and other obligations ("aggregate indebtedness or basic method"). If the broker-dealer makes an election under paragraph (f) of the Rule, the broker-dealer must maintain net capital in excess of the greater of $100,000 or 2 percent of its so-called aggregate debit items (the "alternative method"). These aggregate debit items generally may be thought of as its customer-related receivables.1

      Generally, the net capital requirement is computed by deducting from net worth, among other things, the book value of illiquid assets and cetain prescribed percentages from the market value of proprietary securities. These letter deductions are referred to as "haircuts". In the case of many firms, these haircuts require the firm to maintain significant amounts of capital (either equity capital or properly subordinated debt) to carry the positions while maintaining net capital compliance.

      Paragraph (e) of the Rule generally prohibits withdrawals of equity capital of the registered broker-dealer by action of any stockholder or partner, or the making of unsecured advances or loans to any stockholder, partner or employee if the effect of such withdrawals, advances or loans is to reduce the broker-dealer's net capita! below certain levels. The withdrawals cannot cause the broker-dealer's net capital to be less than, among other things, 120 percent of the applicable minimum dollar amount required under the Rule. If the broken-dealer is computing its requirement under the basic method, the broker-dealer may not allow its net capital to be lowered as the result of equity capital withdrawals and unsecured loans such that its aggregate indebtedness would exceed 1,000 percent of its net capital. If the broker-dealer computes its requirement under the alternative method, it may not allow its net capital to be reduced lower than 5 percent of its aggregate debit items.

      These early warning levels in the Rule are set at an amount above the minimum net capital requirement of the broker-dealer. They are designed to provide the Commission and the self-regulatory organizations a margin of safety in which to respond to the potential failure of a firm. These early warning levels restrict the withdrawal of capital below the specified limits, although the Rule does not expressly restrict the broker-dealer from making other distributions of capital to its parent or affiliates. Despite these limitations, the early warning levels of the Rule have generally provide an adequate cushion of net capital before a firm could be considered to be in or approaching financial difficulty. This is particularly true in the case of a large retail firm with a large customer business and little or no dealer business.

      II. The Drexel Burnham Bankruptcy

      Recent events have indicated that the existing early warning restrictions may not be sufficient to address the problems that have arisen in connection with the development by many broker-dealers of large, complex holding companies. The Division of Market Regulation in its October 1987 Market Break Report anticipated to some degree the problems that might arise:2

      The large investment banking firms generally are owned by holding companies that have other subsidiaries engaging in unregulated securities-related or banking related activities. These unregulated entities attain a degree of leverage and take credit risks regulated broker-dealers cannot. In some cases, the registered broker-dealer's parent (without the broker-dealer's capital) or sister affiliates have significantly less capital than the broker-dealer. Moreover, the Division believes that in many cases the creditors of those entities are indirectly relying on the credit of the broker-dealer and (he ability of the holding company to shift capital from broker-dealer to the unregulated entity. * * *

      A broker-dealer may be indirectly affected, however, by an insolvency of an affiliate or a parent. Broker-dealers often need short-term financing. The failure of a related entity could have substantial effects on the broker-dealer. In addition, management might seek ways to divert capital from the broker-dealer to the extent permitted by the net capital rule. While this shift of assets would not, by itself, place a firm in net capital violation, it could leave the firm more exposed to failure during volatile market conditions.

      The recent bankruptcy of Drexel Burnham Lambert Group" Inc. ("Drexel"), the holding company parent of the broker-dealer Drexel Burnham Lambert, Inc. ("DBL"), underscores the need for amendments to the net capital rule that will enable the Commission to control diversions of a broker-dealer's capital within an interlocking financial services structure. In that case, Drexel had over $1 billion in commercial paper and other unsecured short term borrowings. Unsecured borrowing, particularly through the commercial paper market, is a common financing technique used by many large broker-dealer holding companies. As a result of significant losses and a decline in the rating of its commercial paper, Drexel found it more difficult to renew its short-term borrowings. Drexel was then forced to look to the only liquid sources of capital in its assetsâ€"the excess net capital of DBL and an affiliate government securities dealer.

      In a period of approximately three weeks, and without the knowledge of the Commission or the New York Stock Exchange Inc., (the "NYSE") DBL's designated examining authority, approximately $220 million was transferred to the holding company in the form of short term loans. This action occurred during a period in which the default or financial problems of a number of issuers3 had adversely impacted the liquidity and pricing reliability in the high-yield securities market and raised difficulties in valuing a substantial portion of the firm's portfolio of securities for purposes of determining capital compliance. Moreover, at the time the Commission became aware of Drexel's financial dilemma, Drexel or its affiliates had more than $400 million in short-term liabilities coming due in the next two weeks and an additional $330 million scheduled to mature in the next month.

      Prior to the chapter 11 bankruptcy filing by Drexel, the Commission advised Drexel and DBL of its concerns regarding the substantial withdrawals of capital by Drexel from DBL and an affiliate government securities dealer. In addition, the Division of Market Regulation sent a letter to DBL confirming its understanding that DBL would not make any further loans to Drexel or its affiliates without prior consultation with the Commission. This letter was followed by two letters from the NYSE which: Prohibited DBL from making any loans or advances to any related entity without NYSE approval; increased DBL's haircuts on its high yield inventory position; and prescribed a minimum net capital requirement for DBL of $150,000,000.4

      Had the Commission and the NYSE not intervened when they did, Drexel would have continued to withdraw funds out of DBL and probably would have continued until the broker-dealer's early warning level was reached. Especially in light of Drexel's precarious financial position and the uncertainty with respect to DBL's valuation of its high yield portfolio, this would have created the risk that the broker-dealer's customers and its counterparties would have been subjected to a liquidation under the Securities Investor Protection Act.

      III. The Proposed Rule Amendments

      The Commission proposes to address the potential for a holding company parent in financial difficulty from withdrawing a substantial percentage of a broker-dealer's net capital in three different ways. First, the Commission is concerned that the present early warning levels may not be sufficient for firms that primarily do a dealer business. Because such a firm may have relatively few customer debits, the capital level required under the alternative method may be relatively low, and it may not be related to the size or risk of its dealer business. Haircuts provide an approximation of the risk in a dealer's proprietary securities positions. Accordingly, the proposed amendments would establish a new early warning level for a dealer based on the firm's proprietary positions, as represented by the haircuts on those positions. If a firm triggers the proposed new early warning level, that event will indicate to the Commission that the firm's net capital is low in relation to the amount of the firm's securities positions. In such cases, no capital should be removed from the firm to benefit insiders.

      In order to assess the impact of the proposed early warning level on large broker-dealer subsidiaries of holding companies, the Commission staff examined data provided by the staff of the NYSE which refelcted NYSE member financial data as of December 31,1989. The proposed amendments would raise the early warning level of twelve of the twenty largest NYSE member firms. These firms would have a total of approximately $911 million in capital restricted from withdrawal by the proposed amendments, or an average of $76 million per firm.

      Additionally, twelve of the twenty NYSE member firms with the largest dollar amount of haircuts would be affected by the proposed amendments. These firms would have approximately $940 million in additional capital restricted from withdrawal. On average, each of these firms would have approximately $78 million in capital per firm that would be subject to restrictions on withdrawal. The twenty NYSE firms that would be most impacted by the proposed early warning level would have approximately $1 billion in additional capital restricted from withdrawal, for an average of approximately $50 million per firm.

      Based on this data, the Commission has preliminarily concluded that 30 percent of a firm's haircuts will provide an adequate cushion of net capital to liquidate a firm's positions. If a firm reaches this early warning level, regulatory authorities will be alerted to the need for increased surveillance of the firm and will be able to take appropriate action. This action may include requiring a firm to reduce its securities positions.

      Second, the proposed amendments would require a broker-dealer to notify the Commission and its designated examining authority at least two business days before it intends to withdraw capital in certain instances. This notification would be required only where the projected withdrawal, along with other withdrawals over the preceding 30 days, would equal or exceed 20 percent of the firm's excess net capital, or where 30 percent of the firm's excess net caiptal was withdrawn over the preceding 90 days. In order to provide smaller broker-dealers flexibility to transfer funds in the ordinary course of business, the notification requirement would not be triggered by aggregate withdrawals of less than $50,000. This exception would not apply to limitation on withdrawals imposed by the other early warning levels.

      Finally, the proposed amendments would also allow the Commission in extraordinary circumstances to restrict any withdrawal of capital by insiders of the firm for a period of up to twnety business days at a time. This discretionary authority could be used where the Commission believes that any withdrawal of capital may be detrimental to the finacial integrity of the broker-dealer or might unduly jeopardize the broker-dealer's ability to pay its liabilities to customers or other creditors.

      The twenty business day period would enable the Commission and its staff to further examine the broker-dealer's financial condition, net capital position and the risk exposure to the customers and creditors of the broker-dealer. During this period the Commission, after considering the above and other factors, could determine whether, under what circumstances, or in what amounts, withdrawals of net capital from the broker-dealer should be allowed. To continue to restrict withdrawals, however, additoinal orders will have to be issued by the Commission, each with a term of no more than twenty business days.

      The Commission does not expect that this authority will be exercised except in those exceptional circumstances where the Commission is concerned that the concentration or lack of liquidity of the assets held by the dealer raise concerns about the firm's ability to liquidate, if necessary, in an orderly fashion.

      IV. Request for Comment

      The Commission requests comments on the proposed amendments. In particular, commentators are requested to address the issue of whether the proposed amendments will improve the Commission's ability to respond to serious financial and liquidity problems occurring in the holding company of a borker-dealer. Comment is also invited on any potential adverse impact the proposed amendments may have on the willingness of other corporate entities to invest in and to maintain substantial excess net capital in a broker-dealer. Comment is also requested on the adequacy of the specific standards proposed, including, but not limited to, the use of a 30 percent of haircuts test for limiting capital withdrawals and the provision that exempts notification when the anticipated withdrawal is $50,000 or less.

      With respect to the provision that would enable the Commission to restrict withdrawals of capital from any particular broker-dealer, the Commission preliminarily believes that the execution of an order under paragraph (e}(4) would fall within section 23(c) of the Securities Exchange Act and, in particular, 17 CFR 201.27 adopted thereunder. More specifically, Rule 201.27 would require the Commission to give prompt notice to the broker-dealer in th event an order restricting a withdrawal of capital is issued. The Commission requests comment on whether proposed paragraph (e](4l raises issues under either section 23(a) of the Securities Exchange Act or the Administrative Procedure Act.

      In addition to requesting comment on the amendments proposed today, the Commission also requests comment on whether additional amendments to the Commission's financial responsibility rules are appropriate in light of the increased complexity of broker-dealer holding company structures and the higher incidence of proprietary risks now taken by many broker-dealers. Specifically, the Commission requests comment on the adequacy of the existing minimum capital levels for broker-dealers, in particular larger broker-dealers that conduct a broad range of activities, both in the broker-dealer and in affiliated enterprises. The Commission asks for alternative aproaches to determining the appropriate required capital for large firms in view of the large degree of leverage that those firms, particularly those that operate under the alternative method, can attain.5 Insofar as the deductions taken on the firm's securities positions represent the Rule's general measurement of risk related to those positions, the Commission asks for comment regarding whether the net capital Rule should provide for a required level of capital that is based on the haircuts incurred by the firm on its positions.

      V. Summary of Initial Regulatory Flexibility Analysis

      The Commission has prepared an Initial Regulatory Flexibility Analysis ("IRFA") in accordance with 5 U.S.C. 630 regarding the proposed amendments. The Analysis notes that the objective of the proposed amendments is to further the purposes of the various financial responsibility rules which provided safeguards with respect to financial responsibility and related practices of brokers and dealers. Smaller broker-dealers will generally not be affected because the new early warning level will generally not be in excess of their present early warning levels. Additionally, a firm may withdraw capital of up to $50,000 without notice if this withdrawal would not pull the firm below other early warning levels. In sum, the Analysis states that the proposed amendments would affect the ability of broker-dealers to distribute capital to related parties. The amendments are designed to prevent insiders from withdrawing capital from the registered broker-dealer to benefit the parent or its ultimate owners to the detriment of the creditors of the broker-dealer. A copy of the IRFA may be obtained by contacting Roger G. Coffin, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC, 20549, (202] 272-2396.

      VI. Statutory Analysis

      Pursuant to the Securities Exchange Act of 1934 and particularly sections 15(c)(3), 17 and 23 thereof, 15 U.S.C. 78o(c)(3), 78q and 78w, the Commission proposes to amend § 240.15c3-l, of title 17 of the Code of Federal Regulations in the manner set forth below.

      VII. List of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements; Securities.

      VIII. Text of the Proposed Amendments

      In accordance with the foregoing, title 17, chapter II of the Code of Federal Regulations is proposed to be amended as follows:

      PART 240â€"GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

      1. The authority citation for part 240 is amended by adding the following citation:

      Authority: Sec. 23, 48 Stat. 901. as amended (15 U.S.C. 78w), * * *. § 240.15C3-1 is also issued under sees. 15(c){3). 15 U.S.C. 78o{c)(3).

      2. By revising paragraph (e) to § 240.15c3-l as follows:

      § 240.15c3-1 Net capital requirements for brokers or dealers.

      * * * * *

      [e]
      (l) Limitation on withdrawal of equity capital. No equity capital of the broker or dealer or a subsidiary or affiliate consolidated pursuant to appendix C (17 CFR 24Q.15c3-lc) may be withdrawn by action of a stockholder or a partner or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, employee or affiliate:
      (i) Without prior written notice to the Commission in Washington, DC, to the regional office of the Commisison for the region in which the broker or dealer has its principal place of business, to the broker or dealer's designated examining authority and to the Commodity Futures Trading Commission if such broker or dealer is registered with such Commission, received at least two business days prior to the withdrawals, unsecured advances or loans if those withdrawals, advances or loans in the aggregate exceed, in any 30 day period, the greater of $50,000 or 20 percent of the broker or dealer's excess net capital or in any 90 day period, 30 percent of excess net capital; or
      (ii) If after giving effect thereto and to any other such withdrawals, advances or loans and any Payments of Payment Obligations (as defined in appendix D (17 CFR 240.15c3-ld) under satisfactory subordination agreements which are scheduled to occur within 180 days following such withdrawal, advance or loan either:
      (A) Aggregate indebtedness of any of the consolidated entities exceeds 1000 percent of its net capital; or
      (B) Its net capital would be less than:
      (1) 120 percent of the minimum dollar amount required by paragraph (a); or,
      [2] 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a; or,
      (3) If registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the option customer's account), if greater, or;
      [4] 30 percent of deductions from net worth in computing net capital required by paragraph (c)(2)(vi) and appendix A; or
      (C) If the total outstanding principal amounts of satisfactory subordination agreements of a broker or dealer consolidated pursuant to appendix C (17 CFR 240.15c3-lc) (other than such agreements which qualify as equity under paragraph (d) of this section) would exceed 70% of the debt-equity total as defined in paragraph (d).
      (2) Excess net capital is that amount in excess of the amount required under paragraph (a). The term equity capital includes capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts. The term equity capital does not include securities in the securities accounts of partners and balances in limited partners' capital accounts in excess of their stated capital contributions.
      (3) Paragraphs (e)(l) and (e)(2) shall not preclude a broker or dealer from making required tax payments or preclude the payment to partners of reasonable compensation, and such payments shall not be included in the calculation of withdrawals, advances, or loans for purposes of paragraph (e)(l)(i).
      (4) The Commission may by order restrict, for a period up to twenty business days, any withdrawal by the broker or dealer of equity capital or unsecured loan or advance to a stockholder, partner, sole proprietor, employee of affiliate which the Commission believes may be detrimental to the financial integrity of the broker or dealer or which may unduly jeopardize its ability to repay its customers claims or other liabilities of the broker or dealer.

      * * * * *

      By the Commission.

      Dated: August 15, 1990.

      Jonathan C. Katz,

      Secretary.

      [FR Doc. 90-19606 Filed 8-20-90; 8:45 am]

      BILLING CODE 8010-01-M


      1More specifically, the broker-dealer must maintain net capital in excess of 2 percent of its aggregate debit items as computed in accordance with the Formula for Determination of Reserve Requirement for Brokers and Dealers contained in Securities Exchange Act Rule 15c3-3 (17 CFR 240.15C3-3).

      2See The October 1987 Market Break. A Report by the Division of Market Regulation of the U.S. Securities and Exchange Commission. February 1988, pp 5-17, 5-18.

      3During 1989. 47 issuers defaulted or were involved in distressed exchange offers [i.e., an exchange of an outstanding debt security for a security with a lower principal amount or a lower interest rate) on approximately $7.3 billion in registered high-yield securities. For example, in June of 1989. Integrated Resources, a major issuer of high-yield securities, defaulted on $1 billion in commercial paper. In July of 1989, the Southmark Corporation filed for bankruptcy, and in September of that year, the Campeau Corporation announced that it lacked sufficient cash to satisfy its debt obligations. In January of 1990. the Campeau Corporation filed for protection from creditors under the federal bankruptcy laws. These failures adversely impacted the high-yield market in two ways. First secondary trading in high-yield securities fell off sharply. Second, new transactions involving the issuance of high-yield securities began to slow down, with a resultant decline in underwriting and related income.

      4The NYSE letters were predicated on NYSE Rules 325 and 326. which authorize the NYSE to require a member firm to maintain net capital in an amount necessary to meet a firm's financial obligations, and authorize the NYSE to prohibit a firm from advancing funds to its owners.

      5For example, immediately before Drexel declared bankruptcy, DBL's net capital requirement was approximately $16 million, in addition to aggregate haircuts of approximately $900 million.


    • 90-65 Suggested Customer Suitability Statement and Agreement to Purchase Form for Members' Compliance With SEC Rule 15c2-6

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Trading

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

      EXECUTIVE SUMMARY

      The NASD is publishing a suggested Customer Suitability Statement and Agreement to Purchase Form to assist members in complying with SEC Rule 15c2-6.

      BACKGROUND AND SUMMARY

      Effective January 1, 1990, the SEC adopted Rule 15c2-6, the so-called "Penny Stock/Cold Call Rule," in response to widespread unsuitable recommendations and other abusive sales practices by certain broker-dealers involving transactions in low-priced securities not listed on NASDAQ or the exchanges. The rule imposes special suitability and recordkeeping requirements on certain broker-dealers that recommend transactions in designated securities to persons who are not "established customers." Designated securities are generally defined as equity securities of companies having less than $2 million in net tangible assets and are selling below $5 per share. All securities listed on NASDAQ or a national securities exchange in the U.S. are exempt from the rule.

      SEC Rule 15c2-6 prescribes specific procedures a firm must follow before such designated securities can be recommended to nonestablished customers. Included is the requirement to obtain from each customer oral or written suitability information detailing such a customer's previous investment experience, investment objectives, and financial situation. The scope of the information gathered is very important. With that information, the firm must reasonably determine whether transactions in these designated securities are suitable for the particular customer.

      If the firm determines that the securities are suitable for purchase by the customer, the firm must prepare a written statement of its reasons for making such a determination, deliver it to the customer, and secure a manually signed copy from the customer acknowledging receipt of the firm's suitability determination. The customer also must review and agree that the information contained on the form from which the suitability determination was made accurately reflects the customer's financial situation, investment objectives, and investment experience.

      In addition, the firm must obtain the customer's written agreement for the first three purchase transactions involving designated securities. Both the customer suitability statement and the written agreement must be properly executed by the customer and then received by the firm prior to any transactions in designated securities.

      NASD members have requested guidance concerning the extent of customer information that must be gathered to make a suitability determination, and the proper text of both the firm's suitability determination and the customer's writ ten agreement for the transaction. To assist members in complying with SEC Rule 15c2-6, the NASD, in collaboration with the SEC staff, is publishing a suggested Customer Suitability Statement and an Agreement to Purchase Form, which follow this notice. Please note that these suggested forms are intended to serve as models, not as requirements for use.

      Questions concerning this notice should be directed to Gary Carleton or Daniel Sibears, NASD Compliance Division, at (202)728-8959.

      Suggested Customer Suitability Statement and Agreement to Purchase Form

    • 90-64 Amendments to the NASD By-Laws and to Schedule B Thereof to Modify the Size and Composition of the Board of Governors and the Number and Configuration of the Districts, Effective September 4, 1990

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission has approved amendments to the NASD By-Laws and Schedule B thereof that restructure the size and composition of the NASD Board of Governors and the number and configuration of the NASD districts.

      The amendments also give the Board the authority to make subsequent modifications in its composition and size and in the number and configuration of the NASD's districts.

      In addition, the amendments implement other recommendations of the Special Committee on NASD Structure and Governance that were approved by the Board and the membership.

      The text of the amendments follows this notice.

      BACKGROUND

      The Special Committee on NASD Structure and Governance ("Special Committee") was established by the Board of Governors ("Board") to review the corporate structure and governance of the NASD and its subsidiaries in light of the far-reaching changes that have occurred in the securities markets and the industry serving those markets in recent years.

      The Special Committee conducted an intensive study and developed a series of recommendations designed to ensure that the NASD's governance process fairly represents the increased diversity of the securities industry, that the volunteer members of the industry and the public who serve on the Board and its committees can address problems knowledgeably and efficiently, and that the process continues to command respect and confidence.

      The recommendations of the Special Committee were set forth in a final report that was issued to the membership in Notice to Members 90-19 (April 1990).

      On September 4, 1990, the SEC approved an NASD rule change to restructure the size and composition of the Board and the number and configuration of the NASD districts. Also, the rule change gives the Board the authority to make subsequent modifications in its composition and size and in the number and configuration of the NASD's districts.

      SUMMARY OF AMENDMENTS

      The Board of Governors

      Prior to these amendments, Article VII, Section 4(a) of the NASD By-Laws provided for a Board of 31 Governors. As amended, the provision gives the Board the authority to adjust its size to between 25 and 29 Governors in order to enhance the participation of individual Governors in the Board's deliberations and the Board's overall efficiency. Pursuant to this authority, the Board has resolved to reduce its size during the next two years to 29 Governors.

      The composition of the Board has also been modified. Prior to the amendments, Article VII, Section 4 of the NASD By-Laws provided that the Board be comprised of 21 Governors elected from the districts; nine Governors elected by the Board from the securities industry, issuers and the public; and the President of the NASD. The amendments to Article VII, Section 4 require that the Board be comprised of 13 to 15 Governors elected from the districts; 11 to 13 Governors elected by the Board from the securities industry, issuers and public; and the NASD's President.

      They also require that each district be represented on the Board by at least one Governor and that the total number of Governors elected from the districts constitute a majority of the Board. In addition, the Board has the authority to determine which districts shall elect more than one Governor so as to provide for fair representation of the NASD's members and of its various districts.

      Of the Governors elected by the Board, one must represent the insurance industry, one must represent the investment company industry, at least three must represent investors, at least three must represent issuers, and at least three must be chosen from the members of the NASD. The amendments permit the Board to consider candidates for Governor to represent the insurance industry and the investment company industry who are not directly associated with a member.

      Article X, Section 6 of the By-Laws has been amended to give the Board the authority to provide for compensation to Governors, the Chairman of the Board, and members of any committee of the Board or any district committee. Although the Board does not currently plan on providing such compensation, this amendment provides the Board with the authority to do so if it becomes necessary to ensure successful recruitment of highly qualified candidates for services as Chairman or member of the Board, its committees, or the district committees.

      Districts

      Amendments to Article VII, Section 4(b), authorize the Board to consider from time to time the fairness of the representation of members by the current district structure. Whenever the Board finds any unfairness in such representation, it now is authorized to change the number and the boundaries of districts.

      Pursuant to this authority, the Board has adopted specific changes to the districts set forth in Schedule B to the NASD By-Laws. Specifically, the Board has determined that the number of districts should be reduced from 13 to 11. These 11 districts will be represented on the Board by 15 of its 29 Governors. The 11 new districts will be as follows:

      • New District 1 — The portion of existing District 2 referred to as District 2N (San Francisco), including northern California (the counties of Monterey, San Benito, Fresno, and Inyo, and the remainder of the state north or west of such counties), northern Nevada (the counties of Esmeralda and Nye, and the remainder of the state north or west of such counties), and Hawaii. Board representation: one Governor.
      • New District 2 — The portion of existing District 2 referred to as District 2S (Los Angeles), including southern California (that part of the state south or east of the counties of Monterey, San Benito, Fresno, and Inyo) and southern Nevada (that part of the state south or east of the counties of Esmeralda and Nye). Board representation: one Governor.
      • New District 3 — Existing Districts 1 (Seattle) and 3 (Denver), including Alaska, Arizona, Colorado, Idaho, Montana, New Mexico, Oregon, Utah, Washington, and Wyoming. Board representation: one Governor.
      • New District 4 — Most of existing District 4 (Kansas City) and certain neighboring states, including Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. Board representation: one Governor.
      • New District 5 — Most of existing District 5 (New Orleans) and certain neighboring states, including Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma, and Tennessee. Board representation: one Governor.
      • New District 6 — Existing District 6 (Dallas), consisting of Texas. Board representation: one Governor.
      • New District 7 — Most of existing District 7 (Atlanta) and one neighboring state, including Florida, Georgia, North Carolina, South Carolina, Puerto Rico, the Canal Zone, and the Virgin Islands. Board representation: two Governors.
      • New District 8 — Most of existing Districts 8 (Chicago) and 9 (Cleveland), including Illinois, Indiana, Michigan, Ohio, and Wisconsin, and part of upstate New York (the counties of Monroe, Livingston, and Steuben, and the remainder of the state west of such counties). Board representation: two Governors.
      • New District 9 — Most of existing Districts 10 (Washington, DC) and 11 (Philadelphia), including the District of Columbia, Delaware, Maryland, Pennsylvania, Virginia, West Virginia, and southern New Jersey (the counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem). Board representation: one Governor.
      • New District 10 — Existing District 12 (New York) and northern New Jersey, including the five boroughs of New York City and the adjacent counties in New York (the counties of Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester) and northern New Jersey (the state of New Jersey except for the counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem). Board representation: three Governors.
      • New District 11 — Existing District 13 (Boston), with the exception of part of upstate New York, including Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, and New York (except for the counties of Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester; the counties of Monroe, Livingston, and Steuben, and the remainder of the state west of such counties; and the five boroughs of New York City). Board representation: one Governor.

      Transition Plan

      The amendments to the By-Laws and Schedule B to the By-Laws became effective September 4, 19901. Pursuant to its authority under Article VIII of the By-Laws, as amended, the Board has approved a transition plan to govern the administration of the election and nomination process for the remainder of calendar year 1990 and to provide for the transition from the existing 13 District Committees and District Business Conduct Committees (DBCCs) to the District Committees and DBCCs of the 11 new and reconfigured districts.

      For all matters and purposes relating to the districts (including for purposes of the Code of Procedure and for filing complaints, holding hearings and all other matters relating to the disciplinary process) other than the nomination and election process, the existing 13 District Committees and DBCCs shall maintain responsibility until the end of calendar year 1990 for all members located within the boundaries of the existing 13 Districts.

      Miscellaneous Technical Amendments

      The text of the amendments contains further miscellaneous technical amendments that the NASD encourages members to review.

      Questions concerning this notice may be directed to P. William Hotchkiss, Director, Surveillance, at (202) 728-8235.

      TEXT OF PROPOSED RULE CHANGE

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

      AMENDMENTS TO THE NASD BY-LAWS

      ARTICLE I

      Definitions

      When used in these By-Laws, and any rules of the Corporation, unless the context otherwise requires, the term:

      * * * * *

      (r) "Board" means the Board of Governors of the Corporation.
      (s) "Governor" means a member of the Board.

      ARTICLE VII

      Board of Governors

      * * * * *

      Composition of Board

      Sec. 4. (a) The management and administration of the affairs of the Corporation shall be vested in a Board of Governors composed of from twenty-five to twenty-nine Governors [thirty-one members], as determined from time to time by the Board. The Board shall consist of: (i) at least thirteen but not more than fifteen Governors [twenty-one] to be elected by the members of the various districts in accordance with the provisions of sub-section[s] (b) [(1) through (5)] hereof;[,] (ii) at least eleven but not more than thirteen Governors [nine] to be elected by the Board [of Governors] in accordance with the provisions of subsection[s] (c) [(b)(6), (7) and (8)] hereof;[,] and (iii) the President of the Corporation to be selected by the Board [of Governors] in accordance with the provisions of Article X, Section 2 of the By-Laws. The Board, in exercising its power to determine its size and composition under this subsection (a), shall be required to select its members in a manner such that when all vacancies, if any, are filled, the number of Governors elected by the members of the various districts in accordance with subsection (b) hereof shall exceed the number of Governors (including the President) not so elected.

      (b) The several districts shall be represented on the Board [of Governors]. Each district shall elect at least one Governor. The Board shall determine from time to time which districts, if any, shall elect more than one Governor, so as to provide fair representation of the Corporation's members and of its various districts on the Board. The determination of which districts shall elect more than one Governor need not be submitted to the membership for approval and shall become effective at such time as the Board may prescribe. [The elected members of the Board of Governors shall be chosen as follows:] The Board shall, from time to time, consider the fairness of the representation of members and of the various districts on the Board. Whenever the Board finds any unfairness in such representation to exist, it shall make appropriate changes in the number or boundaries of the districts or the number of Governors elected by each district to provide fair representation of members and districts.
      [(1) Three members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 2;
      (2) Two members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 8;
      (3) Five members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 12;
      (4) Two members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 13;
      (5) One member of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in each of the remaining districts not referred to in Subsections (1), (2), (3) and (4) of this Section;]
      (c) The Board shall elect (i) at least three Governors representative of investors, none of whom are associated with a member or any broker or dealer; (ii) at least three Governors representative of issuers, at least one of whom is not associated with a member or any broker or dealer; (iii) at least three Governors chosen from members; (iv) at least one Governor representative of the principal underwriters of investment company shares or affiliated members; and (v) at least one Governor representative of insurance companies or insurance company affiliated members.
      [(6) One member of the Board of Governors shall be elected by the Board of Governors from among the principal underwriter members of investment company shares, and he shall be designated a Governor-at-Large;
      (7) One member of the Board of Governors shall be elected by the Board of Governors from among insurance company members or insurance company affiliated members of the Corporation and he shall be designated a Govemor-at-Large;
      (8) Seven members of the Board of Governors shall be elected by the Board of Governors and they shall be designated Governors-at-Large. Any Governor-at-Large initially filling a Governor-at-Large office shall be elected at such time as the Board of Governors in its discretion deems appropriate;
      (9) At least one member of the Board of Governors shall be representative of issuers and not be associated with a member, broker or dealer and at least one member of the Board of Governors shall be representative of investors and not be associated with a member, broker or dealer;
      (10) The Board of Governors shall, from time to time, consider the fairness of the representation of the various districts on the Board of Governors, and whenever it finds any unfairness in such representation to exist, it shall recommend appropriate changes in these By-Laws to assure fair representation of all districts.]

      Term of Office of Governors

      Sec. 5. Each [elected] Governor [member of the Board of Governors, including the Governors-at-Large], except as otherwise [herein] provided by these By-Laws or the Certificate of Incorporation, shall hold office for a term of three years, and until his successor is elected and qualified, or until his death, resignation or removal. The President of the Corporation shall serve as a member of the Board [of Governors] until his successor is selected and qualified, or until his death, resignation or removal.

      Succession to Office

      Sec. 6.(a) The office of a retiring Governor [member of the Board of Governors] elected under subsection[s (1) through (5)] (b) of Section 4 [3(b)] of this Article shall be filled by the election of a Governor [member] from the same district as that of the retiring Governor [member]. The office of a retiring Governor [-at-Large] elected under subsection (c) of Section 4 of this Article shall be filled by election by the Board [of Governors] as provided in subsection[s] (c) [(6), (7) and/or (8)] of Section 4 [3(b)] of this[e] Article[, as the case may be].

      (b) Notwithstanding subsection (a) of this Section 6, the Board shall prescribe the succession of office in cases affected by a change in the number of Governors constituting the Board, the composition of the Board, the number or boundaries of districts, or the number of Governors elected by a district.

      Election of Board Members

      Sec. 7. The [elected members of the Board of] Governors elected under subsection (b) of Section 4 of this Article shall be chosen as follows:

      * * * * *

      Transitional Procedures

      (d) Notwithstanding subsections (a), (b) and (c) of this Section 7, the Board shall prescribe the nomination and election procedures in cases affected by a change in the number of Governors constituting the Board, the composition of the Board, the number or boundaries of districts, or the number of Governors elected by a district.

      Filling of Vacancies on Board

      Sec. 8. All vacancies in the Board [of Governors] other than those caused[s] by the expiration of a Governor's term of office, shall be filled as follows:

      (a) If the unexpired term of a Governor elected under subsection[s] (b) [(1) through (b)(5)] of Section 4 [3] of this Article[,] is for less than twelve months, such vacancy shall be filled by appointment by the District Nominating Committee of a representative of a member of the Corporation eligible to vote in the same district.
      (b) If the unexpired term of a Governor[,] elected under subsection[s] (b) [(1) through (b)(5)] of Section 4 [3] of this Article[,] is for twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as practicable in accordance with the provisions of Section 7 [6] of this Article.
      (c) If the unexpired term is that of a Governor[-at-Large] elected by the Board, such vacancy shall be filled in accordance with the provisions of subsections (c)(i) through (c)(v) [(b)(6), (b)(7), and/or (b)(8)] of Section 4 [3] of this Article as the case may be.

      ARTICLE VIII

      District Committees Administrative Districts

      Sec. 1. For the purpose of administration, the United States is hereby divided into districts, the boundaries of which shall be established by the Board [of Governors]. The Board [of Governors] may from time to time make such changes in the number or boundaries of such districts as it deems necessary or appropriate. Neither the establishment nor any change in the number or boundaries of such districts need be submitted to the membership for approval, and the number or boundaries, as established or changed, shall become effective at such time as the Board [of Governors] may prescribe. The Board shall prescribe such policies and procedures as are necessary or appropriate to address the implementation of a new district configuration in the event of a change in the number or boundaries of the districts.

      District Committees and District Business Conduct Committees

      Sec. 2. (a) For the purpose of effectuating a maximum degree of local administration of the affairs of the Corporation, each of the districts created under Section 1 of this Article shall elect a District Committee, as hereinafter provided. Each such District Committee shall determine the number of its members so to be elected, but [in] no [event shall any] District Committee shall consist of more than twelve members[;] unless otherwise provided[,] [however, that] by resolution of the Board. [of Governors by resolution may increase, upon request, any such District Committee to a larger number.]

      * * * * *

      Transitional Provisions

      Sec. 12. The Board, by resolution amending or supplementing the provisions of this Article and Article IX, shall have the authority to establish the policies and procedures applicable to District Committees affected by a change in the number or boundaries of the districts, including, without limitation, prescribing the procedures for nomination and election of District Committee members.

      ARTICLE IX

      Nominating Committees Composition of Nominating Committees

      Sec. 1. (a) Each of the Districts created under Section 1 of Article VIII of the By-Laws shall elect a Nominating Committee, as provided in Section 3 of this Article. Each such Nominating Committee shall consist of five members; provided, however, that the Board [of Governors] by resolution may increase any such Nominating Committee to a larger number. Members of the Nominating Committee in each District shall be members of the Corporation having places of business in the respective District, but shall not be members of the District Committee. All Nominating Committees shall include a majority of persons who have previously served on a [the] District Committee [and/] or who are current or former [on the Board of] Governors, and shall [, insofar as practicable,] include at least one current or former [member of the Board of] Governors].

      * * * * *

      Transitional Provisions

      Sec. 7. The Board, by resolution amending or supplementing the provisions of this Article and Article VIII, shall have the authority to establish the policies and procedures applicable to District Nominating Committees affected by a change in the number or boundaries of the districts, including, without limitation, prescribing the procedures for nomination and election of District Nominating Committee members.

      ARTICLE X

      Officers and Employees

      * * * * *

      [Restrictions on] Compensation of Board and Committee Members

      Sec. 6. [No member of] The Board [of Governors (except the President of the Corporation or the President pro tern), no member of any District Committee and no member of any other Committee, other than an Extended Hearing Committee as defined in Article I of the Corporation's Code of Procedure shall be entitled to] may provide for reasonable [received any] compensation of the Chairman of the Board, Governors, and the members of any committee of the Board or any District Committee from the Corporation, [for any work done in connection with his duties as a member of the Board of Governors, any District Committee or any other committee. However, such persons shall be entitled to] The Board may also provide for reimbursement of [for] reasonable expenses incurred by such persons in connection with the business of the Corporation.

      ARTICLE XI

      Committees

      National [Standing] Committees

      Sec. 1. The Board [of Governors] may appoint such [standing and other] committees or subcommittees as it deems necessary or desirable, and it shall fix their powers, duties and terms of office. Any such committee or subcommittee consisting of one or more Governors, to the extent provided by these By-Laws or by resolution of the Board, shall have and may exercise all powers and authority of the Board in the management of the business and affairs of the Corporation.

      [District Standing]

      Committees of the Districts

      Sec. 2. Each District Committee, in the exercise of its powers and performance of its duties as provided in the By-Laws, may, except as otherwise herein provided, appoint such [standing or other] committees or subcommittees as it deems necessary or desirable, and shall fix their powers, duties and terms of office.

      Removal of Committee Member

      Sec. 3. Any member of any committee or sub-committee appointed pursuant to [Sections 1 or 2 of] this Article XI may be removed from office, after appropriate notice from the District Committee appointing such member, or from the Board [of Governors], if it is the appointing authority, for refusal, failure, neglect or inability to discharge his duties, or for any cause the sufficiency of which shall be decided by the District Committee or the Board [of Governors], whichever is the appointing authority.

      ARTICLE XIV

      Powers of Board to Prescribe Sanctions

      The Board [of Governors] is hereby authorized to prescribe appropriate sanctions applicable to members, including censure, fine, suspension or expulsion from membership, suspension or barring from being associated with all members, limitation of activities, functions and operations of a member, or any other fitting sanction, and to prescribe appropriate sanctions applicable to persons associated with members, including censure, fine, suspension or barring a person associated with a member from being associated with all members, limitation of activities, function and operations of a person associated with a member, or any other fitting sanction, for:

      * * * * *

      (d) refusal by a member or person associated with a member to abide by an official ruling of the Board [of Governors] or any committee [Uniform Practice Committee acting within its appropriate authority] exercising powers assigned [delegated] by the Board with respect to any transaction which is subject to the Uniform Practice Code; or
      (e) failure by a member or a person associated with a member to adhere to any ruling, order, direction or decision of, or to pay any penalty, fine or costs, imposed by, the Board [of Governors], the National Business Conduct Committee, the Market Surveillance Committee, any other committee exercising powers assigned [delegated] by the Board or any District Business Conduct Committee.

      AMENDMENTS TO SCHEDULE B OF THE BY-LAWS

      Schedule B

      The number and t[T]erritorial boundaries of the several districts established as provided in Section 1 of Article VIII and the number of Governors elected from the several districts established as provided in Section 4(b) of Article VII of the By-Laws of the Corporation[,] are as follows:

      • District No. 1State of Hawaii; in the State of California, the Counties of Monterey, San Benito, Fresno and Inyo, and the remainder of the State North or West of such Counties; and in the State of Nevada, the Counties of Esmeralda and Nye, and the remainder of the State North or West of such Counties. [States of Alaska, Idaho, Montana, Oregon and Washington.]
        One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 1.
      • District No. 2In the State of California, that part of the State South or East of the Counties of Monterey, San Benito, Fresno and Inyo; and, in the State of Nevada, that part of the State South or East of the Counties of Esmeralda and Nye. [States of California, Nevada and Hawaii.]
        One Governor shall be elected from and by the members of the Corporation eligible to vote in District No, 2.
      • District No. 3 — States of Alaska, Arizona, Colorado, Idaho, Montana, New Mexico, Oregon, Utah, Washington and Wyoming.
        One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 3.
      • District No. 4 — States of Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota [Oklahoma].
        One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 4.
      • District No. 5 — States of Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma and [in the State of] Tennessee[, the Counties of Montgomery, Dickson, Hickman, Lewis and Lawrence and the remainder of the State lying West of such Counties].
        One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 5.
      • District No. 6 — State of Texas.
        One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 6.
      • District No. 7 — States of Florida, Georgia, North Carolina, and South Carolina [, and, in the State of Tennessee, the Counties of Robertson, Cheatham, Williamson, Maury and Giles and the remainder of the State lying East of such Counties,]; Puerto Rico, Canal Zone and the Virgin Islands.
        Two Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 7.
      • District No. 8 — States of Illinois, Indiana, [Iowa,] Michigan, [Minnesota,] [North Dakota,] Ohio [South Dakota] and Wisconsin, and, in the State of New York, the Counties of Monroe, Livingston and Steuben, and the remainder of the State West of such Counties.
        Two Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 8.
      • District No. 9The District of Columbia, and the States of Delaware, Maryland, Pennsylvania, Virginia and West Virginia, and, in the State of New Jersey, the Counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean and Salem [States of Kentucky and Ohio].
        One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 9.
      • District No. 10In the State of New York, the Counties of Nassau, Orange, Putnam, Rockland, Suffolk, Westchester, and the five Boroughs of New York City, and the State of New Jersey (except for the Counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean and Salem) [The District of Columbia and the States of Maryland, North Carolina and Virginia].
        Three Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 10.
      • District No. 11 — [The] States of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont and New York (except for the Counties of Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester; the Counties of Monroe, Livingston and Steuben, and the remainder of the State West of such Counties; and the five Boroughs of New York City) [Delaware, Pennsylvania, West Virginia and New Jersey, except for the Counties of Bergen, Essex, Hudson, Passaic and Union].
        One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 11.
      • [District No. 12 — In the State of New York, the Counties of Nassau, Orange, Putnam, Rockland, Suffolk, Westchester, and the five Boroughs of New York City, and, in the State of New Jersey, the Counties of Bergen, Essex, Hudson, Passaic and Union.]
      • [District No. 13 — States of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont and New York, with the exception of the Counties of Nassau, Orange, Putnam, Rockland, Suffolk, Westchester, and the five Boroughs of New York City.]

      1 SEC Release No. 34-28289 (September 4, 1990).


    • 90-63 Amendment to Proposed Rule Re: Disclosure of Payment for Order Flow Practices On Customer Confirmations; Last Voting Date: November 5, 1990

      SUGGESTED ROUTING*

      Senior Management
      Institutional
      Legal & Compliance
      Trading

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

      MAIL VOTE

      EXECUTIVE SUMMARY

      To improve disclosure of broker-dealer compensation for order flow and to make the disclosure more uniform, the NASD submitted a change to the Rules of Fair Practice to the Securities and Exchange Commission (SEC) in April 1990. The NASD Board of Governors has now approved a change to that proposal on which members are requested to vote. The change would require specific language to appear on each applicable customer confirmation disclosing that remuneration has been received by the firm for directing orders to particular market makers or market centers. Prior to becoming effective, the amendment must be filed with and approved by the SEC. The text of the proposed amendment follows this notice.

      BACKGROUND AND EXPLANATION

      In Notice to Members 90-11, the NASD submitted a rule proposal regarding enhanced disclosure of certain payment for order flow practices to the membership for vote. Members approved the proposal, and the rule was submitted to the Securities and Exchange Commission (SEC) for approval. After discussions with the SEC and after reviewing comment letters filed by members and others, the Association is proposing an amendment to the rule proposal that would more specifically identify members' receipt of remuneration for directing orders to particular markets.

      DISCLOSURE OF COMPENSATION

      Rule 10b-10 under the Securities Exchange Act of 1934 prescribes information that a broker or dealer must disclose to its customer on the confirmation form. The rule requires, among other things, that the broker-dealer disclose whether additional remuneration has been or will be received in connection with a transaction, and that the source and amount of such payment will be furnished to the customer on written request.1 Under this rule, therefore, payments received by a retail firm from a market maker in return for directing its order flow to the market maker are considered additional compensation and must be disclosed to the customer. The NASD Board of Governors believes that this disclosure must be more specifically stated than is the current practice and that the following language must appear on each customer confirmation for a transaction that has been subject to a compensation plan:

      The firm receives remuneration for directing orders to particular broker/ dealers or market centers for execution. When such remuneration is received, it is considered compensation to the firm, and the source and amount of any compensation received by the firm in connection with your transaction will be disclosed upon request.

      The proposed language differs from that previously submitted to the membership in that the new language is a more affirmative statement of payment practices. Rule 10b-10 requires the member to state whether it has received additional remuneration in connection with transactions, and the new language reflects this requirement. (Members that participate in payment for order flow arrangements may, of course, elect to identify that a specific payment has or has not been received on individual customer confirmations, rather than utilizing the language appearing above.) The Board of Governors approved the amended language for customer confirmations, believing that it will more clearly disclose these compensation arrangements. Therefore, the amendment will be submitted to the SEC for approval, if the membership approves the change.

      Best Execution: The Board also reiterates its interpretation on best execution. The interpretation of the Board of Governors on Execution of Retail Transactions,2 the "Best Execution Interpretation," requires that:

      [i]n any transaction for or with a customer, a member and persons associated with a member shall ... buy or sell ... so that the resultant price to the customer is as favorable as possible under prevailing market conditions.

      In accordance with long-standing NASD policy, this requirement is particularly applicable to situations in which firms direct their order flow to a selected dealer. Although examinations by the NASD indicate that firms that have entered into agreements for payment for order flow are obtaining the best execution of their customers' transactions, it is important for all firms to assure that they continue to obtain the best execution of trades subject to these arrangements. NASD examiners will continue to review this area during on-site examinations to ensure ongoing compliance.

      The NASD Board of Governors believes this change to the Rules of Fair Practice is 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 5, 1990.

      Questions or comments regarding this notice may be directed to P. William Hotchkiss, Director, Surveillance, at (202) 728-8235.


      lRule 10b-10(a)(7), 17 CFR §240.10b-10(a)(7).

      2NASD Manual (CCH) Art. III, Sec. 1, §2151.03, p. 2037.


    • 90-62 Proposed Amendment Re: Use and Disclosure of Member Names; Last Voting Date: November 5, 1990

      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 a proposed revision to an amendment to Article ill, Section 35 of the NASD Rules of Fair Practice. The membership has previously approved an amendment to Section 35 to establish standards regarding the use and disclosure of member names in public communications, including business cards and letterhead.

      Following membership approval, the NASD filed the proposed amendment with the Securities and Exchange Commission (SEC), which published the amendment for public comment. In response to comments that the SEC received regarding the proposed amendment, the NASD proposes to make certain revisions to the planned amendment.

      The revisions would create a limited exception to the general requirement that all advertising and sales literature contain the full name of a member. Under the proposed exception, advertising and sales literature would be permitted to include only a "derivative" of a member's name if the derivative name was used to promote a specific area of the member's business and was not misleading in context. The text of the amendment, as revised, follows this notice.

      BACKGROUND AND SUMMARY

      Pursuant to Board of Governors approval and membership vote, the NASD filed with the SEC a proposed amendment to Article III, Section 35 of the Rules of Fair Practice. The proposed amendment would establish standards regarding the use and disclosure of member names in public communications, including business cards and letter-head. The proposed amendment reflects the concern of the Board 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 proposed amendment rests 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 the identity of the entity that is, in fact, offering securities. The proposed 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. Currently, Section 35(d)(2)(A) of the Rules requires the disclosure of the member's name in all advertising and sales literature.

      The proposed amendment was submitted to the membership for comment in 1988. In response to the 41 detailed comment letters that were received, the NASD made significant modifications to the proposed amendment. Notices to Members 88-65 and 89-22 should be consulted regarding the differences between the amendment as originally proposed and as approved by the membership. The proposed amendment was filed with the SEC on April 25, 1990, and was published for comment in the Federal Register. The SEC received three comment letters.

      In response to these comment letters, the NASD proposes to revise the amendment so as to create a narrow exception to the general requirement that the full name of a broker-dealer appear in all of its advertising and sales literature. Under this proposed exception, a member would be permitted to use a "derivative" of its name, without also including the member's full name, if: (1) the derivative name was 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 had a "derivative" name that it used 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.

      The NASD contemplates that the availability of the proposed exception would be limited to instances in which the use of a derivative name would not be misleading in a particular context. In this regard, the NASD emphasizes that, while the use of derivative names (without disclosure of the full broker-dealer name) might not be misleading in the context of advertising and sales literature directed to an institutional audience, the use of derivative names may well be deemed misleading if used in promotional materials disseminated to the general public.

      EFFECTIVE DATE

      If the foregoing proposal is approved by the membership and by the SEC, the Board of Governors believes that it is appropriate to provide members with sufficient time following SEC approval to use existing supplies of such business stationery as letterhead, business cards, confirmation forms, and similar printed material. Accordingly, the Board has concluded that, insofar as the proposed amendment affects printed business stationery, the amendment should not take effect until six months after publication of a Notice to Members announcing SEC approval of the amendment. The Board contemplates, however, that in all other respects the proposed amendment would become effective 30 days after the publication of a Notice to Members announcing SEC approval of the amendment.

      The Board believes that the proposed revision to the amendment is 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 5, 1990.

      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 of General Counsel, at (202) 728-8815.

      COMMUNICATIONS WITH THE PUBLIC

      (Note: Language that has been deleted from the version of Section 35 that was previously approved by the membership is bracketed; language that has been added to that version is underlined.)

      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 [(except those forms of advertising excluded under subsection (d)(2)(A) of this Section) shall] 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 relationship, 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
      [In addition to the foregoing general standards, the following specific standards apply:]
      The foregoing standards set forth in subsections (g)(l) 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)(l) 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 [or use altered versions of the firm name to promote certain areas of the firm's business], 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)
      [(C)] "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)
      [(D)] "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)
      [(E)] 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.

    • 90-61 Proposed Amendments to Article III, Section 5(b) and Article IV, Sections 3 and 4 of the NASD By-Laws, and Article IV, Section 5 and Article V, Sections 1 and 3 of the NASD Rules of Fair Practice Re: Retention of Jurisdiction Over Member Firms and Associa

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Registration

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

      MAIL VOTE

      EXECUTIVE SUMMARY

      Members are invited to vote on proposed amendments to Article III, Section 5(b) and Article IV, Sections 3 and 4 of the NASD By-Laws, and Article IV, Section 5 and Article V, Sections 1 and 3 of the NASD Rules of Fair Practice. The amendments to the By-Laws would codify procedures currently employed by the NASD in processing terminations of associated persons and cancellations and revocations of member firms. The amendments to the Rules of Fair Practice would clarify the obligation of members and persons who remain subject to the NASD's jurisdiction to respond to requests for information made by the NASD. The amendments to Article V, Sections 1 and 3 would conform those provisions to amendments to the Code of Procedure.

      The text of the proposed amendments follows this notice.

      BACKGROUND

      A significant aspect of the NASD's self-regulatory activity is the investigation of members and associated persons to determine if their activities comply with the Association's rules and the federal securities laws. In addition to investigating the full range of potential violations, the Association also routinely investigates associated persons who have been terminated for cause to determine whether the circumstances leading to the termination involved violations of the NASD's or other securities rules.

      Currently, Article IV, Section 3(a) of the Association's By-Laws only provides the NASD limited authority to place on hold a termination for cause where any complaint or action that involves the associated person is pending, or so long as any examination of the member or associated person is in process. Where no complaint, action, or examination is in process, the NASD's practice has been to place a hold on terminations for cause when the Uniform Termination Notice for Securities Industry Registration ("Form U-5") indicates the possibility of misconduct to ensure adequate time to investigate such matters fully and to bring disciplinary action where appropriate. The effect of the hold is to prevent the termination from becoming effective and thus postpone the start of the one-year period within which, under Article IV, Section 4 of the By-Laws, an individual no longer associated with a member firm remains subject to the NASD's jurisdiction to file a complaint.

      A similar issue arises in connection with the membership status of firms whose membership has been canceled or revoked. When a member firm resigns its membership voluntarily, Article III, Section 5(b) of the By-Laws currently provides that the firm remains subject to the NASD's jurisdiction to file a complaint for one year. Furthermore, a resignation does not take effect if a complaint, action, or examination is pending.

      The membership of numerous firms has been canceled or revoked by the NASD for failure to pay dues, fees, and fines and to file financial reports with the NASD. However, because Article III, Section 5(b) of the By-Laws does not apply to canceled or revoked firms, the NASD does not cancel or revoke the membership of a firm as a matter of practice. Instead, the NASD holds the cancellation or revocation of the firm membership in abeyance pending completion of any investigation in which it is determined that formal disciplinary action may be warranted. This procedure frustrates the NASD's obligation to cancel or revoke the membership of firms that do not comply with NASD requirements and can lead to firms remaining in the securities business for an extended period of time.

      Investigations of terminations for cause, as with other investigations, necessarily involve obtaining information from terminated individuals, typically by means of a request for information pursuant to Article IV, Section 5 of the Rules of Fair Practice. The NASD has consistently taken the position that an individual who remains subject to the filing of a complaint pursuant to Article IV, Section 4 of the By-Laws, or whose termination is subject to a hold, remains a "person associated with a member" for purposes of the individual's obligation to provide information requested by the NASD pursuant to Article IV, Section 5 of the Rules of Fair Practice. In addition, the NASD regards any failure by a member or associated person to respond to Article IV, Section 5 requests for information to be a violation of Article III, Section 1 of the Rules of Fair Practice.

      When required to provide information with regard to any matter involved in an NASD investigation, a member or associated person is required to testify on the record if so directed by any committee, or duly authorized agent of any such committee, in order to comply with Article IV, Section 5. The NASD's ability to require such persons to provide information regarding the circumstances of their termination and to impose sanctions for failure to do so is essential to the discharge of its regulatory obligations.

      As a result of a significant number of recent disciplinary actions involving failure to provide information regarding terminations for cause and failure to provide information in response to NASD requests made pursuant to Article IV, Section 5, as well as cancellations and revocations of members and associated persons, the NASD Board of Governors decided to codify its practices to ensure the performance of its self-regulatory functions.

      SUMMARY OF PROPOSED AMENDMENTS

      Article III, Section 5 of the NASD By-Laws

      The NASD is proposing to renumber current Section 5(b) to Article III of the By-Laws as new Section 6 and revise the provision to codify the NASD's current practice of retaining jurisdiction for one year over members whose membership has been canceled or revoked by the NASD for failure to pay a fee or fine or to file financial reports.

      Article IV of the NASD By-Laws

      Section 3 — The NASD is proposing to amend Article IV, Section 3(a) of the NASD By-Laws to codify the NASD's current practice of placing a hold on a termination for cause of a person associated with a member when the Form U-5 indicates that the circumstances surrounding the termination may have involved actionable misconduct. The proposed amendment would also codify the NASD's position that a hold may be imposed retroactively; that is, where a termination is permitted to become effective, the NASD may rescind the effective termination date based on the subsequent receipt of an amended Form U-5 or other information that discloses previously undiscovered misconduct. Any hold placed on the termination of registration of an associated person operates only to preserve the Association's jurisdiction and does not affect the termination of the person's relationship with his firm.

      Section 4 — Article IV, Section 4 of the NASD By-Laws currently provides that the NASD retains, for a period of one year following the effective date of termination, jurisdiction to bring a disciplinary action against a person formerly associated with a member alleging misconduct that occurred during the period of association. The NASD is proposing to amend Section 4 to codify the NASD's practice of extending the one-year jurisdictional period by placing a hold on a termination for cause and preventing the termination from taking effect. The amendment would also provide that failure of a person to respond to a request for information pursuant to Article IV, Section 5 of the Rules of Fair Practice during the period that a person is subject to the NASD's jurisdiction to file a complaint may be charged as a violation of the NASD's rules, notwithstanding that such failure occurred after the person ceased to be associated with an NASD member.

      Article IV, Section 5 of the NASD Rules of Fair Practice

      The NASD is proposing to amend Article IV, Section 5 of the Rules of Fair Practice to codify the NASD's position that the obligation to respond to a request for information extends to persons who remain subject to the NASD's jurisdiction to file a complaint. The NASD believes it essential that persons whose terminations are being investigated for possible misconduct be under an obligation to provide information necessary to enable staff to determine whether a complaint is warranted.

      In addition, the NASD is proposing to amend Section 5 to provide that "failure" to respond to an Article IV, Section 5 request for information constitutes a violation of the NASD's rules, rather than a "refusal" as is presently provided. When a member or associated person is required to report with regard to any matter, the Association is also proposing that such person must testify on the record if so directed by any NASD committee or duly authorized agent of any such committee. Finally, the NASD is proposing that Section 5 be amended to provide that a request for information is properly made if it is sent to a member's or person's last address of record with the NASD.

      CONFORMING AMENDMENTS

      Article V, Sections 1 and 3 of the NASD Rules of Fair Practice

      The NASD is also proposing to amend Article V, Sections 1 and 3 of the Rules of Fair Practice to conform those rules to proposed amendments to the Code of Procedure pending at the Securities and Exchange Commission (SEC), implementing the recommendations of the Special Committee on NASD Structure and Governance that would provide that the decisions of the National Business Conduct Committee (NBCC) are the final decisions of the NASD in disciplinary cases and would not require action by the full Board to become effective. The proposed amendment to Section 1 would change the term "penalty" to "sanction" and empower the NBCC to impose sanctions for violations of NASD rules. The amendment to Section 3 would authorize the NBCC to impose costs of disciplinary proceedings on respondents.

      The Board of Governors believes that the proposed amendments to Article III, Section 5(b) and Article IV, Sections 3 and 4 of the NASD By-Laws and Article IV, Section 5 and Article V, Sections 1 and 3 of the NASD Rules of Fair Practice are necessary and appropriate and recommends that members vote their approval. Prior to becoming effective, the proposed amendments also must be approved by the SEC.

      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 5, 1990.

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

      PROPOSED AMENDMENTS TO NASD BY-LAWS

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

      ARTICLE III

      Membership

      Comments were requested on the amendments to the Code of Procedure in Notice to Members 90-19 (April 1990) and Securities Exchange Act Rel. No. 34-28289 (July 31, 1990).

      * * * * *

      Resignation of Members

      Current Section 5(a) is renumbered as Section 5.

      Retention of Jurisdiction

      [Sec. 5(b)] 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 year after the effective date of the resignation, cancellation or revocation.

      Current Sections 6-9 are renumbered as Sections 7-10, respectively.

      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 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 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.

      PROPOSED AMENDMENTS TO NASD RULES OF FAIR PRACTICE

      ARTICLE IV

      Complaints

      * * * * *

      Reports and Inspection of Books for Purposes of Investigating Complaints

      Sec. 5. For the purpose of any investigation, or determination as to filing of a complaint or any hearing of any complaint against any member of the Corporation or any person associated with a member made or held in accordance with the Code of Procedure, any Local Business Conduct Committee, any District Business Conduct Committee, or the Board of Governors, or any duly authorized member or members of any such Committees or Board or any duly authorized agent or agents of any such Committee or Board shall have the right (1) to require any member of the Corporation, [or] person associated with a member, or person no longer associated with a member when such person is subject to the Corporation's jurisdiction to report, either informally or on the record, orally or in writing with regard to any matter involved in any such investigation or hearing, and (2) to investigate the books, records and accounts of any such member or person with relation to any matter involved in any such investigation or hearing. No such member or person [associated with a member,] shall [refuse] fail to make any report as required in this Section, or [refuse] fail to permit any inspection of books, records and accounts as may be validly called for under this Section. Any notice requiring an oral or written report or calling for an inspection of books, records and accounts pursuant to this Section shall be deemed to have been received by the member or person to whom it is directed by the mailing thereof to the last known address of such member or person as reflected on the Corporation's records.

      ARTICLE V

      Sanctions [Penalties]

      Sanctions [Penalties] for Violation of the Rules

      Sec. 1. Any District Business Conduct Committee, Market Surveillance Committee, the National Business Conduct Committee, any other committee exercising powers assigned by the Board, or the Board, [of Governors,] in the administration and enforcement of these Rules, and after compliance with the Code of Procedure, may (1) censure any member or person associated with a member, and/or (2) impose a fine upon any member or person associated with a member, and/or (3) suspend the membership of any member or suspend the registration of a person associated with a member, if any, for a definite period, and/or (4) expel any member or revoke the registration of any person associated with a member, if any, and/or (5) suspend or bar a member or person associated with a member from association with all members, and/or (6) impose any other fitting sanction [penalty] deemed appropriate under the circumstances, for each or any violation of any of these Rules by a member or person associated with a member or for any neglect or refusal to comply with any orders, directions or decisions issued by any such committee [District Business Conduct Committee, Market Surveillance Committee] or by the Board [of Governors] in the enforcement of these Rules, including any interpretative ruling made by the Board [of Governors], as any such c[C]ommittee or the Board, in its discretion, may deem to be just; provided, however, that no such sanction imposed by any such [District Business Conduct or Market Surveillance] c[C]ommittee shall take effect until the period for appeal therefrom or review thereof by the National Business Conduct Committee or the Board, as applicable, has expired[,] and any such appeal or review has been completed in accordance with [as provided in Article III, Section 1 of] the Code of Procedure; and provided, further, that all parties to any proceeding resulting in a sanction shall be deemed to have assented to or to have acquiesced in the imposition of such sanction unless a party aggrieved thereby shall have made application [to the Board of Governors] for review thereof pursuant to the Code of Procedure, within fifteen (15) days after the date of the decision rendered in such proceeding [such notice].

      * * * * *

      Costs of Proceedings

      Sec. 3. Any member or any person associated with a [such] member disciplined pursuant to Section 1 of this Article shall bear the costs of the proceedings as [the District Business Conduct Committee] any committee referred to in such Section 1 or the Board [of Governors] deems fair and appropriate under the circumstances.

    • 90-60 NASDAQ National Market System (NASDAQ/NMS) Additions, Changes, and Deletions As of August 13, 1990

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading

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

      As of August 13, 1990, the following 35 issues joined NASDAQ/NMS, bringing the total number of issues to 2,641:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      NLCO

      Environmental Elements Corporation

      7/13/90

      1000

      ADDDF

      Alias Research Inc.

      7/17/90

      1000

      BHICW

      Baker Hughes Incorporated (Wts)

      7/17/90

      1000

      LMTS

      LaserMaster Technologies, Inc.

      7/17/90

      1000

      MSIC

      Microscience International Corporation

      7/17/90

      200

      OSHSF

      OSHAP Technologies Ltd.

      7/17/90

      1000

      OSHWF

      OSHAP Technologies Ltd. (Wts)

      7/17/90

      500

      PCTL

      PictureTel Corporation

      7/17/90

      1000

      PCTLW

      PictureTel Corporation (Wts)

      7/17/90

      1000

      PRST

      Presstek, Inc.

      7/17/90

      1000

      ISAN

      In-Store Advertising, Inc.

      7/19/90

      1000

      MECA

      MECA Software, Inc.

      7/19/90

      1000

      MODT

      Modtech, Inc.

      7/19/90

      1000

      CHUX

      O'Charley's Inc.

      7/19/90

      1000

      TRMB

      Trimble Navigation Limited

      7/20/90

      1000

      CROPP

      Crop Genetics International Corporation (Pfd)

      7/24/90

      500

      IKOS

      IKOS Systems, Inc.

      7/25/90

      1000

      COHO

      Coho Resources, Inc.

      7/26/90

      1000

      MOLXA

      Molex Incorporated (Cl A)

      7/26/90

      1000

      ACLB

      Allied Clinical Laboratories, Inc.

      7/31/90

      1000

      BMTI

      Bird Medical Technologies, Inc.

      8/2/90

      1000

      CBCL

      Capitol Bancorp Ltd.

      8/7/90

      200

      CSYI

      Circuit Systems, Inc.

      8/7/90

      1000

      DVIC

      DVI Financial Corporation

      8/7/90

      1000

      DREAF

      Dreco Energy Services Ltd. (Cl A)

      8/7/90

      1000

      ESBB

      ESB Bancorp, Inc.

      8/7/90

      200

      KEEN

      Keene Corporation

      8/7/90

      1000

      MGXI

      Micrografx, Inc.

      8/7/90

      1000

      OSII

      Orthopedic Services, Inc.

      8/7/90

      1000

      REPH

      Republic Health Corporation

      8/7/90

      500

      BSBL

      Score Board, Inc. (The)

      8/7/90

      1000

      VRETS

      Vanguard Real Estate Fund II

      8/7/90

      500

      EASL

      Easel Corporation

      8/9/90

      1000

      SMRKV

      Southmark Corporation (WI)

      8/13/90

      1000

      SMRPV

      Southmark Corporation (Pfd)(WI)

      8/13/90

      500

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since July 13, 1990.

      New/Old Symbol

      New/Old Security

      Date of Change

      APTS/LEDA

      Apertus Technologies, Inc./Lee Data Corp.

      7/20/90

      CUBN/LCNB

      CU Bancorp/Lincoln Bancorp

      8/2/90

      HFOX/HFOX

      Ultra Bancorp/Home Federal Savings Bank

      8/6/90

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      ASH

      Automated Systems, Inc.

      7/13/90

      BRLNE

      Brooklyn Savings Bank (The)

      7/16/90

      EBKC

      Eliot Savings Bank

      7/16/90

      SCAPY

      Svenska Cellulosa Aktiebolaget SCA

      7/17/90

      ATTWZ

      Attwoods plc (Rts)

      7/18/90

      LIVE

      LIVE Entertainment Inc.

      7/18/90

      PFTS

      Profit Systems, Inc.

      7/18/90

      INTCZ

      Intel Corporation (Wts)

      7/19/90

      TCGN

      Tecogen Inc.

      7/19/90

      BOGO

      Bogert Oil Company

      7/20/90

      HEIC

      HEI Corporation

      7/23/90

      DSTS

      DST Systems, Inc.

      7/24/90

      MAJL

      Michael Anthony Jewelers, Inc.

      7/24/90

      CFIXW

      Chemfix Technologies, Inc. (Wts)

      7/31/90

      PMBK

      PrimeBank, Federal Savings Bank

      7/31/90

      NOWT

      North-West Telecommunications, Inc.

      8/1/90

      PSPA

      Pennview Savings Association

      8/1/90

      AASQE

      Action Auto Stores, Inc.

      8/2/90

      DOSKQ

      Doskocil Companies, Inc.

      8/2/90

      ITGN

      Integon Corporation

      8/2/90

      PACE

      Pacesetter Homes, Inc.

      8/2/90

      GRGI

      Greenery Rehabilitation Group, Inc.

      8/3/90

      CPLSZ

      Care Plus, Inc. (Cl A Wts)

      8/7/90

      INCL

      Intellicall, Inc.

      8/8/90

      CCARQ

      CCAIR, Inc.

      8/9/90

      CPTC

      CPT Corporation

      8/9/90

      VIPTS

      Vinland Property Trust

      8/9/90

      WTWQE

      Wall to Wall Sound & Video, Inc.

      8/9/90

      USBK

      United Savings Bank

      8/13/90

      WWBC

      Washington Bancorporation

      8/13/90

      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.

    • 90-59 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 8, 1990. On this day, the NASDAQ system and the exchange markets 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 Columbus Day.

      Trade Date

      Settlement Date

      Reg. T Date*

      September 27

      October 4

      October 8

      28

      5

      9

      October 1

      9

      10

      2

      10

      11

      3

      11

      12

      4

      12

      15

      5

      15

      16

      8

      15

      17

      9

      16

      18

      Note: October 8, 1990, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 8, will be combined with transactions made on the previous business day, October 5, for settlement on October 15. Securities will not be quoted ex-divident, 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 8.

      These settlement dates should be used by brokers, dealers, and municipal securities dealers 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)(l) 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)(l), 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."


    • 90-58 Clarification of Schedule H Reporting Requirements

      SUGGESTED ROUTING*

      Legal & Compliance
      Operations
      Trading

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

      EXECUTIVE SUMMARY

      Effective August 1, 1989, the requirement to report daily price and volume in non-NASDAQ over-the-counter equity securities ("non-NASDAQ securities") pursuant to Schedule H to the NASD By-Laws was extended to the entire universe of such securities, including foreign issues. Since that time, questions have been raised concerning the applicability of the schedule to foreign securities and foreign securities transactions. Accordingly, the NASD is publishing guidelines regarding the application of Schedule H to such securities and transactions. In addition, the NASD is publishing guidelines regarding the general application of the Schedule.

      BACKGROUND

      Schedule H, which became fully effective August 1, 1989, requires the reporting of price and volume information for principal transactions in non-NASDAQ securities whenever a member exceeds the minimum daily thresholds of 50,000 shares or $10,000, on either side, in a given non-NASDAQ security. All non-NASDAQ equity securities, including foreign securities, are subject to the requirements of Schedule H. Since its effectiveness, questions have been raised regarding the applicability of the Schedule to foreign securities and certain foreign securities transactions. The NASD has decided to publish the following guidelines to clarify the requirements and to assist members in complying with the Schedule.

      1. Schedule H applies only to principal transactions effected by NASD members.
      2. The term "non-NASDAQ security" includes all foreign equity securities, American Depositary Receipts, or shares traded in the U.S. other than on NASDAQ or on a national securities exchange. Foreign exchanges are not "national securities exchanges," as that term is used in the Schedule H definition of non-NASDAQ security. Therefore, the fact that a foreign security is also traded on a foreign exchange does not, per se, exclude all transactions in that security from the Schedule's coverage.
      3. Schedule H is applicable to transactions in foreign securities executed in the U.S., regardless of the country where clearance and settlement occur.
      4. Schedule H is not applicable to any transaction involving a foreign security that is executed outside the U.S. and cleared and settled in the U.S. if the transaction is reportable, and is reported, to a foreign regulatory securities authority (e.g., The Securities Association in the United Kingdom).
      5. Schedule H is not applicable to transactions in foreign securities executed on and reported to a foreign securities exchange (e.g., the International Stock Exchange, the Tokyo Stock Exchange, Toronto Stock Exchange, Stock Exchange of Singapore, Hong Kong Stock Exchange, etc.).
      6. The type of currency in which the trade is effected or in which the trade settles has no bearing on whether the trade is reportable under Schedule H.
      7. All trades reported under Schedule H must be reported in U.S. dollars. The method employed for currency conversion will be left to the NASD member.
      8. The time a trade is effected, whether during or outside U.S. market hours, has no bearing on whether the trade is reportable under Schedule H.

      The NASD is also clarifying the general application of the requirement in the following circumstances.

      1. Schedule H does not apply to transactions in "restricted securities" as defined in Rule 144(a)(3) of the Securities Act of 1933, including transactions made pursuant to Rule 144A.
      2. Schedule H does not apply to bonds, including convertible bonds.
      3. Schedule H does not apply to "junk bonds" with rights attached or any combination of securities of which a debt instrument is an integral part. Schedule H will apply to transactions in the equity components when they become detached and trade separately.
      4. Schedule H does apply to preferred stock, rights, and warrants.

      Questions regarding CUSIP numbers and/or security symbols should be directed to Dorothy Kennedy, Manager, Uniform Practice, at (212)858-4340. Other questions regarding this notice should be directed to Katherine Malfa, Senior Regional Attorney, Market Surveillance, at (301) 590-6445 or to Michael Kulczak, Associate General Counsel, at (202) 728-8811.

    • 90-57 Implementation of Amendment to Rules of Practice and Procedures for the Small Order Execution System Re: Market Makers' Entry of Agency Orders into SOES, Effective July 27, 1990

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Trading

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

      EXECUTIVE SUMMARY

      Effective July 27, 1990, the NASD implemented a new rule for NASDAQ's Small Order Execution System (SOES) that prohibits a market maker from entering agency orders into SOES in a security in which it is registered as a market maker, unless the market is locked or crossed. The rule emphasizes the market maker's continuing obligations of best execution for agency orders, even when use of SOES is prohibited. The text of the new rule follows this notice.

      BACKGROUND

      On July 26, 1990, the SEC approved an NASD rule change that prohibits market makers from entering agency orders into SOES in securities in which they make markets, and emphasizes a market maker's obligation to obtain best execution for its customer orders.1 The new rule became effective July 27, 1990.

      The new rule prohibits a market maker from receiving its own customers' orders and reviewing them, deciding not to act as market maker for those orders, and sending them into SOES for an automatic execution on an order-entry basis. An exception to the rule exists when the prevailing market is locked or crossed. In such instances, a market maker will be permitted to submit its own customer orders into SOES on an agency basis so that the locking market maker will refresh its quotes. At all other times, market makers are prohibited from entering agency orders in securities in which they are registered as market makers.

      SOES is designed to facilitate the efficient and economical execution and comparison of small, retail orders in NASDAQ securities. SOES is available only for retail customer orders of specified size, and the SOES rules enumerate certain market-maker and order-entry participant obligations to ensure that SOES operates efficiently. The Association believes that the new rule furthers these goals by reemphasizing a market maker's obligation to execute its customers' orders, either in its own right as a market maker or through telephone negotiation. Furthermore, the change relieves SOES market makers from the burden of executing those orders emanating from a competing market maker's customer base and entered as agency orders for execution in an automated SOES environment. Finally, the new rule specifically establishes that a market maker's duty to provide best execution to its customer is in no way diminished by the unavailability of a SOES execution.

      TEXT OF AMENDMENT TO THE RULES OF PRACTICE AND PROCEDURES FOR THE SMALL ORDER EXECUTION SYSTEM

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

      c) PARTICIPATION OBLIGATIONS IN SOES

      * * * * * *

      2. Market Makers
      (A) through
      (C) No Change
      (D) For each security in which a Market Maker is registered, the Market Maker may not enter orders on an agency basis into SOES, unless a locked or crossed market as defined in Part IV, Section 2(e) of Schedule D to the NASD By-Laws, exists for that security. This prohibition against use of SOES does not obviate the Market Maker's duty to give its agency orders orders best execution in the prevailing market, according to the NASD Board of Governors' Interpretation on Executions of Retail Transactions.
      (E) [(D)] No change
      (F) [(E)] No change
      (G) [(F)] No change
      (H) [(G)] No change
      (I) [(H)] No change

      1See Release No. 34-28268, 55 FR 31,273; File No. SR-NASD-89-52.


    • 90-56 Proposed Amendments to Subsections (b) "Definitions" and (d) ("Sales Charge Rule") of Article III, Section 26 of the NASD Rules of Fair Practice Re: Regulation By the NASD of Mutual Fund Asset-Based Sales Charges; Last Voting

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Mutual Fund
      Operations

      *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 the NASD mutual fund maximum sales charge rule that would subject asset-based sales charges to the provisions of the rule. The last voting date is October 5, 1990. The text of the amendments follows this notice.

      BACKGROUND

      In Notice to Members 90-26 (April 16, 1990), the NASD distributed for comment proposed amendments to subsections (b) and (d) of Article III, Section 26 of the NASD Rules of Fair Practice. If adopted, they would subject asset-based sales charges of mutual funds to the provisions of the NASD's maximum sales charge rule. Currently, the rule governs only front-end and deferred sales charges.

      Fifty-eight comment letters were received from members and other interested persons. Twenty-five of the commenters were not in favor of the adoption of the amendments. The remainder, who expressed varying degrees of support for the proposals, made a number of constructive comments, many of which have been incorporated into the proposed amendments.

      Several comments from those who do not support the amendments dealt with service fees. Most of these commenters consider that the proposals do not make adequate provision for service fees. The Board notes that the amendments provide for a continuing service fee to persons of up to a maximum of .25 percent per annum of the average annual net asset value of shares sold by such persons that is not subject to the asset-based sales charge caps in other sections of the proposed amendments. Thus, subject to arrangements made with a mutual fund or its underwriter, a member could continue to receive a fee for servicing mutual fund accounts it introduced for as long as such accounts are in existence. This is the rationale for defining "sales charges" and "service fees" separately in the proposal. The Board wishes to encourage members to give continuing service to their customers after the sale and believes that this activity deserves the reasonable continuing compensation provided for in the proposed amendments.

      The following are the changes to the proposed amendments, suggested by commenters and recommended by the NASD Investment Companies Committee ("Committee"), which have been approved by the Board of Governors.

      Definition of "Person"

      In the proposed amendments, the term "investor" was used in lieu of the term "person." A number of commenters noted that an adequate definition of a person is contained in the Investment Company Act of 1940, and this definition has been added to subparagraph (b)(4) of the Definitions section. "Investor" has been changed to "person" throughout the proposal.

      Management Fees

      The Board wishes to clarify that investment management fees and profits are not subject to the jurisdiction of the Association. Consequently, members will not be required to verify whether such fees or profits are being used, directly or indirectly, to finance sales-related expenses. Members will be able to rely on disclosures in prospectuses for information about sales-related fees and charges. Subparagraph (b)(8) of the Definitions section has been amended.

      Service Fees

      Several commenters felt that the definition of service fees in the proposal is too narrow. For example, it does not cover payments of service fees to nonmembers such as banks or foreign broker-dealers. The definition of service fees in subparagraph (b)(9) therefore has been broadened to permit service fees to be used for a wide variety of services provided by members and other entities to mutual fund shareholders. Service fees as defined do not include transfer agent or custodian fees paid by mutual funds. Subparagraph (b)(8)(C) has also been amended to define more clearly the distinction between "sales charges" and "service fees" in the proposal.

      The Committee decided not to use the term "maintenance fee" in lieu of "service fee" as recommended by some commenters because it lacks the connotation of personal service that the Committee wishes to encourage.

      The service fee limit in various parts of the proposed amendments is defined to be not more than .25 percent per annum of the average annual net assets of an investment company. This could mean that some members might receive more than .25 percent per annum of a mutual fund's assets for which they were responsible while others might receive less — the overall amount being not more than the maximum percentage of the total net assets permitted.

      The Committee believes that the maximum percentage permitted should apply to all recipients and has amended the proposal to relate the maximum percentage of .25 percent per annum to the shares sold by any person. Thus, if the proposal is adopted, a recipient would be able to receive a service fee of not more than .25 percent per annum of the average annual net asset value of the shares it sold to customers. New section (d)(5) has been added.

      As originally proposed, subparagraph (d)(l)(F) would not have permitted a mutual fund without an asset-based sales charge that reinvests dividends at the offering price to pay a service fee. The Committee feels that, with an appropriate haircut, such a prohibition should not apply. Accordingly, it has amended the subparagraph to permit such a service fee if the maximum aggregate sales charge does not exceed 6.25 percent of the offering price.

      Maximum Front-End and Deferred Sales Charges

      Subsection (d)(2) of the proposal deals with mutual funds that have an asset-based sales charge. Many such companies also have front-end and/or deferred sales charges. Since the caps in subparagraph (2)(A) and (2)(B) are a percentage of total new gross sales, it is possible to construct a scenario whereby some investors who make large investments might pay a minimal front-end sales charge while other investors might be required to pay a very high sales charge per individual transaction even though the overall sales charges related to the net assets of the fund are within the required maximum percentages. For example, a person investing $1 million might have to pay no front-end sales charge while a person investing $10,000 might have to pay an excessive front-end sales charge even though the aggregate sales charges by the fund were within the maximum percentages of total new gross sales permitted by the proposal. The Committee has amended both subparagraphs to set maximum front-end and/or deferred sales charges per individual transaction.

      Exchanges

      A number of commenters asked how exchanges of shares between companies in the same complex, between companies with multiple classes, and between series shares of a series investment company, should be treated, i.e., should they be treated as new sales for purposes of the maximum caps. The Committee believes that such exchanges should not be treated as new sales primarily because the extensive record-keeping that would be required would be an expensive and difficult burden for many mutual funds. However, if a mutual fund wishes to keep such records, the practice would be permitted provided that the increase in the maximum aggregate sales charges for the receiving mutual fund is deducted from the maximum aggregate sales charges of the redeeming company. Subparagraphs (2)(A) and (B) have been amended, and new subparagraph (D) has been added.

      Treatment of Prior Sales and Unreimbursed Expenses

      Several commenters remarked that the proposal does not deal adequately with unreimbursed sales-related expenses incurred in the past that would be amortized by asset-based and/or deferred sales charges after the amendments are adopted. They also pointed out that there is no provision for interest payments on the financing necessary to fund such expenses.

      A new subparagraph (d)(2)(C) has been added to the proposed amendments that would apply the maximum permitted sales charges of 6.25 percent or 7.25 percent retroactively, on sales made prior to the effective date of the proposed amendments, to the time when a mutual fund first adopted an asset-based sales charge. An interest rate of prime plus one percent per annum would be added to the amount so calculated, and the total would be reduced by any front-end, asset-based, and deferred sales charges received prior to the effective date of the proposed amendments as a result of such sales. The net total would be added to the maximum aggregate sales charges on new gross sales calculated as described in subparagraphs (d)(2)(A) and (B). The grand total would be continually reduced by sales charges received by the investment company after the effective date of the proposed amendments. The interest rate of the prime rate plus one percent per annum would be applied to the fluctuating grand total over time.

      "No Load" Designation

      The proposed amendments would have prohibited members or their associated persons from describing an investment company with a deferred or an asset-based sales charge as "no load." The Committee considers that this prohibition should apply to a mutual fund that has a front-end or a deferred sales charge and to a fund that has an asset-based and/or a service fee that together exceed .25 percent of its average annual net assets. Subparagraph (d)(3) has been amended.

      Tax Question

      Some commenters believe that the requirement in subparagraph (2)(E)(ii) that excess deferred sales charges be credited to the net assets of an investment company may imperil a mutual fund's status as a regulated investment company under the provisions of the Internal Revenue Code. One commenter suggested excising the term "net assets" from the subparagraph. That has been done. The NASD does not wish to adversely affect the tax status of mutual funds by any provision of the rule and is continuing to study this area. If necessary, appropriate amendments will be made prior to the adoption of the proposal.

      The following recommendations made by some commenters were not adopted.

      Nonconforming Mutual Funds — Procedures for Exemption

      Several commenters suggested that the NASD adopt procedures for the review and approval of sales charge structures that do not conform to the provisions of the proposed amendments. The Board of Governors is unwilling, at this time, to consider including exemptive provisions in the rule. It considers that the provisions of the amended rule will provide ample scope for innovation in the financing of sales-related expenses of mutual funds.

      However, the Board would be willing, in view of the importance of the proposed amendments to the mutual fund industry and the fact that the NASD has yet to experience the effect of their implementation, to consider whether any changes are necessary after the NASD has had one year's experience in administering the new provisions.

      Service Fees

      Some commenters suggested a sliding, increasing scale of service fees with appropriate further haircuts to the maximum sales charge caps of 7.25 percent or 6.25 percent of gross new sales. Others commented that if a mutual fund did not offer the maximum service fee of .25 percent per annum of a fund's net asset value, the excess should be permitted to be added to the maximum asset-based sales charge of .75 percent.

      The Board of Governors considers the maximum asset-based sales charge proposed of .75 percent per annum of average net assets and the maximum service fee of .25 percent of a fund's average annual net assets to be adequate to finance sales-related expenses and to provide compensation for continued service to mutual fund shareholder accounts. In addition, the Board does not wish to add further complexity to an already complex rule.

      Application of the Proposed Amendments — Multiple Classes of Shares

      Some commenters requested that the proposal be amended to clarify how the maximum caps should be applied when an investment company has multiple classes of shares or is a series investment company. The Board considers each class of shares and each series to be a separate investment company for purposes of the sales charge rule. In addition, the caps will apply to each class and each series and not to the investment company as a whole. The NASD has always applied its rules governing investment companies in this way, and the Board sees no reason to further amend the proposed amendments.

      Grace Period

      A number of commenters recommended that a grace period of one year be permitted, after the SEC approves the rule, before the rule is implemented. It is the intention of the NASD that such a provision will be provided for in the NASD's rule filing seeking SEC approval after member approval has been obtained. The membership will be notified of the effective date after SEC approval.

      Technical Amendments

      In addition to the changes described above that have been made to the proposed amendments, a number of technical changes have been made to clarify certain terms and to ensure uniformity in the language used.

      EXPLANATION

      A section-by-section analysis of the proposed amendments to subsections (b) and (d) of Article III, Section 26 of the NASD Rules of Fair Practice follows:

      Definitions Section

      (b)
      (4) The current rule defines "person" as it is defined in Rule 22(d)-l under the Investment Company Act of 1940 ("the Act"), which no longer contains such a definition. The amendment defines "person" as it is defined in the definitions section of the Act.
      (8) Sales charges are defined in this subsection to include all charges and fees, described in the prospectus, that are used to finance sales-related expenses. Included in the definition are front-end, deferred, and asset-based sales charges. Excluded are investment management fees and charges or fees that are used to defray ministerial, record-keeping, or administrative expenses. The provisions of the rule govern only sales-related charges described as such in the mutual fund prospectus, and members may rely on such prospectus disclosure for purposes of this section.
      Nominal (i.e., small or minimal) charges incurred by shareholders on redemption of mutual fund shares for special services are excluded from the definition of deferred sales charges, as are redemption charges described in a prospectus to discourage short-term trading generally within one year of purchase of shares. Such nominal and short-term charges may not be used to pay for sales-related expenses and must be returned to the mutual fund.
      The term "asset-based sales charge" is not defined in terms of a specific rule, such as Rule 12(b)-l under the Act. It is intended to encompass charges against net assets, disclosed in the prospectus, that are used to pay for sales-related expenses.
      (9) A service fee is defined to be a payment by a mutual fund for a broad variety of services after the sale provided by members and other entities to mutual fund shareholders. The term "service fee" does not include transfer agent, custodian, or similar fees paid by mutual funds.
      (10) The prime rate is the most preferential rate of interest charged by the largest commercial banks on loans to their corporate clients. It appears daily in The Wall Street Journal.

      Sales Charges

      (d) This subsection contains the general obligation of the NASD under Section 22(b) of the Act to prevent excessive sales charges on mutual funds sold by its members. A major restructuring of the rule was required to expand its provisions to include deferred and asset-based sales charges. This was accomplished by dividing the rule into two parts. Part One deals with funds that do not, and Part Two deals with funds that do have an asset-based sales charge.
      (d)
      (l) Part One, for the most part, reiterates the provisions of the current rule with minor changes to extend the rule's provisions to govern deferred sales charges. New subsection (d)(l)(E) would permit a fund without an asset-based sales charge to pay a service fee provided the aggregate front-end and/or deferred sales charges do not exceed 7.25 percent of the offering price. New subsection (d)(l)(F) would permit a fund without an asset-based sales charge that reinvests dividends at the offering price to pay a service fee provided (1) the aggregate front-end and/or deferred sales charges do not exceed 6.25 percent of the offering price and (2) the fund offers quantity discounts and rights of accumulation.
      (d)
      (2) This part is new and expands the rule to govern mutual funds with asset-based sales charges offered by members to the public.
      (d)
      (2)
      (A) This subsection places a cap of 6.25 percent of new gross sales, plus an interest rate equal to the prime rate plus one percent per annum, on the total sales charges — asset-based, front-end, and deferred — levied by a mutual fund that pays a service fee. The reduction from 8.5 percent, the maximum permitted sales charge under the rule, to 6.25 percent occurs because asset-based sales charges do not provide quantity discounts or rights of accumulation and because a service fee, not subject to the cap, is paid.
      The term "new gross sales" does not include sales resulting from the reinvestment of investment income or capital gains or from exchanges of shares between mutual funds in a complex of funds or between classes of shares in a fund with multiple classes or between series of a series fund. If a fund with an asset-based sales charge also has a front-end and/or a deferred sales charge, the latter two charges cannot exceed 6.25 percent of the amount invested by any person.
      (d)
      (2)
      (B) This subsection permits a fund that has an asset-based sales charge and that does not pay a service fee to increase the cap described in subsection (d)(2)(A) to 7.25 percent of new gross sales plus an interest rate equal to the prime rate plus one percent, per annum. Front-end and/or deferred sales charges cannot exceed 7.25 percent of the amount invested by any person.
      (d)
      (2)
      (C) Subsections (d)(2)(A) and (B) refer to sales made after the proposed amendments are adopted. This subsection would permit a mutual fund that has had an asset-based sales charge in the past to apply the appropriate cap of 6.25 percent or 7.25 percent retroactively to new gross sales from the time it first adopted an asset-based sales charge until the proposed amendments are implemented.
      The amount thus calculated would be increased by an interest rate equal to the prime rate plus one percent per annum and reduced by any sales charges — front-end, deferred, or asset-based — on such sales or from net assets resulting from such sales. The net total would be added to the total calculated by the application of the provisions of subsections (d)(2)(A) or (B). The grand total would be reduced over time by sales charges received after the proposed amendments are implemented. This subsection permits past unreimbursed sales-related expenses to be accommodated within the provisions of the sales charge rule and provides for their gradual amortization.
      (d)
      (2)
      (D) Despite the exclusion of exchanges from the definition of total new gross sales in the previous subsections, some mutual funds may wish to keep records of exchanges between mutual funds in the same complex, between classes of shares of mutual funds with multiple classes, and between series shares of series mutual funds. Such mutual funds may increase the maximum aggregate sales charges permitted under the previous sections by including such exchanges as new gross sales provided the maximum aggregate sales charges of the mutual fund, class, or series of the redeeming mutual fund are reduced by the amount of such increase.
      (d)
      (2)
      (E)
      (i) This subsection would prohibit a member from offering the shares of a mutual fund that has an asset-based sales charge in excess of .75 percent of its average annual net assets.
      (d)
      (2)
      (E)
      (ii) If the maximum cap described in subsections (d)(2)(A), (B), (C), and (D) is reduced to zero and a mutual fund still continues to receive deferred sales charges on redemption, such sales charges may not be used to pay for sales-related expenses.
      (d)
      (3) No person associated with an NASD member may describe, orally or in writing, a mutual fund as "no load" or as having "no sales charge" if the fund has a front-end or deferred sales charge or if it has an asset-based sales charge that exceeds .25 percent of average net assets per annum.
      (d)
      (4) Since the proposed amendments contemplate fund-level accounting rather than individual shareholder accounting, it is probable that long-term shareholders in a mutual fund that has an asset-based sales charge may pay more in total sales charges than they would have paid if the mutual fund did not have an asset-based sales charge. Members may not offer or sell shares of such mutual funds if the fund does not disclose this information near the fee table at the front of a prospectus.
      (d)
      (5) A member may not offer or sell the shares of a mutual fund if it pays a service fee in excess of .25 percent of its average annual net assets. No person or entity can be paid a service fee by a mutual fund that exceeds .25 percent of the average annual net asset value of the shares of the fund that were sold originally by such a person or entity.

      REQUEST FOR VOTE

      The NASD Board of Governors believes that the proposed rule amendments will assist the NASD in meeting its obligation, under the mandate given to it by the U.S. Congress, to prevent excessive sales charges on mutual fund shares sold to the public by NASD members.

      Thus, the Board considers the proposed amendments necessary and appropriate and recommends that members vote their approval. Please mark the attached ballot according to your convictions and mail it in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than October 5, 1990.

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

      PROPOSED AMENDMENTS TO SUBSECTIONS (B) AND (D) OF ARTICLE III, SECTION 26 OF THE NASD RULES OF FAIR PRACTICE

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

      DEFINITIONS

      (b)
      (4) Person ["any person"] shall mean "person" ["any person"] as defined in [subsection (a) or "purchaser" as defined in subsection (b) of Rule 22d-l under] the Investment Company Act of 1940.
      (8) "Sales charge" and "sales charges" as used in subsection (d) of this section shall mean all charges or fees that are paid to finance sales or sales promotion expenses, including front-end, deferred and asset-based sales charges, excluding charges and fees for ministerial, recordkeeping or administrative activities and investment management fees. For purposes of this section, members may rely on the sales-related fees and charges disclosed in the prospectus of an investment company.
      (A) A "front-end sales charge" is a sales charge that is included in the public offering price of the shares of an investment company.
      (B) A "deferred sales charge" is a sales charge that is deducted from the proceeds of the redemption of shares by an investor, excluding any such charges that are (i) nominal and are for services in connection with a redemption or (ii) to discourage short-term trading, that are not used to finance sales-related expenses, and that are credited to the net assets of the investment company.
      (C) An "asset-based sales charge" is a sales charge that is deducted from the net assets of an investment company and does not include a service fee.
      (9) "Service fees" as used in subsection (d) of this section shall mean payments by an investment company for personal service and/or the maintenance of shareholder accounts.
      (10) "Prime rate" as used in subsection (d) of this section shall mean the most preferential interest rate on corporate loans at large U.S. money center commercial banks.

      Sales Charges

      (d) No member shall offer or sell the shares of any open-end investment company or any "single payment" investment plan issued by a unit investment trust (collectively "investment companies") registered under the Investment Company Act of 1940 if the sales charges described in the prospectus are excessive. [if the public offering price includes a sales charge which is excessive, taking into consideration all relevant circumstances.] Aggregate [S]sales charges shall be deemed excessive if they do not conform to the following provisions:
      (1) Investment Companies Without an Asset-Based Sales Charge
      [(1)]
      (A) Front-end and/or deferred sales charges described in the prospectus which may be imposed by an investment company without an asset-based sales charge [The maximum sales charge on any transaction] shall not exceed 8.5% of the offering price.
      [(2)(A)]
      (B)
      (i) Dividend reinvestment may [shall] be made available at net asset value per share to any person who requests such reinvestment, [at least ten days prior to the record date subject only to the right to limit the availability of dividend reinvestment to holders of securities of a stated minimum value, not greater than $1200.]
      [(B)]
      (ii) If dividend reinvestment is not made available as specified [on terms at least as favorable as those] in subparagraph (B)(i) [(2)(A)], the maximum aggregate sales charge [on any transaction] shall not exceed 7.25% of the offering price.
      [(3)(A)]
      (C)
      (i) Rights of accumulation (cumulative quantity discounts) may [shall] be made available to any person [for a period of not less than 10 years from the date of first purchase] in accordance with one of the alternative quantity discount schedules provided in subparagraph (D)(i) [(4)(A)] below, as in effect on the date the right is exercised.
      [(B]]
      (ii) If rights of accumulation are not made available on terms at least as favorable as those specified in subparagraph (C)(i)[(3)(A)] the maximum aggregate sales charge [on any transaction] shall not exceed:
      [(i)]
      (a) 8% of offering price if the provisions of subparagraph (B)(i)[(2)(A)] are met; or
      [(ii)]
      (b) 6.75% of offering price if the provisions of subparagraph (B)(i) [(2)(A)] are not met.
      [(4)(A)]
      (D)
      (i) Quantity discounts, if offered, shall be made available on single purchases by any person in accordance with one of the following two alternatives:
      [(i)]
      (a) A maximum aggregate sales chrge of 7.75% on purchases of $10,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more, or
      (b) A maximum aggregate sales charge of 7.50% on purchases of $15,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more.
      [(B)]
      (ii) If quantity discounts are not made available on terms at least as favorable as those specified in subparagraph (D)(i) [(4)(A)] the maximum aggregate sales charge [on any transaction] shall not exceed:
      [(i)]
      (a) 7.75% of the offering price if the provisions of subparagraphs (B)(i) and (C)(i) [(2)(A) and (3)(A)] are met.
      [(ii)]
      (b) 7.25% of the offering price if the provisions of subparagraph (B)(i) [(2)(A)] are met but the provisions of subparagraph (C)(i) [(3)(A)] are not met.
      [(iii)]
      (c) 6.50% of the offering price if the provisions of subparagraph (C)(i) [(3)(A)] are met but the provisions of subparagraph (B)(i) [(2)(A)] are not met.
      [(iv)]
      (d) 6.25% of the offering price if the provisions of subparagraphs (B)(i) and (C)(i) [(2)(A) and (3)(A)] are not met.
      (E) If an investment company without an asset-based sales charge pays a service fee, the maximum aggregate sales charge shall not exceed 7.25% of the offering price.
      (F) If an investment company without an asset-based sales charge reinvests dividends at offering price, it shall not offer or pay a service fee unless it offers quantity discounts and rights of accumulation and the maximum aggregate sales charge does not exceed 6.25% of the offering price.
      (2) Investment Companies With an Asset-Based Sales Charge
      (A) Except as provided in subparagraphs (2)(C) and (2)(D), the aggregate asset-based, front-end and deferred sales charges described in the prospectus which may be imposed by an investment company with an asset-based sales charge, if the investment company has adopted a plan under which service fees are paid, shall not exceed 6.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of shares of an investment company with multiple classes of shares or between series shares of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 6.25% of the amount invested.
      (B) Except as provided in subparagraphs (2)(C) and (2)(D), if an investment company with an asset-based sales charge does not pay a service fee, the aggregate asset-based, front-end and deferred sales charges described in the prospectus shall not exceed 7.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of shares of an investment company with multiple classes of shares or between series shares of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 7.25% of the amount invested.
      (C) The maximum aggregate sales charge on total new gross sales set forth in subparagraphs (2)(A) and (B) may be increased by an amount calculated by applying the appropriate percentages of 6.25% or 7.25% to total new gross sales which occurred after an investment company first adopted an asset-based sales charge until the (effective date of these amendments) plus interest charges on such amount equal to the prime rate plus one percent per annum less any front-end, asset-based or deferred sales charges on such sales or net assets resulting from such sales.
      (D) The maximum aggregate sales charges of an investment company in a single complex, a class of shares issued by an investment company with multiple classes of shares or a separate series of a series investment company, may be increased to include sales of exchanged shares provided that such increase is deducted from the maximum aggregate sales charges of the investment company, class or series which redeemed the shares for the purpose of such exchanges.
      (E) No member shall offer or sell the shares of an investment company with an asset-based sales charge if:
      (i) The amount of the asset-based sales charge exceeds .75 of 1% per annum of the average annual net assets of the investment company.
      (ii) Any deferred sales charges deducted from the proceeds of a redemption after the maximum cap described in subparagraphs (2)(A), (B), (C) and (D) has been attained are not credited to the investment company.
      (3) No member or person associated with a member shall, either orally or in writing, describe an investment company as being "no load" or as having "no sales charge" if the investment company has a front-end or deferred sales charge or whose total charges against net assets to provide for sales related expenses and/or service fees exceed .25 of 1% of average net assets per annum.
      (4) No member or person associated with a member shall offer or sell the securities of an investment company with an asset-based sales charge unless its prospectus discloses that long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this section. Such disclosure shall be adjacent to the fee table in the front section of a prospectus.
      (5) No member or person associated with a member shall offer or sell the securities of an investment company if the service fees paid by the investment company, as disclosed in the prospectus, exceed .25 of 1% of its average annual net assets or if a service fee paid by the investment company, as disclosed in the prospectus, to any person who sells its shares exceeds .25 of 1% of the average annual net asset value of such shares.

    • 90-55 SIPC Trustee Appointed for Blinder, Robinson & Company, Inc.

      SUGGESTED ROUTING*

      Senior Management
      Municipal
      Operations
      Systems

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

      On August 1, 1990, the United States District Court for the District of Colorado appointed a SIPC trustee for:

      Blinder, Robinson & Company, Inc.
      6455 South Yosemite Street
      Englewood, Colorado 80111.

      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.

      Questions regarding the firm should be directed to the SIPC trustee:

      Glen E. Keller, Jr., Esquire
      Davis, Graham & Stubbs
      370 17th Street, Suite 4700
      Denver, Colorado 80202
      (303) 892-9400.

    • 90-54 NASDAQ National Market System (NASDAQ/NMS) Additions, Changes, and Deletions As of July 13, 1990

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading

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

      As of July 13, 1990, the following 19 issues joined NASDAQ/NMS, bringing the total number of issues to 2,645:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      CDRG

      Cedar Group, Inc.

      6/19/90

      1000

      CDRGW

      Cedar Group, Inc. (Wts)

      6/19/90

      1000

      EXCA

      Excalibur Technologies Corporation

      6/19/90

      1000

      VBMV

      Viejo Bancorp

      6/19/90

      500

      ZEOS

      Zeos International, Ltd.

      6/19/90

      1000

      SECF

      Security Financial Holding Company

      6/20/90

      500

      CFSB

      CFSB Bancorp, Inc.

      6/22/90

      1000

      AICP

      AlCorp, Inc.

      6/26/90

      1000

      ACAT

      Arctco, Inc.

      6/26/90

      1000

      JSBF

      JSB Financial, Inc.

      6/27/90

      1000

      CRII

      Crest Industries, Inc.

      6/29/90

      200

      HHRD

      Horsehead Resource Development Company, Inc.

      6/29/90

      1000

      SOSI

      Sundowner Offshore Services, Inc.

      6/29/90

      1000

      SWFT

      Swift Transportation Co., Inc.

      6/29/90

      1000

      VDMK

      Vidmark, Inc.

      6/29/90

      500

      ATTWZ

      Attwoods pic (Rts)

      7/3/90

      200

      ARTG

      Artistic Greetings, Incorporated

      7/3/90

      1000

      SHRT

      Shirt Shed, Inc. (The)

      7/3/90

      1000

      WTSLA

      Wet Seal, Inc. (The)(Cl A)

      7/3/90

      1000

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since June 14, 1990.

      New/Old Symbol

      New/Old Security

      Date of Change

      FASB/FASB

      First American Bancorp/First American Savings Bank, F.S.B.

      7/2/90

      AROW/AROW

      Arrow Financial Corporation/Arrow Bank Corporation

      7/3/90

      HCEN/FFAM

      Home Centers, Inc./First Family Group, Inc.

      7/3/90

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      MOBI

      Molecular Biosystems, Inc.

      6/19/90

      COBE

      Cobe Laboratories, Inc.

      6/20/90

      PROFE

      Professional Investors Insurance Group, Inc.

      6/20/90

      STRM

      Sturm, Ruger & Company, Inc.

      6/20/90

      VAGO

      Vanderbilt Gold Corporation

      6/20/90

      FBXCC

      FBX Corporation

      6/21/90

      FABKO

      First of America Bank Corporation (Ser D Pfd)

      6/21/90

      AKLMZ

      Acclaim Entertainment, Inc. (Wts)

      6/25/90

      OMCM

      Omnicom Group Inc.

      6/27/90

      ATEFQ

      Amertek, Inc.

      6/28/90

      CRNR

      Chronar Corp.

      6/28/90

      FABK

      First of America Bank Corporation

      6/29/90

      CCPT

      Concept, Inc.

      7/2/90

      MIHO

      M/I Schottenstein Homes, Inc.

      7/2/90

      UVTB

      United Vermont Bancorporation

      7/3/90

      ASIXW

      Assix International Inc. (Wts)

      7/5/90

      INTO

      Initio, Inc.

      7/5/90

      DAZXC

      Daisy Systems Corporation

      7/10/90

      PMSC

      Policy Management Systems Corporation

      7/10/90

      HFSLP

      Home Owners Savings Bank, F.S.B. (Pfd)

      7/11/90

      TIER

      Tierco Group, Inc. (The)

      7/12/90

      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.

    • 90-53 Labor Day: Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING*

      Internal Audit
      Legal & Compliance
      Operations
      Systems
      Municipal
      Syndicate
      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 3, 1990, 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*

      August 24

      August 31

      September 5

      27

      September 4

      6

      28

      5

      7

      29

      6

      10

      30

      7

      11

      31

      10

      12

      September 3

      Markets Closed

      4

      11

      13

      These settlement dates should be used by brokers, dealers, and municipal securities dealers 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)(l) 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)(l), 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."


    • 90-52 SEC Approval of Amendments to Article III, Sections 2 and 21 (c) of the Rules of Fair Practice Re: Customer Account Information

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Training

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

      EXECUTIVE SUMMARY

      The SEC has approved amendments to Article III, Sections 2 and 21 (c) of the Rules of Fair Practice ("Rules") to require NASD members to make reasonable efforts to obtain additional information pertaining to customer accounts. In the case of noninstitutional accounts, the amendment to Section 21 (c) requires NASD members to make reasonable efforts to obtain the necessary additional information prior to the settlement of the initial transaction in the account, including discretionary and corporate accounts. Existing requirements regarding institutional accounts are retained, and the new rule also requires that the names of any persons authorized to transact business on behalf of the entities should be obtained, if the customer is a corporation, partnership, or other legal entity.

      The amendment to Section 2 requires NASD members to make reasonable efforts to obtain the additional information prior to the execution of a transaction recommended to a noninstitutional customer.

      Both amendments exclude transactions and accounts when the investments are limited to money market mutual funds. These new requirements will apply to accounts opened, and recommendations made, after the effective date of January 1, 1991. The text of each amendment follows this notice.

      BACKGROUND AND SUMMARY OF AMENDMENTS

      On May 2, 1990, the SEC approved an NASD rule change that requires NASD members to make reasonable efforts to obtain additional information pertaining to customer accounts.1

      Pursuant to existing Article III, Section 21(c) of the Rules, the accounts of all customers are required to be maintained in such form and manner as to show name; address; age; signatures of the introducing representative and member, partner, officer, or manager accepting the account for the member; and a customer's association with or employment by another member. In discretionary accounts, the customer's occupation must be noted, along with the signature of each person authorized to exercise discretion in such account. When recommending to a customer the purchase, sale, or exchange of any security, Article III, Section 2 currently requires that a member have reasonable grounds for believing that the recommendation is suitable for the customer on the basis of any facts disclosed by the customer about his other security holdings, financial situation, and needs.

      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 to the above-listed information currently required to be obtained. Furthermore, if the customer is a corporation, partnership, or other entity, the member also must obtain the names of any persons authorized to transact business on behalf of such entity. For discretionary accounts, the member is required to obtain the signature of each person authorized to exercise discretion in the account and the date such discretion is granted.

      Amended Section 2 provides that, prior to the execution of a transaction recommended to a noninstitutional customer, a member must make reasonable efforts to obtain information concerning that customer's financial status, tax status, investment objectives, and such other information used or considered to be reasonable and necessary by the member or registered representative in making recommendations to the customer.

      Both amendments exclude transactions and accounts in which investments are limited to money market mutual funds.

      The NASD believes the amendments to Article III, Sections 2 and 21(c) of the Rules will provide extra protection for both customers and firms since the additional information obtained will permit more informed determinations as to customer accounts and investment recommendations. The requirement of "reasonable effort" can be met by prepared questionnaires for customers to complete and return or by telephone inquiry. It is not necessary to obtain a written statement from a customer in each instance in order to be in compliance with the rule.

      The NASD also believes that the requirement of Section 21(c) that information be obtained prior to the settlement of the initial transaction, and of Section 2 that information be obtained prior to the execution of a transaction recommended to a noninstitutional customer, will allow some freedom in opening new accounts. Moreover, it may be advisable for members to keep a record of efforts they have made to obtain a customer's tax identification or Social Security number, as required by Section 103.35, Part 103 of Title 31 of the Code of Federal Regulations adopted by the Treasury Department, effective June 1972.

      The new requirements will apply to accounts opened, and recommendations made, after the effective date of January 1, 1991.

      TEXT OF AMENDMENT TO ARTICLE III, SECTION 2 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New language is underlined.)

      Recommendation to Customers

      Sec. 2.(a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.

      (b) Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:
      (i) the customer's financial status;
      (ii) the customer's tax status;
      (iii) the customer's investment objectives; and
      (iv) such other information used or considered to be reasonable and necessary by such member or registered representative in making recommendations to the customer.

      TEXT OF AMENDMENT TO ARTICLE III, SECTION 21(c) OF THE NASD RULES OF FAIR PRACTICE

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

      Books and Records

      Sec. 21.

      * * * * *

      [Information on accounts

      (c) Each member shall maintain accounts of customers in such form and manner as to show the following information: name, address, and whether the customer is legally of age; the signature of the registered representative introducing the account and the signature of the member or the partner, officer, or manager accepting the account for the member. If the customer is associated with or employed by another member, this fact must be noted. In discretionary accounts, the member shall also record the age or approximate age and occupation of the customer as well as the signature of each person authorized to exercise discretion in such account.]

      Customer Account Information

      (c) Each member shall maintain accounts opened after January 1, 1991 as follows:
      (1) for each account, each member shall maintain the following information:
      (i) customer's name and residence;
      (ii) whether customer is of legal age,
      (iii) signature of the registered representative introducing the account and signature of the member or partner, officer, or manager who accepts the account; and
      (iv) if the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity:
      (2) for each account other than an institutional account, and accounts in which investments are limited to transactions in money market funds, each member shall also make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, the following information to the extent it is applicable to the account:
      (i) customer's tax identification or Social Security number;
      (ii) occupation of customer and name and address of employer; and
      (iii) whether customer is an associated person of another member; and
      (3) for discretionary accounts, in addition to compliance with subsections (1) and (2) above, and Article III, Section 15(b) of these rules, the member shall:
      (i) obtain the signature of each person authorized to exercise discretion in the account; and
      (ii) record the date such discretion is granted.
      (4) For purposes of this section and Article III, Section 2, the term "institutional account" shall mean the account of:
      (i) a bank, savings and loan association, insurance company, or registered investment company;
      (ii) an investment adviser registered under Section 203 of the Investment Advisers Act of 1940; or
      (iii) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.

      1See Release No. 34-27982 (May 2, 1990), 55 FR 19402 (May 9, 1990).


    • 90-51 SEC Approval of Amendment to Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities

      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 has approved an amendment to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities which provides, with certain exceptions, that no member shall effect a short sale for its own account in any security unless the member makes an affirmative determination that it can borrow the securities or otherwise provide for their delivery by settlement date. This requirement will become effective September 1, 1990. The text of the new rule follows this notice.

      SUMMARY OF NEW PROVISIONS

      On July 5, 1990, the Securities and Exchange Commission (SEC) approved NASD Rule Filing 89-5, which adds new Section 2(b) to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities.

      This provision will require that no NASD member effect a short sale for its own account in any security unless the member makes an affirmative determination that it can borrow the securities or otherwise provide for their delivery by settlement date.

      The rule includes exemptions for transactions: (1) in corporate debt securities, (2) for bona fide market-making transactions by a member in NASDAQ securities for which it is a registered market maker and in non-NASDAQ securities for which it publishes a two-sided quotation in an independent quotation medium, and (3) for transactions that result in fully hedged or arbitraged positions.

      The rule, as originally filed with the Commission, did not include the exception for market-making transactions in non-NASDAQ securities. As a result of comments received by the Commission when it published the rule proposal, the NASD Board reconsidered the issue and added the exclusion for non-NASDAQ securities for which a member publishes two-sided quotations.

      In its order approving the rule change, the SEC expressed the expectation that the NASD will develop enforcement mechanisms to ensure compliance with the rule by member firms and, in particular, the expectation that the NASD will monitor closely the use of the exemption for bona fide market-making transactions as it applies to both NASDAQ and non-NASDAQ securities.

      The Commission is requiring the NASD to report back in one year on the effectiveness of the new requirements.

      TEXT OF PROPOSED RULE CHANGE

      The National Association of Securities Dealers, Inc. (NASD) is amending SR-NASD-89-5 to revise the text of the proposed rule change and its statement of the purpose of, and statutory basis for, the proposed rule change. The following is the full text of the proposed amendment to the Interpretation, as revised.

      (Note: New language is underlined.)

      Article III, Section 1 of the NASD Rules of Fair Practice

      INTERPRETATION OF THE BOARD OF GOVERNORS ON PROMPT RECEIPT AND DELIVERY OF SECURITIES

      * * * * *

      (2) "Short" Sales
      (a) No member or person associated with a member shall accept a "short" sale order for any customer in any security unless the member makes an affirmative determination that it will receive delivery of the security from the customer or that it can borrow the security on behalf of the customer for delivery by settlement date. This requirement shall not apply, however, to transactions in corporate debt securities.
      (b) No member shall effect a "short" sale for its own account in any security unless the member makes an affirmative determination that it can borrow the securities or otherwise provide for delivery of the securities by the settlement date. This requirement will not apply to transactions in corporate debt securities, to bona fide market making transactions by a member in securities in which it is registered as a NASDAQ market maker, to bona fide market maker transactions in non-NASDAQ securities in which the market maker publishes a two-sided quotation to an independent quotation medium, or to transactions which result in fully hedged or arbitraged positions.

    • 90-50 Proposed Amendment to Article III, Section 28 of the Rules of Fair Practice Re: Associated Person Notifying and Obtaining Approval of Employer Prior to Opening Securities Account With Another Member; Last Date for Comment: September 4, 1990

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      Registration

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

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on proposed amendments to Article III, Section 28 of the NASD Rules of Fair Practice that will require an associated person to notify the executing member in writing of the employment relationship that exists with the employing member, and to notify and receive approval from the employing member prior to opening an account or transacting business with the executing member.

      BACKGROUND

      Article III, Section 28(c) now requires a registered representative, prior to 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 does not, however, require the notice to be in writing. In addition, there is no specific provision in the Association's Rules of Fair Practice that require the registered representative to inform his/her employing member that he/she is executing trades through another firm.1 The rule, as currently structured, places the burden upon the executing member to notify the employing member and to provide duplicate confirmations or such other information as the employing member may require. Currently, many, but not all, firms have internal compliance procedures requiring that notice be given to the employer. If such notification was required, the Board of Governors believes that notification may allow member firms to more directly detect the existence of possible rule violations, including potential insider trading by associated persons.

      The proposed rule change provides that an associated person shall be required to (1) provide written notice to and obtain approval from his/her employer prior to opening or trading in a securities account with another member, and (2) provide notice in writing to the executing member of his/her association with the employing member.

      The NASD Board of Governors believes the proposed rule amendments will provide additional assurances that the registered representative, the employing member firm, and the executing member firm have satisfied their respective obligations under the federal securities laws and the Rules of Fair Practice. The amendments also would, among other things, prevent instances where trades may be made on inside information because the employing member was not aware of the existence of the account with another member, the Board feels.

      The Board of Governors asks all members and interested persons to comment on this proposed amendment. Comments should be directed to:

      Mr. Lynn Nellius, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Questions concerning this notice may be directed to T. Grant Gallery, Vice President and Deputy General Counsel, or Maureen Eisenberg, Attorney, Office of General Counsel, at (202) 728-8285 or (202) 728-8245, respectively.

      Comments must be received no later than September 4, 1990. Changes to the NASD Rules of Fair Practice must be approved by the Board of Governors and by a vote of the membership and filed with and approved by the SEC before becoming effective.

      PROPOSED SECTION 28 TO ARTICLE III OF THE NASD RULES OF FAIR PRACTICE

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

      Sec. 28. Transactions for or by Associated Persons

      * * * * *

      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 order for the purchase or sale of securities with another member, shall notify the employer member and obtain the approval of that member; in addition he or she shall notify the executing member, in writing, of his or her association with the employer 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 and obtain the necessary approval promptly after becoming so associated.

      1The 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.


    • 90-49 SIPC Trustee Appointed for First Ohio Securities Company

      SUGGESTED ROUTING*

      Senior Management
      Municipal
      Operations
      Systems

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

      On June 22, 1990, the United States District Court for the Northern District of Ohio appointed a SIPC trustee for:

      First Ohio Securities Company
      Two Park Plaza
      1111 Chester Avenue
      Cleveland, OH 44114.

      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.

      Questions regarding the firm should be directed to the SIPC trustee:

      Joseph Patchan, Esquire
      Baker & Hostetler
      3200 National City Center
      Cleveland, OH 44114
      (216) 621-0200.

    • 90-48 NASDAQ National Market System (NASDAQ/NMS) Additions, Changes, and Deletions As of June 14, 1990

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading

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

      As of June 14, 1990, the following 30 issues joined NASDAQ/NMS, bringing the total number of issues to 2,647:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      IWSI

      Integrated Waste Services, Inc.

      5/14/90

      1000

      BART

      Barton Industries, Inc.

      5/15/90

      1000

      CYNR

      Canyon Resources Corporation

      5/15/90

      1000

      LWNGF

      Loewen Group Inc. (The)

      5/15/90

      500

      MAMS

      Mid Atlantic Medical Services, Inc.

      5/15/90

      1000

      MFRI

      Midwesco Filter Resources, Inc.

      5/15/90

      1000

      CHOS

      Columbia Hospital Corporation

      5/17/90

      1000

      GBSI

      Gwinnett Bancshares, Inc.

      5/17/90

      500

      MAWS

      Mid-American Waste Systems, Inc.

      5/18/90

      1000

      PENV

      Pinnacle Environmental, Inc.

      5/18/90

      1000

      HINF

      Healthlnfusion, Inc.

      5/23/90

      1000

      JAVA

      Mr. Coffee, inc.

      5/31/90

      1000

      PFBC

      Pioneer Fed BanCorp, Inc.

      6/4/90

      1000

      BRINV

      Broadcast International, Inc. (WI)

      6/5/90

      1000

      DRRC

      Doctors Rehabilitation Corporation of America

      6/5/90

      1000

      FBTC

      FB&T Corporation

      6/5/90

      200

      FLCP

      Falcon Products, Inc.

      6/5/90

      500

      FLER

      Fleer Corporation

      6/5/90

      1000

      GNSA

      Gensia Pharmaceuticals, Inc.

      6/5/90

      1000

      KSWS

      K-Swiss Inc. (Cl A)

      6/5/90

      500

      KOIL

      Kelley Oil Corporation

      6/5/90

      500

      SHOE

      Millfeld Trading Co., Inc.

      6/5/90

      1000

      SECD

      Second Bancorp, Incorporated

      6/5/90

      200

      BEAM

      Summit Technology, Inc.

      6/5/90

      1000

      TWIN

      Twin Star Productions, Inc.

      6/5/90

      1000

      WCHI

      Workingmens Capital Holdings, Inc.

      6/7/90

      500

      DGTL

      Digital Systems International, Inc.

      6/8/90

      500

      NSCC

      NSC Corporation

      6/12/90

      1000

      XLNX

      Xilinx, Inc.

      6/12/90

      1000

      ECCB

      Ellwood Federal Savings Bank

      6/13/90

      500

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since May 14, 1990.

      New/Old Symbol

      New/Old Security

      Date of Change

      BRCP/CRNS

      Business Records Corporation Holding Company/Cronus Industries, Inc.

      5/16/90

      CVAL/FIRF

      Chester Valley Bancorp/First Financial Savings Association

      5/21/90

      AEGSY/WCRSY

      Aegis Group PLC/WCRS Group PLC (The)

      5/21/90

      HICI/KDNY

      Home Intensive Care, Inc./Home Intensive Care, Inc.

      5/21/90

      BIRD/BIRD

      Bird Corporation/Bird Inc.

      5/25/90

      MOGN/MOGN

      MGIPHARMA, Inc./Molecular Genetics, Inc.

      5/29/90

      CEBC/VWBN

      Centennial Bancorp/Valley West Bancorp

      5/30/90

      NCCB/ALBC

      Northern California Community Bancorporation, Inc./Alameda Bancorporation, Inc.

      6/1/90

      PULS/PULS

      Pulse Bancorp, Inc./Pulawski Savings & Loan Association

      6/1/90

      PORT/CRAB

      Bayport Restaurant Group Inc./Capt. Crab, Inc.

      6/4/90

      FFKY/FFKY

      First Federal Financial Corporation of Kentucky/First Federal Savings Bank of Elizabethtown

      6/4/90

      FCOB/FCOB

      First Commercial Bancorp, Inc./First Commercial Bancorp

      6/11/90

      DOMZ/DOMZ

      Dominguez Services Corp./Dominguez Water Corp.

      6/14/90

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      PFSI

      Pioneer Financial Services, Inc.

      5/16/90

      PFSIP

      Pioneer Financial Services, Inc. (Pfd)

      5/16/90

      CTWLE

      Chartwell Group Ltd.

      5/17/90

      CTYN

      City National Corporation

      5/17/90

      FEXCZ

      First Executive Corporation (10-9-92 Wts)

      5/17/90

      SHCO

      Schult Homes Corporation

      5/17/90

      SMLB

      Smith Laboratories, Inc.

      5/17/90

      DEAL

      Dial REIT, Inc.

      5/18/90

      JERR

      Jerrico, Inc.

      5/21/90

      ALLPW

      Alliance Pharmaceutical Corp. (Wts)

      5/22/90

      NEEC

      NEECO, Inc.

      5/23/90

      CTYFE

      CityFed Financial Corp.

      5/29/90

      CTYOE

      CityFed Finanical Corp. (Ser. B Pfd)

      5/29/90

      CSYSC

      Central Banking System, Inc.

      5/30/90

      POWR

      Environmental Power Corporation

      5/30/90

      HOMEQ

      International American Homes, Inc.

      5/30/90

      LLOG

      Lincoln Logs, Ltd.

      5/30/90

      MCBKA

      Merchants Capital Corp. (Cl A)

      5/30/90

      NTLQE

      National Lumber & Supply, Inc.

      5/30/90

      SSOA

      Software Services of America, Inc.

      5/30/90

      SEQP

      Supreme Equipment & Systems Corp.

      5/30/90

      CNBT

      Community National Bancorp, Inc.

      5/31/90

      APIOE

      American Pioneer, Inc.

      6/1/90

      SYST

      Systematics, Inc.

      6/1/90

      CLRXR

      Colorocs Corporation (Rts)

      6/4/90

      UNFI

      Unifi, Inc.

      6/6/90

      TOOL

      Easco Hand Tools, Inc.

      6/8/90

      GAMA

      Gamma Biologicals, Inc.

      6/8/90

      SUMA

      Summa Medical Corporation

      6/13/90

      ALCCC

      ALC Communications Corporation

      6/14/90

      ALTS

      Altus Bank, A Federal Savings Bank

      6/14/90

      AMCO

      American Midland Corporation

      6/14/90

      ACOM

      Astrocom Corporation

      6/14/90

      BNBGA

      Bull & Bear Group, Inc. (Cl A)

      6/14/90

      CMLQE

      Casual Male Corporation (The)

      6/14/90

      FINX

      Fingermatrix, Inc.

      6/14/90

      JHSN

      Johnson Electronics, Inc.

      6/14/90

      RHCC

      Rocking Horse Child Care Centers of America, Inc. (The)

      6/14/90

      SHBS

      ShareBase Corporation

      6/14/90

      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.

    • 90-47 Amendments to Code of Arbitration Procedure

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Training

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) has approved amendments to Part III, Sections 13, 30, 43, and 44 of the NASD Code of Arbitration Procedure that are intended to discourage successive adjournments of arbitration hearings and that modify the procedures and schedules under which fees are assessed for the use of NASD arbitration facilities. The new fee and deposit schedules will be applied in all cases filed on or after June 18, 1990, as well as in all cases where a notice of prehearing conference or notice of hearing is issued on or after June 18, 1990. The new fee and deposit schedules will not be applied to cases currently in process where a notice of prehearing conference or a notice of hearing dated prior to June 18, 1990, has been issued. In order to encourage settlement discussions well in advance of hearings or prehearing conferences, the NASD intends to apply the provisions of new sections 43(f) and 44(1) to all applicable cases whether currently pending or newly filed.

      The text of the amendments follows this notice.

      BACKGROUND AND EXPLANATION

      On September 19, 1989, following favorable recommendation by the NASD's National Arbitration Committee, the Association's Board of Governors authorized the filing of amendments to the Association's Code of Arbitration Procedure ("Code") that would have increased arbitration fees under the pre-existing administrative framework set forth in the Code. While the Association filed, these amendments with the SEC on October 12, 1989, the NASD withdrew the amendments at the request of the SEC staff on October 17, 1989, and began considering an alternative administrative framework for the assessment of fees in NASD arbitration proceedings.

      The NASD received SEC staff comment dated March 8, 1990, and there was also substantial progress toward the development of a proposed uniform rule increasing fees and incorporating the alternative administrative framework for the assessment of fees in arbitration proceedings involving customers by a Drafting Subcommittee of the Securities Industry Conference on Arbitration. Following that, the NASD filed with the SEC amendments to Sections 13, 30, 43, and 44 of the NASD Code of Arbitration Procedure. Following the solicitation of public comment (55 Federal Register 15048, April 20, 1990), the SEC approved the Association's amendments on June 1, 1990 (55 Federal Register 23493, June 8, 1990). In general, the proposed rule changes are intended to discourage successive adjournments of arbitration hearings and to implement revised procedures and schedules for the assessment of fees in arbitrations brought by or against customers as well as in intraindustry arbitrations.

      An amendment to Section 30 of the Code is expected to reduce delays by discouraging frivolous requests for adjournments in the arbitration process. The amendment raises the adjournment fee assessed following the grant of a first request for adjournment from $100 to an amount equal to the initial hearing session deposit required pursuant to the new fee schedules set forth in Sections 43 and 44 of the Code. The adjournment fee for second and subsequent adjournments requested by the same party will be twice the initial hearing session deposit, but such fee may not exceed $1,000. In the event that a third request for adjournment is received to which all parties have consented, the arbitrators will be empowered to dismiss the arbitration without prejudice to the claimant's filing of a new arbitration action.

      In amending Sections 13, 43, and 44 of the Code, the NASD has adopted a revised administrative framework for the assessment of fees based on the establishment of a nonrefundable filing fee plus forum fees assessable based on the number of hearing sessions held, in amounts varying in accordance with the amount in dispute. The non-refundable filing fee, which is intended to recoup certain fixed administrative costs related to each filing, is distinguishable from the hearing session deposit, which is intended to relate to hearing costs, not the administrative costs connected with the processing of filings. These filing fees, which are analogous to court filing fees, are intended to offset some of the NASD's costs of administration, at least to a limited degree, even when cases settle prior to hearing.

      Revised Sections 43(f) and 44(f) of the Code provide for, in addition to retention of all nonrefundable fees, the retention of the total initial amount deposited as hearing session deposits by all of the parties if a case, including a case filed under customer-simplified procedures, is settled or withdrawn within eight business days of the first scheduled hearing session. A prehearing conference with an arbitrator is not considered a scheduled hearing session under these sections.

      The new fee and deposit schedules will be applied in all cases filed on or after June 18, 1990, as well as in all cases where a notice of prehearing conference or notice of hearing dated prior to June 18, 1990, has been issued. The new fee and deposit schedules will not be applied to cases currently in process where a notice of prehearing conference or a notice of hearing has been or will have been sent to the parties prior to June 18, 1990. In order to encourage settlement discussions well in advance of hearings or prehearing conferences, the NASD intends to apply the provisions of new sections 43(f) and 44(f) to all applicable cases, whether currently pending or newly filed. The text of the amendments follows this notice.

      Questions can be directed to Kenneth A. Andrichik, Deputy Director, Arbitration, at (212) 858-3915, or Norman Sue, Jr., Assistant General Counsel, NASD Office of General Counsel, at (202) 728-8117.

      AMENDMENTS TO THE NASD CODE OF ARBITRATION PROCEDURE

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

      CODE OF ARBITRATION PROCEDURE

      * * * * *

      PART III. UNIFORM CODE OF ARBITRATION

      * * * * *

      SIMPLIFIED ARBITRATION

      * * * * *

      Section 13.

      (a) No change.
      (b) No change.
      (c) The Claimant shall pay a non-refundable filing fee and shall remit a hearing session deposit [$15.00 if the amount in controversy is $1,000 or less, $25.00 if the amount is more than $1,000 but does not exceed $2,500, $100 if the amount in controversy is more than $2,500 but does not exceed $5,000, or $200 if the amount in controversy is more than $5,000 but does not exceed $10,000] as specified in Section 43 of this Code upon filing of the Submission Agreement. The final disposition of [this] the fee or deposit shall be determined by the arbitrator.
      (d) The Director of Arbitration shall endeavor to serve promptly by mail or otherwise on the Respondent(s) one (1) copy of the Submission Agreement and one (1) copy of the Statement of Claim. Within twenty (20) calendar days from receipt of the Statement of Claim, Respondent(s) shall serve each party with an executed Subcommission Agreement and a copy of Respondent's Answer. Respondent's executed Submission Agreement and Answer shall also be filed with the Director of Arbitration with sufficient additional copies for the arbitrator(s) along with any deposit required under the schedule of fees for customer disputes. The Answer shall designate all available defenses to the Claim and may set forth any related Counterclaim and/or related Third Party Claim the Respondent(s) may have against the Claimant or any other person. If the Respondent(s) has interposed a Third Party Claim, the Respondent(s) shall serve the Third Party Respondent with an executed Submission Agreement, a copy of Respondent's Answer containing the Third Party Claim, and a copy of the original Claim filed by the Claimant. The Third Party Respondent shall respond in the manner herein provided for response to the Claim. If the Respondent(s) files a related Counterclaim exceeding $10,000, the arbitrator may refer the Claim, Counterclaim and/or Third Party Claim, if any, to a panel of three (3) or five (5) arbitrators in accordance with Section 19 of this Code or, he may dismiss the Counterclaim and/or Third Party Claim without prejudice to the Counterclaimant(s) and/or Third Party Claimant(s) pursuing the Counterclaim and/or Third Party Claim in a separate proceeding. The costs to the Claimant under either proceeding shall in no event exceed [$200.00.] the total amount specified in Section 43.

      * * * * *

      Adjournments

      Section 30. (a) The arbitrator(s) may, in their discretion, adjourn any hearing(s) either upon their own initiative or upon the request of any party to the arbitration.

      (b) A party requesting an adjournment after arbitrators have been appointed[,] shall, if an [said] adjournment is granted, [shall pay] deposit a fee, equal to the initial deposit [of costs but not more than $100.] of hearing session fees for the first adjournment and twice the initial deposit of hearing session fees, not to exceed $1,000, for a second or subsequent adjournment requested by that party. The arbitrator(s) may waive the deposit of this fee or in their award may direct the return of the adjournment fee. [This provision shall not apply to matters filed under Section 13 of the Code.]
      (c) Upon receiving a third request consented to by all parties for an adjournment, the arbitrator(s) may dismiss the arbitration without prejudice to the Claimant filing a new arbitration.

      * * * * *

      Schedule of Fees for Customer Disputes

      * * * * *

      Section 43. (a) At the time of filing a Claim, Counterclaim, Third Party Claim or Cross-Claim, a party shall [deposit with] pay a non-refundable filing fee and shall remit a hearing session deposit to the Association in the amounts indicated in the schedules below unless such fee or deposit is specifically waived by the Director of Arbitration.

      [Amount in Dispute

      Deposit

      (Exclusive of interest and expenses)

      $1,000 or less

      $15

      Above $1,000 but not exceeding $2,500

      $25

      Above $2,500 but not exceeding $5,000

      $100

      Above $5,000 but not exceeding $10,000

      $200

      Above $10,000 but not exceeding $50,000

      $400

      Above $50,000 but not exceeding $100,000

      $500

      Above $100,000 but not exceeding $500,000

      $750

      Above $500,000

      $1,000]

      Where [the amount in dispute is $10,000 or less, no additional deposits shall be required despite the number of hearing sessions. Where the amount in dispute is above $10,000 and] multiple hearing sessions are required, the arbitrators may require any of the parties to make additional hearing deposits for each additional hearing session. In no event shall the [aggregate] amount deposited by all parties per hearing session exceed the amount of the largest initial hearing deposit[(s)] made by any party under [as set forth in] the [above] schedules below.

      (b) A hearing session is any meeting between the parties and the arbitrator(s), including a pre-hearing conference with an arbitrator, which lasts four (4) hours or less. The forum fee for a pre-hearing conference with an arbitrator shall be the amount set forth in the schedules below as a hearing session deposit for a hearing with a single arbitrator.
      (c) The arbitrators, in their awards, [may] shall determine the amount chargeable to the parties as forum fees [(fees)] and shall determine [by whom such fees shall be borne] who shall pay such forum fees. [Where the amount in dispute is $10,000 or less, total fees chargeable to the parties shall not exceed the amount of the total initial deposit deposited by the parties, regardless of the number of hearing sessions conducted. Where the amount in dispute is above $10,000, total] Forum fees chargeable to the parties shall be assessed on a per hearing session basis, and the aggregate for each hearing session [to the parties] may equal but shall not exceed the amount of the [total] largest initial hearing deposit[(s)] deposited by [the parties.] any party, except in a case where claims have been joined subsequent to filing in which case hearing session fees shall be computed as provided in para graph (d). The arbitrator(s) may determine in the award that a party shall reimburse to another party any non-refundable filing fee it has paid. If a customer is assessed forum fees in connection with an industry claim, forum fees assessed against the customer shall be based on the hearing deposit required under the industry claims schedule for the amount awarded to industry parties to be paid by the customer and not based on the size of the industry claim. No fees shall be assessed against a customer in connection with an industry claim that is dismissed; however, in cases where there is also a customer claim, the customer may be assessed forum fees based on the customer claim under the procedure set out above. Amounts deposited by a party shall be applied against forum fees, if any. [If the fees are not assessed against a party who had made a deposit, the deposit will be refunded.] In addition to forum fees, the arbitrator(s) may determine in the[ir] award[s] the amount of costs incurred pursuant to Sections 30, 32, 33, and 37 and, unless applicable law directs otherwise, other costs and expenses of the parties and arbitrator(s) which [that] are within the scope of the agreement of the parties. [or otherwise as permitted by law.] The arbitrator(s) shall determine by whom such costs shall be borne. If the hearing session fees are not assessed against a party who had made a hearing deposit, the hearing deposit will be refunded unless the arbitrators determine otherwise.
      (d) For claims filed separately which are subsequently joined or consolidated under Section 25(d) of this Code, the hearing deposit and forum fees assessable per hearing session after joinder or consolidation shall be based on the cumulative amount in dispute. The arbitrator(s) shall determine by whom such fees shall be borne.
      [(d)] (e) If the dispute, claim, or controversy does not involve, [or] disclose, or specify a money claim, the non-refundable filing fee [amount to be deposited by the Claimant shall] shall be [$200,] $250 and the hearing session deposit to be remitted by a party shall be $600 or such greater or lesser amount as the Director of Arbitration or the panel of arbitrators may require, but shall not exceed $1,000.
      [(e)] (f) If a matter has been submitted and thereafter is settled or withdrawn prior to the commencement of the first hearing session, the parties shall be entitled to a refund of all but $100 of the amount deposited with the Association. This section shall not apply to claims filed under Section 13 of this Code.] The Association shall retain the total initial amount deposited as hearing session deposits by all the parties in any matter submitted and settled or withdrawn within eight business days of the first scheduled hearing session other than a pre-hearing conference.
      [(f)] (g) Any matter submitted and thereafter settled or withdrawn subsequent to the commencement of the first hearing session, including a pre-hearing conference with an arbitrator, shall [may] be subject to [such refund of assessed deposits, if any, as the panel of arbitrators presiding may determine.] an assessment of forum fees and costs incurred pursuant to Sections 30, 32, 33, and 37 based on hearing sessions held and scheduled within eight business days after the Association receives notice that the matter has been settled or withdrawn. The arbitrator(s) shall determine by whom such forum fees and costs shall be borne.
      [(g) The arbitrators may assess forum fees and costs incurred pursuant to Section 30, 31, 33, and 37 in any matter settled or withdrawn subsequent to the commencement of the first hearing session.]

      Schedule of Fees

      For purposes of the schedule of fees, the term "claim" includes Claims, Counterclaims, Third Party Claims, and Cross-Claims. Any such claim made by a customer is a customer claim. Any such claim made by a member or associated person of a member is an industry claim.

      Customer Claimant

      (Note: See chart on page 266 of this notice.)

      Industry Claimant

      (Note: See chart on page 267 of this notice.)

      * * * * *

      [Filing Fee for Members

      Section 44. A member firm shall, when filing a Submission Agreement against a non-member, pay a non-refundable filing fee of $500.00. This fee shall be in addition to all other fees, deposits, or costs which may be required.]

      * * * * *

      Schedule of Fees for Industry and Clearing Controversies

      Section [45.] 44. (a) At the time of filing a [Submission Agreement, a Claimant] Claim, Counterclaim, Third-Party Claim or Cross-Claim in an industry or clearing controversy which is required to be submitted to arbitration before the Association as set forth in Section 8, above, a party shall [deposit with] pay a non-refundable filing fee and shall remit a hearing session deposit to the Association in the amounts indicated in the schedule below unless such fee or deposit is specifically waived by the Director of Arbitration.

      [Amount in Dispute

      Deposit
      (Exclusive of interest and expenses)
      $10,000 or less $200
      Above $10,000 but less than $100,000 $750
      Above $100,000 $1,000]

      Where [the amount in dispute is $10,000 or less, no additional deposits shall be required despite the number of hearing sessions. Where the amount in dispute is above $10,000 and] multiple hearing sessions are required, the arbitrator(s) may require any of the parties to make additional hearing deposits for each additional hearing session. In no event shall the [aggregate] amount deposited by all parties per hearing session exceed the amount of the largest initial hearing deposit[(s)] made by any party [as set forth in the above] under the schedule below.

      (b) A hearing session is any meeting between the parties and the arbitrator(s), including a pre-hearing conference with an arbitrator, which lasts four (4) hours or less. The forum fee for a pre-hearing conference with an arbitrator shall be the amount set forth in the schedule below as a hearing session deposit for a hearing with a single arbitrator.
      (c) The arbitrators, in their award[s], [may] shall determine the amount chargeable to the parties as forum fees [(fees)] and shall determine [by whom such fees shall be borne] who shall pay such forum fees. [Where the amount in dispute is $10,000 or less, total fees chargeable to the parties shall not exceed the amount of the total initial deposit deposited by the parties regardless of the number of hearing sessions conducted. Where the amount in dispute is above $10,000,] Forum [total] fees chargeable to the parties shall be assessed on a per hearing session basis and the aggregate for each hearing session may equal but shall not exceed the amount of the largest [total] initial hearing deposit[(s)] deposited by [the parties.] any party, except in a case where claims have been joined sub sequent to filing in which case hearing session fees shall be computed as provided in paragraph (d). The arbitrator(s) may determine in the award that a party shall reimburse to another party any non-refundable filing fee it has paid. Amounts deposited by a party shall be applied against forum fees, if any. [If the fees are not assessed against a party who had made a deposit, the deposit will be refunded.] In addition to forum fees, the arbitrator(s) may determine in the[ir] award the amount of costs incurred pursuant to Sections 30, 32, 33, [or] and 37 and, unless applicable law directs otherwise, other costs and expenses of the parties and arbitrator(s) which are within the scope of the agreement of the parties. The arbitrator(s) shall determine by whom such costs shall be borne. If the hearing session fees are not assessed against a party who had made a hearing deposit, the hearing deposit will be refunded unless the arbitrators determine otherwise.
      (d) For claims filed separately which are subsequently joined or consolidated under Section 25(d) of this Code, the hearing deposit and forum fees assessable per hearing session after joinder or consolidation shall be based on the cumulative amount in dispute. The arbitrators) shall determine by whom such fees shall be borne.
      [(d)](e) If the dispute, claim, or controversy does not involve, [or] disclose or specify a money claim[,] the non-refundable filing fee will be $250 and the hearing session deposit [the amount] to be deposited by [the Claimant] a party shall be [$200] $600, or such greater or lesser amount as the Director of Arbitration or the panel of arbitrators may require, but shall not exceed $1,000.
      [(e)](f) [If a matter has been submitted and thereafter is settled or withdrawn prior to the commencement of the first hearing session, the parties shall be entitled to a refund of all but $125 of the amount deposited with the Association.] The Association shall retain the total initial amount deposited as hearing session deposits by all the parties in any matter submitted and settled or withdrawn within eight business days of the first scheduled hearing session other than a pre-hearing conference.
      [(f)](g) Any matter submitted and thereafter settled or withdrawn subsequent to the commencement of the the first hearing session, including a pre-hearing conference with an arbitrator, shall [may] be subject to [such refund of assessed deposits, if any, as the panel or arbitrators presiding may determine.] an assessment of forum fees and costs incurred pursuant to Sections 30, 32, 33, and 37 based on hearing sessions held and scheduled within eight business days after the Association receives notice that the matter has been settled or withdrawn. The arbitrator(s) shall determine by whom such fees and costs shall be borne.
      [(g) The arbitrator(s) may assess forum fees and costs incurred pursuant to Section 30, 32, 33, and 37 in any matter settled or withdrawn subsequent to the commencement of the first hearing session.]
      (h) In each industry or clearing controversy [that] which is required to be submitted to arbitration before the Association as set forth in Section 8, above, requiring expedited hearings, a non-refundable surcharge of $2,500 shall be paid by all Claimants, collectively, and a non-refundable surcharge of $2,500 shall be paid by all Respondents, collectively. These surcharge fees shall be in addition to all other non-refundable filing fees, hearing deposits, or costs which may be required.

      (Note: See chart on page 267 of this notice.)

      (Note: Taken from Section 43 on page 265 of this notice.)

      Customer Claimant

      Amount in Dispute

      Claim Filing Fee

      Hearing Session Deposit

      (Exclusive of Interest and Expenses)

      Simplified1

      One Arbitrator2

      Three+ Arbitrators3

      $.01-$1,000

      $15

      $15

      $15

      NA

      $1000.01-$2,500

      $25

      $25

      $25

      NA

      $2,500.01-$5,000

      $50

      $75

      $100

      NA

      $5,000.01-$10,000

      $75

      $75

      $200

      NA

      $10,000.01-$30,000

      $100

      NA

      $300

      $400

      $30,000.01-$50,000

      $120

      NA

      $3004

      $400

      $50,000.01-$100,000

      $150

      NA

      $3004

      $500

      $100,000.01-$500,000

      $200

      NA

      $3004

      $750

      $500,000.01-$5,000,000

      $250

      NA

      $3004

      $1,000

      Over $5,000,000

      $300

      NA

      $3004

      $1,500


      1Simplified Arbitration (Without Hearing)

      2One Arbitrator (Per Hearing Session)

      3Three or More Arbitrators (Per Hearing Session')

      4Prehearing Conferences Only

      (Note: Taken from Section 43 on page 265 of this notice.)

      Industry Claimant

      Amount in Dispute

      Claim Filing Fee

      Hearing Session Deposit

      (Exclusive of Interest
      and Expenses)

      Simplified1

      One Arbitrator2

      Three+ Arbitrators3

      $.01-$l,000

      $500

      $75

      $300

      NA

      $1000.01-$2,500

      $500

      $75

      $300

      NA

      $2,500.01-$5,000

      $500

      $75

      $300

      NA

      $5,000.01-$10,000

      $500

      $75

      $300

      NA

      $10,000.01-$30,000

      $500

      NA

      $300

      $600

      $30,000.01-$50,000

      $500

      NA

      $3004

      $600

      $50,000.01-$100,000

      $500

      NA

      $3004

      $600

      $100,000.01-$500,000

      $500

      NA

      $3004

      $750

      $500,000.01-$5,000,000

      $500

      NA

      $3004

      $1,000

      Over $5,000,000

      $500

      NA

      $3004

      $1,500


      1Simplified Arbitration (With out Hearing)

      2One Arbitrator (Per Hearing Session)

      3Three or More Arbitrators (Per Hearing Session)

      4Prehearing Conferences Only

      (Note: Taken from Section 44 on page 266 of this notice)

      Schedule of Fees

      Amount in Dispute

      Claim Filing Fee

      Hearing Session Deposit

      (Exclusive of Interest and Expenses)

      Simplified1

      One Arbitrator2

      Three+Arbitrators3

      $.01-$1,000

      $500

      $75

      $300

      NA

      $1000.01-$2,500

      $500

      $75

      $300

      NA

      $2,500.01-$5,000

      $500

      $75

      $300

      NA

      $5,000.01-$10,000

      $500

      $75

      $300

      NA

      $10,000.01-$30,000

      $500

      NA

      $300

      $600

      $30,000.01-$50,000

      $500

      NA

      $3004

      $600

      $50,000.01-$100,000

      $500

      NA

      $3004

      $600

      $100,000.01-$500,000

      $500

      NA

      $3004

      $750

      $500,000.01-$5,000,000

      $500

      NA

      $3004

      $1,000

      Over $5,000,000

      $500

      NA

      $3004

      $1,500


      1Simplified Arbitration (With out Hearing)

      2One Arbitrator (Per Hearing Session)

      3Three or More Arbitrators (Per Hearing Session)

      4Prehearing Conferences Only

    • 90-46 Reporting Disciplinary Information on Form BD

      SUGGESTED ROUTING*

      Legal & Compliance
      Registration
      Training

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

      EXECUTIVE SUMMARY

      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 has become evident that states and the Securities and Exchange Commission (SEC) differ in their disclosure requirements related to pending disciplinary matters reportable on Form BD. This notice outlines these differences and provides an update as to the steps being taken to reconcile the differences.

      ISSUE

      There are two basic interpretations regarding the disclosure of pending matters classified under the term "proceeding" found on Form BD in Item 7G. The SEC interpretation of these matters as outlined in release number 12078 (February 6, 1976), and as restated in 1985, includes finally adjudicated criminal proceedings and finally adjudicated proceedings brought by the SEC, regulators, and self-regulators. The SEC does not require disclosure of investigations, arrests without convictions, or civil litigation not conducted by a regulatory or self-regulatory body.

      Many states interpret the term "proceeding" in a much different way. In an effort to formalize the state interpretation, the North American Securities Administrators Association (NASAA) adopted a resolution that outlines a different interpretation of disclosure requirements. This 1989 resolution states that the term "proceeding" includes pending administrative and civil proceedings initiated by self-regulatory, regulatory, and governmental agencies as well as pending criminal charges and civil litigation.

      The SEC is the oversight body of the NASD and, since the Form BD is an SEC form, its disclosure requirements are considered appropriate for NASD filing purposes. The NASD also operates the CRD system pursuant to a joint contract with the NASAA. Under the terms of the contract, the CRD captures and maintains all information submitted by members on Form BD. Hence, if states require disclosure of information and it is contained in a filing, it is captured and maintained on the CRD system.

      The nature of the information found in the CRD system differs from member to member as a result of inconsistent disclosure causes by these differing interpretations. Because public inspection of this information is available through the states, the lack of standardized disclosure can result in comparisons of members that are misleading. Such a situation happened several months ago when The New York Times published an article attempting this kind of a comparison.

      STATUS

      To resolve these differences and to establish uniform disclosure of information, the NASD is participating in ongoing discussions with the SEC and the NASAA. Indications are that these discussions could result in a requirement that more information would need to be disclosed. Pending the resolution of this matter, members are advised that information provided on Form BD in Item 7G should continue to be filed as instructed by the state(s) with which a registration is maintained.

      Questions regarding this notice should be directed to Jay Cummings, Director, Membership Department, at (301) 590-6733.

    • 90-45 SEC Approval to Articles II and III of the NASD's Code of Procedure Regarding Board of Governors and Committee Proceedings in Disciplinary Actions, Effective August 1, 1990

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance

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

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission has approved amendments to Articles II and III of the NASD's Code of Procedure ("Code"). The amendments modify existing procedures and establish new procedures in connection with hearings before a District Business Conduct Committee, Market Surveillance Committee, or an Extended Hearing Committee ("Committee"), pursuant to Article II of the Code, and proceedings in connection with Board of Governors' reviews of disciplinary actions taken by a Committee, pursuant to Article III of the Code.

      The amendments to Article II establish requirements for the submission of documentary evidence and the names of witnesses prior to a Committee hearing. The amendments to Article III convert Board reviews of Committee decisions into more appellate-type proceedings and codify practices as to matters reviewed on the basis of the written record.

      The amendments will become effective August 1, 1990, and will apply only to proceedings in which a new complaint is issued on or subsequent to August 1, 1990. The amendments will not apply to disciplinary proceedings already in progress on August 1, 1990 (i.e., proceedings in which a complaint was issued prior to August 1, 1990). The full text of the amended Articles II and III of the Code follows this notice.

      EXPLANATION

      Under Article II of the Code, respondents are given a full opportunity to participate in and produce evidence in proceedings before a Committee, and Committees are given the opportunity to conduct a full review of each matter.

      Under the amended Article II of the Code, respondents will be required, and the Committee staff or complainant (if other than a Committee), upon request, will be required to submit documentary evidence and the names of witnesses to each other no later than five business days prior to a hearing. This requirement will eliminate any question as to whether the parties were given sufficient notice of additional documentary evidence or witnesses in advance of the hearing.

      Under Article III of the Code, respondents in disciplinary actions taken by a Committee may appeal those actions to the NASD's Board of Governors, or the Board may, on its own motion, call a matter for review. In either case, respondents may elect to attend or waive a hearing before a hearing panel of the Board. Under the amended Article III, Board hearings will be limited to 30-minute oral arguments by the parties, unless extended by the hearing panel because good cause was shown. The introduction of additional evidence will be prohibited except in exceptional circumstances and upon a demonstration of good cause for failure to introduce the evidence before a Committee. Parties to the review must apply to the Board for leave to adduce additional evidence no later than 10 business days before the date of the hearing. The Board may, however, direct that the record be supplemented with such additional evidence as it may deem relevant.

      The amendments also address those situations in which the appealing party did not participate in the proceedings before a Committee. The amendments to Article III permit the Board to remand to a Committee matters in which the appealing party did not participate in the proceedings before a Committee but showed good cause for the failure to participate. If the appealing party fails to show good cause for not participating in the proceedings before a Committee, the matter will be considered by the Board on the basis of the written record developed by the Committee, including written briefs submitted to the Board.

      Parties that failed to request a hearing before a Committee pursuant to Article II, Section 4 of the Code will be permitted to request a hearing. Such parties may request leave to adduce additional evidence, but they must demonstrate good cause for failure to introduce the evidence before a Committee. The amended Article III will also permit the Board to dismiss as abandoned any application for review in which the appealing party failed to advise the Board of the basis for seeking review, or failed to provide the Board with responses to requests for information in a timely manner.

      Article III of the Code will continue to permit the National Business Conduct Committee to designate a matter as an extended proceeding.

      Questions concerning this notice may be directed to Shirley H. Weiss, Attorney, Office of General Counsel, at (202) 728-8844.

      TEXT OF RULE CHANGE

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

      NASD CODE OF PROCEDURE ARTICLE II

      Sec. 1 - Sec. 6 No change.

      Evidence and Procedure in Committee Hearings

      Sec. 7. (a) The Committee staff, or the complainant, if other than a Committee, shall upon request make available to respondents and their counsel any documentary evidence and the names of any witnesses the staff intends to present at the hearing no later than five (5) business days prior to [within a reasonable time before] the hearing.

      (b) Respondents shall submit to the Committee staff or the complainant any documentary evidence and the names of any witnesses respondents intend to present at the hearing no later than five (5) business days prior to [within a reasonable time before] the hearing.
      (c) If a hearing is held, both the complainant and the respondent shall be entitled to be heard in person and by counsel. Formal rules of evidence shall not be applicable. Notwithstanding paragraphs (a)or (b), the parties may submit any additional [documentary] evidence at the hearing as the hearing panel, in its discretion, determines may be relevant and necessary for a complete record. A record of the hearing shall be kept in all cases.

      Sec. 8 - Sec. 13 No change.

      ARTICLE III

      Review of Disciplinary Actions and [Hearings] Proceedings Before The Board of Governors

      Sec. 1. No change.

      [Hearings] Proceedings Before the Board

      Sec. 2. (a) In the case of an appeal or call for review, the [complainant, if other than the Committee, or the respondent] party seeking review may request a hearing. If the party desires a hearing, it should be requested in his application for review. A party subject to a call for review may request a hearing within fifteen (15) calendar days of notification of the call for review, [may request a hearing before a hearing panel of the Board of Governors.] If a request is made, a hearing shall be granted, subject to the limitations of Section 2(f) below. In the absence of a request for a hearing, the Board of Governors may have any matter set down for a hearing.

      (b) If a hearing is held, a [A] notice stating the date, time and place of the hearing shall be mailed to the complainant [, if other than the Committee] and respondent at least ten (10) calendar days before the hearing. The notice period may be waived in writing by the respondent or a shorter notice given where extraordinary circumstances require.
      (c) If a hearing is not held, the matter shall be considered on the basis of the record before the Committee, and written briefs, if submitted. For purposes of this section, the record before the Committee shall include the complaint, respondent's answer, the transcript of the Committee hearing, any exhibits reviewed by the Committee, and the Committee decision.
      [(c)]
      (d) Unless otherwise consented to by the parties, all hearings shall be held before a hearing panel , and all on-the-record reviews shall be conducted by a review panel, appointed by the National Business Conduct Committee consisting of two or more persons, all of whom are associated with members of the Corporation, at least one of whom shall also be a current member of the Board of Governors.
      [(e) If a hearing is held, the hearing panel shall consider the record before the Committee and any new material submitted by the complainant and the respondent. If respondent has waived a hearing and the Board does not order a hearing on its own motion, the panel shall consider the matter on the record, which may include new evidence as long as all parties have previously been tendered the new evidence.]
      (e) A hearing on review by the Board shall consist of oral arguments limited to a total period of thirty (30) minutes each for argument and response by respondent and for argument and response by a complainant, unless extended by the hearing panel in its discretion for good cause shown. The Board's review shall be limited to consideration of oral arguments, written briefs, and the record before the Committee. A record of the hearing shall be kept in all cases.
      (f) Any application for review of a matter in which the party seeking review did not participate in the proceedings before the Committee but shows good cause for the failure to participate, shall normally be dismissed by the Board and remanded to the Committee for further proceedings. If the party seeking review did not participate in the proceedings before the Committee and does not show good cause for the failure to participate, the matter shall be considered by the Board on the basis of the record before the Committee, including written briefs submitted to the Board. For purposes of this paragraph, failure to participate shall mean failure to file an answer or otherwise respond to a complaint or failure to appear at a hearing which has been scheduled and shall not include failure to request a hearing pursuant to Article II, Section 4 of this Code. A party seeking review who failed to request a hearing before a Committee pursuant to Article II, Section 4 of this Code, shall be permitted to have a hearing on review as provided in this section.
      (g) Any application for review as to which the party seeking review fails to advise the Board of the basis for seeking review, or otherwise fails to provide information or submit a written brief in response to a request, may be dismissed as abandoned and the decision of the Committee shall become final Association action.
      (h) Upon consideration of the length of expected testimony, the volume and complexity of documentary evidence before the Committee [and], or other factors it may deem material, and subject to the provisions of Section 2(a) through (g) above, the National Business Conduct Committee may determine that a matter shall be set for an Extended [Hearing] Proceeding. Notice of an Extended [Hearing] Proceeding shall be given as provided in Section [2(a)] 2(b).
      (i) All Extended [Hearings] Proceedings shall be held before an Extended [Hearing] Proceeding Committee appointed by the National Business Conduct Committee consisting of two or more persons, all of whom previously shall have served as members of the Board of Governors; provided, however, that the Chairman of the National Business Conduct Committee shall have the discretion to appoint to an Extended [Hearing] Proceeding Committee one or more current members of the Board of Governors and to compensate any or all members of the Extended [Hearing] Proceeding Committee at the rate then in effect for arbitrators appointed under the Code of Arbitration Procedure.
      [(f)]
      (j). The hearing or on-the-record review panel shall present its recommended findings and sanctions to the National Business Conduct Committee. The National Business Conduct Committee shall make its recommended findings and sanctions to the Board of Governors which shall make the final determination.

      Evidence [and Procedure] in Board [Hearings] Proceedings

      Sec. 3. [(a) Upon request, the Corporation staff or the complainant, if other than a Committee, shall make available to respondents and their counsel any documentary evidence which was not part of the record before the Committee, within a reasonable time before the hearing.]

      (a) A party to the Board's review may apply to the Board for leave to adduce additional evidence. If the party provides notice of the intention to introduce such evidence no later than ten (10) business days prior to the date of the hearing, identifies and describes the evidence, and satisfies the burden of demonstrating that there was good cause for failing to adduce it before the Committee and that the evidence is material to the proceeding, the Board may, in its discretion, permit the evidence to be introduced into the record on review or may remand the case to the Committee for further proceedings in whatever manner and subject to whatever conditions the Board considers appropriate. On its own motion, the Board may direct that the record on review be supplemented with such additional evidence as it may deem relevant.
      [(b) Respondents shall also make available to the Corporation staff or the complainant, any documentary evidence, which was not part of the record before the Committee, within a reasonable time before the hearing.]
      (b) Where leave to adduce additional evidence is granted, the Corporation staff or the complainant, if other than a Committee, and the respondent shall make available to the Board hearing or review panel and to the parties all documentary evidence which was not part of the record before the Committee no later than five (5) business days before the hearing.
      (c) [If a hearing is held, both the complainant and respondent shall be entitled to be heard in person and by counsel.] Formal rules of evidence shall not be applicable. [Notwithstanding paragraphs (a) or (b), the parties may submit any additional documentary evidence at the hearing as the hearing panel, in its discretion, determines may be relevant and necessary for a complete record. A record of the hearing shall be kept in all cases.]

      Sec. 4 - Sec. 7 No change.

    • 90-44 SEC Approval of Amendment to Code of Procedure Regarding Summary Remedial Proceedings, Effective July 1, 1990

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      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 the Code of Procedure that would create a new procedure by which the NASD could take appropriate remedial actions against an NASD member or an associated person if such member or person has engaged, and there was a reasonable likelihood that the member or person will again engage, in securities law violations. The text of the amendment follows this notice.

      EXPLANATION

      The Securities and Exchange Commission (SEC) has approved an amendment to the Code of Procedure that will permit the NASD to suspend membership of, or condition the membership of a broker-dealer, or suspend or condition a person's association with a broker-dealer if the broker-dealer or person has engaged, and there is a reasonable likelihood the broker-dealer or person will again engage, in acts or practices inconsistent with just and equitable principles of trade.

      The amendment provides the NASD with a wide range of actions it could take against a member or associated person for ongoing violations, including imposing limitations or conditions on or the suspension of the firm's membership or the person's registration. This range of permissible actions will allow the NASD to tailor the action taken to meet the needs of the situation. The firm or person that is the subject of such a proceeding would have the right to a hearing prior to the NASD taking any action and, once the Board acts in reviewing the action, that decision could be appealed to the SEC.

      Under the new procedure, such a proceeding will be initiated only after a finding by the NASD Executive Committee that the proceeding is needed to protect the public interest. The NASD will notify the member and/or associated person of the time and place of the hearing. The matter will be considered by a District Committee hearing panel consisting of at least three persons, and this panel will render its decision within five days of the hearing.

      Any party aggrieved by the decision, or the Board itself, will have the opportunity to ask that this decision be reviewed by a committee of the Board of Governors. Any such request will not operate as a stay of the district panel's decision. Upon any application for review, a hearing before a Special Hearing Committee of the Board will be held within five days. Any decision rendered by the Special Hearing Committee will be a final action of the NASD and can be appealed to the SEC. All decisions rendered will be in writing, and any member or person will have the right to appear in person, submit any relevant evidence, and be represented by counsel.

      Questions concerning this notice may be directed to Craig L. Landauer, Assistant General Counsel, NASD Office of General Counsel, at (202)728-8291.

      TEXT OF PROPOSED RULE CHANGE

      (Note: New text is underlined.)

      NASD CODE OF PROCEDURE

      ARTICLE XI

      Expedited Remedial Proceedings

      Purpose

      Sec. 1. This Article establishes procedures for Expedited Remedial Proceedings. These proceedings are in addition to those established for summary suspension or revocation pursuant to Article VI or VIII of this Code of Procedure. Pursuant to the Expedited Remedial Proceedings, the Corporation may suspend the membership of a member or impose conditions upon its continued operation or suspend a person from being associated with a member or impose conditions on such person's continued association with a member. These procedures are adopted pursuant to and in implementation of Section 15A(b)(6) and Section 15A(g) (3)(A) and (B) of the Securities Exchange Act of 1934 which permits the Association to take such action if the broker or dealer or person has engaged, and there is a reasonable likelihood the broker or dealer or person will again engage, in acts or practices inconsistent with just and equitable principles of trade.

      Commencement of Expedited Remedial Proceedings

      Sec. 2. A determination to commence an Expedited Remedial Proceeding pursuant to Section 1 shall be made only upon approval of the Executive Committee of the Board of Governors and a conclusion by it that such action is in the public interest. In arriving at this conclusion the Executive Committee shall consider the egregious nature of the conduct and the likelihood of continuing violations. Upon commencement of this proceeding, the Corporation shall send notice thereof to the member or person associated with a member. Such notification shall contain a statement of the specific grounds on which such action is taken. The date and location of the hearing shall be sent to the member or person at least five (5) business days prior to the hearing. The matter shall be presented to a hearing panel designated by the District Business Conduct Committee or Market Surveillance Committee and shall consist of at least three members from the Committee which has jurisdiction over the proceeding.

      District or Market Surveillance Committee Decision

      Sec. 3. A written decision setting forth the findings made and the grounds upon which that determination is based shall be issued by the District or Market Surveillance Committee hearing panel within five (5) business days of the date of the hearing, and a copy shall be sent to the party against whom the Corporation has taken expedited action and, in the case of a person associated with a member, the member with whom the party is presently an associated person. Any decision conditioning or suspending a member or person associated with a member under this Article shall specify the time period, not to exceed six months, for which the conditions or suspension shall remain in effect and the conditions, if any, which must be fulfilled during the specified time period in order to have the conditions or suspension removed.

      Review by Board

      Sec. 4. The District or Market Surveillance Committee decision shall be subject to review by the Board of Governors on its own motion within five (5) business days after issuance of the written decision. Any such decision shall also be subject to review upon application of any person aggrieved thereby filed within five (5) business days after issuance. The institution of a review, whether on application of the aggrieved person or on the initiative of the Board, shall not operate as a stay of the decision. Upon receipt of an application for review, a hearing will be held within five (5) business days after receipt of such application. Unless extended by the Board hearing panel in its discretion for good cause shown, oral argument in hearings held under this Article shall be limited to 30 minutes each for the respondents and for a representative of the District or Market Surveillance Committee. The introduction of new evidence shall not be permitted unless good cause is shown for not introducing it at the hearing held before the District or Market Surveillance Committee hearing panel.

      Board Decision

      Sec. 5. Upon consideration of the record, and after such further hearings as it shall order, the Board shall, in writing, affirm, modify, reverse, dismiss, or remand the decision to the District or Market Surveillance Committee. The Board shall set forth the findings made and the specific grounds upon which its determination is based. Any decision conditioning or suspending a member or person associated with a member under this Article shall specify the time period, not to exceed six months, for which the conditions or suspension shall remain in effect and the conditions, if any, which must be fulfilled during the specified time period in order to have the conditions or suspension removed. A decision rendered by a three member hearing panel designated by the Board shall constitute final action by the Corporation. A written decision shall be issued by the Board hearing panel within five (5) business days of the date of the hearing, and a copy shall be sent to the party against whom the Corporation has taken expedited action and, in the case of a person associated with a member, the member with which the party is presently an associated person.

      Hearings

      Sec. 6. At any hearing held under this Article, a record shall be kept and the member or person associated with a member and the Corporation shall be entitled to be heard in person and be represented by counsel.

      Other Action Not Foreclosed

      Sec. 7. Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code or the Rules of Fair Practice where a violation of the Rules of the Corporation may be involved.

      Application to Commission for Review

      Sec. 8. Any party against whom expedited action has been taken by the Board of Governors may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal to the Commission unless the Commission determines otherwise.

    • 90-43 Proposed Amendment to Part I of Schedule C to the NASD By-Laws Regarding Written Notification About Certain Events; Last Date for Comment: August 3, 1990

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations

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

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposal to add a new section to Part I of Schedule C to the NASD By-Laws that would require members to provide notification in writing to the appropriate district office on the occurrence of certain events affecting the ownership or control of a member.

      BACKGROUND

      Schedule C to the NASD By-Laws currently permits an NASD member to experience a change in ownership or control without prior review by the appropriate NASD district office. Pursuant to Section (4) to Part I of Schedule C to the NASD By-Laws, in cases where the ownership or control of an existing member changes, the NASD has the discretion to condition continuance in membership on prompt compliance with the premembership interview procedures. Notice of a change in ownership or control of a member must be filed on a revised Form BD whenever the information previously on file changes. Since the form does not specify a time for filing, a general rule of thumb has developed that filing is required within 30 days. In certain cases, a previously dormant member can become active unexpectedly or be sold or taken over by new management. While a new premembership interview can be conducted, regulatory problems may have already occurred in reference to the merger, purchase, or change of ownership of a member. The NASD believes that prompt notification of such a change in ownership will allow the NASD to act more expeditiously in determining whether a new premembership interview should be scheduled.

      EXPLANATION

      The amendment would require prompt notification to the member's district office after a specified significant event, rather than prior notification of such event. The amendment would require members to provide notification in writing to the applicable district office no later than five business days after a specific event, thereby indicating that prenotifying the district is permitted but not required.

      The amendment would focus on four significant events the NASD has determined require prompt notification: (1) the merger of a member; (2) an acquisition by a member; (3) an acquisition of a member or substantially all of its assets; and (4) any change of more than 50 percent of the equity or partnership capital of a member. The NASD also considered whether the new provision should require notification in the case of a change in the president or chief executive officer of a member. It was determined, however, that prompt notification should focus on a change in the ownership structure of the member. A change in the president or chief executive officer of a member would not normally require notification unless accompanied by one of the four triggering events.

      The NASD encourages all members and other interested persons to comment on the proposed amendment to Schedule C to the By-Laws. Comments should be directed to:

      Mr. Lynn Nellius
      Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Comments must be received no later than August 3, 1990. All comments will be made available for public inspection. Comments received by this date will be considered by the NASD's Membership Committee and the NASD Board of Governors. If approved by the Board, the amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice should be directed to Craig L. Landauer, Assistant General Counsel, at 202-728-8291.

      PROPOSED NEW SECTION (5) TO PART I OF SCHEDULE C TO THE BY-LAWS

      (Note: New language is underlined.)

      (5) Notification to the District Office of Certain Events
      Members are required to notify the Corporation's District Office for the District in which the member's main office is located no later than five (5) business days after any of the following specified events: (1) any merger of the member; (2) an acquisition by the member; (3) an acquisition of the member or substantially all of its assets; and (4) any change of more than 50 percent in the equity ownership or partnership capital of the member.

    • 90-42 NASDAQ National Market System (NASDAQ/NMS) Additions, Changes, and Deletions As of May 14, 1990

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading

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

      As of May 14, 1990, the following 21 issues joined NASDAQ/NMS, bringing the total number of issues to 2,658:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      CALGF

      Cal Graphite Corporation

      4/17/90

      500

      MUSA

      Martech USA, Inc.

      4/17/90

      1000

      MCHS

      Micro Healthsystems, Inc.

      4/17/90

      1000

      PESC

      Pool Energy Services Co.

      4/17/90

      1000

      SULL

      Sullivan Dental Products, Inc.

      4/18/90

      1000

      GCCO

      Granite Construction Incorporated

      4/20/90

      1000

      UNIT

      Unitrin, Inc.

      4/23/90

      1000

      BEAV

      BE Avionics, Inc.

      4/24/90

      1000

      ORBI

      Orbital Sciences Corporation

      4/24/90

      1000

      HFMO

      Home Federal Savings Bank of Missouri

      4/25/90

      1000

      TBIT

      Telebit Corporation

      4/27/90

      1000

      TDSSF

      3-D Systems, Inc.

      5/1/90

      1000

      AFTI

      American Film Technologies, Inc.

      5/1/90

      1000

      AFTIW

      American Film Technologies, Inc. (Wts)

      5/1/90

      1000

      ASPT

      Aspect Telecommunications Corporation

      5/1/90

      1000

      NRGN

      Neurogen Corporation

      5/1/90

      1000

      CLRXR

      Colorocs Corporation (Rts)

      5/2/90

      500

      IMNR

      Immune Response Corporation (The)

      5/2/90

      1000

      DNST

      Dynasty Classics Corporation

      5/3/90

      1000

      IGLI

      IG Laboratories, Inc.

      5/3/90

      1000

      ROPS

      RasterOps

      5/9/90

      200

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since April 12, 1990.

      New/Old Symbol

      New/Old Security

      Date of Change

      CTBK/SKAN

      Center Banks, Inc./Skaneateles Savings Bank

      4/18/90

      WEYS/WEYS

      Weyco Group, Inc./Weyenberg Shoe Manufacturing Company

      4/26/90

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      ACPT

      Acceptance Insurance Holdings Inc.

      4/16/90

      PCSI

      PCS, Inc.

      4/17/90

      VEOXF

      Veronex Resources Ltd.

      4/17/90

      DELE

      Del Electronics Corp.

      4/18/90

      INTCW

      Intel Corporation (5/15/95 Wts)

      4/18/90

      TTOR

      Transtector Systems, Inc.

      4/19/90

      ELRRF

      Elron Electronic Industries Ltd. (Rts)

      4/20/90

      CIFR

      Cipher Data Products, Inc.

      4/25/90

      CATLB

      Cantel Industries, Inc. (Cl B)

      4/26/90

      ORFAQ

      ORFA Corp. of America

      4/26/90

      PTRL

      Petrol Industries, Inc.

      4/26/90

      WNSIC

      WNS, Inc.

      4/26/90

      FSAK

      Franklin Savings Association

      4/27/90

      WIMI

      Warwick Insurance Managers, Inc.

      4/27/90

      VIST

      Vista Resources, Inc.

      4/30/90

      FIWI

      First Interstate Corporation of Wisconsin

      5/1/90

      DLTK

      Deltak Corporation

      5/2/90

      ISBJ

      Interchange Financial Services Corporation

      5/2/90

      MFED

      Maury Federal Savings Bank

      5/3/90

      AIRC

      AIRCOA Hospitality Services Inc.

      5/4/90

      LUSK

      Luskin's, Inc.

      5/7/90

      UDRT

      United Dominion Realty Trust, Inc.

      5/7/90

      NWPS

      Northwestern Public Service Company

      5/8/90

      PSLA

      Preferred Savings Bank, Inc.

      5/8/90

      HBOL

      Hartford Steam Boiler Inspection and Insurance Co.

      5/9/90

      MMRHQ

      MMR Holding Corporation

      5/9/90

      LPLI

      LPL Technologies, Inc. (Cl A)

      5/11/90

      SESL

      Southeastern Savings Bank, Inc.

      5/14/90

      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.

    • 90-41 Independence Day: Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING*

      Iternal 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 Wednesday, July 4, 1990 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 6

      27

      5

      9

      28

      6

      10

      29

      9

      11

      July 2

      10

      12

      3

      11

      13

      4

      Markets Closed

      5

      12

      16

      These settlement dates should be used by brokers, dealers, and municipal securities dealers 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)(l) 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)(l), 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."


    • 90-40 SEC Approval of an Amendment to Schedule H to the NASD By-Laws Requiring Members to Demonstrate Compliance With Rule 15c2-11 Before Initiating Quotations in a Quotation Medium

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Trading

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

      EXECUTIVE SUMMARY

      On May 1, 1990, the SEC approved an amendment to Schedule H of the NASD By-Laws to require member firms to file specified information with the NASD before initiating (or resuming) a quotation of a non-NASDAQ over-the-counter security ("non-NASDAQ security") in any quotation medium. Quotation mediums include the OTC Bulletin Board, the National Quotation Bureau's Pink Sheets™ publication, regional/local mediums comparable to the Pink Sheets™, and any other service that falls within the broad definition of "quotation medium," as defined in Rule 15c2-11 (e)(1) under the Securities Exchange Act of 1934 (the "Act").

      The new NASD filing requirements encompass information that broker-dealers must maintain pursuant to paragraphs (a)(1) - (5) of Rule 15c2-11. For example, paragraph (a)(1) specifies maintenance of a copy of an issuer's prospectus relating to certain offerings registered with the SEC under the Securities Act of 1933.

      In addition, member firms will have to specify the factors considered in establishing their initial priced entries for a non-NASDAQ security before such entries may be published in any quotation medium. In those instances where a member firm can rely on one of the stated exemptions from Rule 15c2-11, including the so-called "piggyback" exemption, no filing would be necessary. These new requirements will take effect on July 2, 1990. The text of the amendment follows this notice.

      BACKGROUND

      On May 1, 1990, the SEC approved an NASD rule change that amends Schedule H to the NASD By-Laws to require member firms, before initiating or resuming the quotation of a non-NASDAQ security in any quotation medium, to file with the NASD copies of the information needed to comply with Rule 15c2-11 under the Act and certain additional information.1 The NASD's review of this material is intended to ensure strict compliance by member firms with Rule 15c2-11.

      Furthermore, this rulemaking initiative complements other regulatory efforts undertaken by the NASD as well as the SEC to curtail abusive practices involving so-called "penny stocks."

      SUMMARY OF NEW REQUIREMENTS

      A principal purpose of the new filing requirement in Schedule H is to ensure that members have complied with the information maintenance requirements of Rule 15c2-11. This rule requires that broker-dealers gather and maintain certain information before initiating or resuming the quotation of a non-NASDAQ security2 in a quotation medium such as the OTC Bulletin Board or the NQB's Pink Sheets™ publication. The rule specifies maintenance of categories of information depending, for example, on whether the issuer is an Exchange Act reporting company or whether the issue to be quoted was the subject of a recent offering registered with the Commission under the Securities Act of 1933. Similarly, if the issue represents the outstanding stock of a nonreporting company, paragraph (a)(5) of Rule 15c2-11 specifies 16 elements of information that the broker-dealer must have before starting to quote the security in any quotation medium.

      As amended, Schedule H requires members to file with the NASD, before initiating or resuming the quotation of a non-NASDAQ security in any quotation medium, a Form 211 accompanied by two copies of the information needed to comply with Rule 15c2-11. Although the amendment establishes a new filing requirement, the amount of information to be furnished approximates what member firms currently are required to file and maintain to satisfy Rule 15c2-113. Amended Schedule H, however, requires submission of additional information relating to the initial or resumed publication of a priced entry in certain instances.

      Amended Schedule H further provides that all required information be received by the NASD at least three business days before a member initiates (or resumes) the publication of quotations for a non-NASDAQ security in any quotation medium.4 During this three-day period, the NASD staff will conduct a substantive review of the member's submission and notify the member about the adequacy of its submission by the end of this period. If any deficiency is found, the NASD staff will advise the firm either to amend or supplement its submission. If additional information is submitted, the NASD staff will act on it within seven business days of receipt. Significantly, until the member has demonstrated full compliance with Rule 15c2-11 and Schedule H, a member will not be able to access the OTC Bulletin Board for the affected security. The member will be promptly notified in writing of such a determination.5 Nonetheless, if a member proceeded to publish its quotation in another quotation medium without fully complying with Schedule H and Rule 15c2-11, such action would be reviewed by a District or Market Surveillance Committee to determine if disciplinary action is warranted.

      A member must demonstrate compliance with Rule 15c2-ll regardless of whether its initial or resumed quotation is a priced entry.6 Rule 15c2-11(e)(3) defines "quotation" to mean actual bids/offers, indications consisting only of the firm's name and the telephone number of its OTC trading desk, and bid wanted/offer wanted indications reflecting proprietary trading interest. The definition of "quotation" in Section l(d) of amended Schedule H tracks the language of paragraph (e)(3) of the rule. In situations where a firm's initial or resumed quotation is a priced entry, amended Schedule H obligates the member firm, when filing with the NASD, to specify the basis for determining the proposed bid and/or offer as well as the factors considered in making that determination.

      A broker-dealer cannot avoid having to justify its first priced entry simply by initiating or resuming quotation of a non-NASDAQ security on a "name only" basis and later inserting a priced entry for that security in the same quotation medium. In this circumstance, amended Schedule H would require a supplemental filing explaining the basis for the initial priced entry. The obligation to make this supplemental filing arises only if the broker-dealer previously made a filing under Section 4 of amended Schedule H to initiate or resume quotation of that particular non-NASDAQ security and that initial or resumed quotation did not constitute a priced entry.

      A member firm has no obligation to file information under amended Schedule H when it properly qualifies for one of the exemptions contained in paragraphs (f)(l), (2), (3), and (5) of Rule 15c2-117. The most significant of these is the so-called "piggyback" exemption provided by paragraph (f)(3) of the rule. To rely on the piggyback exemption, a firm must first determine whether the subject non-NASDAQ security has met the frequency-of-quotation test found in paragraphs (f)(3)(i) or (ii) of Rule 15c2-11. (With respect to the OTC Bulletin Board, this capability will be available on-line to market-maker participants after the 60-day startup period.) If so, a firm can begin to enter quotations for the security in that quote medium. Thus, in instances where a member can validly claim the piggyback exemption, no filing whatsoever would be required under Section 4 of amended Schedule H. Nevertheless, in the event that a member firm decides to publish a quotation in the NQB "Pink Sheets,"™ claiming the piggyback exemption, the Form 211 should be sent to the NASD.

      Rule 15c2-11 currently permits the practice of "self-piggybacking." This refers to situations where a broker-dealer initiates or resumes quotation of a non-NASDAQ security in a quote medium by complying with the applicable information maintenance requirement under paragraph (a) of Rule 15c2-11. If, after 30 calendar days have elapsed, the broker-dealer's quotes satisfy the frequency requirement for piggybacking, Rule 15c2-11 does not obligate the member to obtain updated issuer information to continue quoting the company's non-NASDAQ security in that quote medium. The ability of a broker-dealer to self-piggyback does not alter a firm's filing obligation under amended Schedule H to justify its first priced entry. Specifically, if a firm makes an acceptable filing under Section 4 of Schedule H but publishes no priced entry in the medium during the ensuing 30 days, it must make a supplemental filing to justify its first priced entry at any time thereafter. Similarly, if the same firm initially published an unpriced entry (i.e., indication of interest) and wished to change to a priced entry during the first 30 days, it must make a supplemental filing to justify that first priced entry. In sum, the obligation to make a supplemental filing arises only where the firm's initial (or resumed) quotation required a filing under amended Schedule H and that filing did not contain disclosure of the basis for and factors considered in the firm's first priced entry.

      The NASD also wishes to address how amended Schedule H would apply following a Commission trading suspension pursuant to Section 12(k) of the Act. Upon expiration of the suspension, any firm wishing to initiate or resume the quotation of the suspended security in a quote medium must first compile the requisite issuer information under paragraph (a) of Rule 15c2-11. Next, the firm would make the filing with the NASD required by amended Schedule H. If the firm proposed to publish a priced entry in a quote medium, the Schedule H filing must include statements setting forth the basis and factors considered in determining the priced entry. Assuming that the NASD's review disclosed no deficiency with the filing, the firm could proceed to publish its proposed quotation in the medium(s) identified in the filing. Other firms wishing to quote the same security during the next 30 days would have to follow the same procedure. Thereafter, additional firms could initiate or resume quotation of the subject security under the piggyback exemption, provided that the conditions in paragraph (f)(3) of Rule 15c2-11 can be met. If so, those firms would have no obligation to make any filing with the NASD under amended Schedule H.

      In sum, the proposed amendment would not subject member firms to any filing requirement whenever they can validly claim one of the exemptions provided under paragraph (f) of Rule 15c2-11, including the piggyback exemption. These exemptions are specifically referenced in the first sentence of Section 4 of amended Schedule H.

      The new filing requirements prescribed by Schedule H will take effect on July 2, 1990. Questions regarding compliance with amended Schedule H and requests for Form 211 should be directed to Dan Sibears, Roger Sherman, or Ken Worm of the NASD's NNOTC Compliance Unit at (202) 728-8149. Members' filings pursuant to Section 4 of Schedule H should be sent to:

      National Association of Securities Dealers, Inc.
      NNOTC Compliance Unit, 5th Floor
      1735 K Street, NW
      Washington, DC 20006-1506

      TEXT OF AMENDED SCHEDULE H TO THE NASD BY-LAWS

      Section 1â€" Definitions

      * * * * *

      (c) "Quotation medium" means any inter-dealer quotation system (except for the PORTAL™ Market) or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any non-NASDAQ security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.
      (d) "Quotation" shall mean any bid or offer at a specified price with respect to a non-NASDAQ security, or any indication of interest by a broker or dealer in receiving bids or offers from others for such a security, or any indication by a broker or dealer that it wishes to advertise its general interest in buying or selling a particular non-NASDAQ se curity.
      (e) "Issuer," in the case of quotations for American Depositary Receipts ("ADRs"), shall mean the issuer of the deposited shares represented by such ADRs.
      (f) "Priced entry" shall mean a quotation consist ing of a bid, offer, or both at a specified price.

      * * * * *

      Section 4 â€" Submission of Rule 15c2-11 Information on Non-NASDAQ Securities

      Except as provided in subsections (f)(l), (2), (3) and (5) of Rule 15c2-11 under the Securities Exchange Act of 1934, no member shall initiate or resume the quotation of a non-NASDAQ security in any quotation medium unless the member has demonstrated compliance with this rule and the applicable requirements for information maintenance under Rule 15c2-11. A member shall demonstrate compliance by making a filing with, and in the form required by, the Association, which filing must be received at least three business days before the member's quotation is published or displayed in the quotation medium. The information to be filed shall contain one copy of all information required to be maintained under subsections (a)(l), (2), (3)(iii), (4)(ii), or (5) of Rule 15c2-11, including any information that may be required by future amendments thereto. In addition, this filing shall identify the issuer, the issuer's predecessor in the event of a merger or reorganization within the previous 12 months, the type of non-NASDAQ security to be quoted (e.g., ADR, warrant, unit, or common stock), the quotation medium to be used, the member's initial or resumed quotation, and the particular subsection of Rule 15c2-11 with which the member is demonstrating compliance. Additionally, if a member is initiating or resuming quotation of a non-NASDAQ security with a priced entry, the member's filing must specify the basis upon which that priced entry was determined and the factors considered in making that determination.

      If a member's initial or resumed quotation does not include a priced entry, a member shall supplement its prior filing under this section, in the form required by the Association, before inserting a priced entry for the affected non-NASDAQ security in a quotation medium. The supplemental filing shall specify the basis upon which the proposed priced entry was determined and the factors considered in making that determination. This supplemental filing must be received by the Association at least three business days before the member's priced entry first appears in a quotation medium.

      All filings made with the NASD under this Section must be reviewed and signed by a principal of the member firm.


      1See Release No. 34-27968 (May 1, 1990), 55 FR 19132 (May 8, 1990).

      2Following the termination of a Commission trading suspension pursuant to Section 12(k) of the Act, a broker-dealer must reestablish compliance with Rule 15c2-11 before reentering a quotation for that security in a quotation medium.

      3No filing would be rquired if the member can qualify for one of the enumerated exemptions from Rule 15c2-11, including the piggyback exemption.

      4The three-day period corresponds to the Commission's proposed amendment to paragraph (d) of Rule 15c2-11. See Release No. 34-27247 (September 14, 1989), 54 FR 39194 (September 25,1989), at 39205.

      5If the NASD's review disclosed only minor or technical deficiencies, the NASD would have the option to contact the member firm by telephone and request submission of supplemental or revised Rule 15c2-11 information.

      6Section l(f) of amended Schedule H defines "priced entry" as a quotation consisting of a bid, offer, or both at a specified price.

      7Paragraph (4) establishes an exemption for the publication of a quotation on a municipal security. Because municipals are not within the scope of amended Schedule H, the latter exemption is not referenced.


    • 90-39 Amendments to Schedule E to the NASD By-Laws Regarding Potential Conflicts of Interest; Last Date for Comment: July 5, 1990

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate
      Training

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

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests membership comment on proposed changes to Schedule E to the NASD By-Laws that, if adopted, would require compliance with its provisions if a member participating in a distribution of a public offering of debt or equity securities has a conflict of interest with the issuer. A conflict of interest would be deemed to exist if the member or its affiliates own an aggregate of 10 percent or more of the debt, 10 percent or more of preferred stock, or 10 percent or more of the common stock of an issuer.

      BACKGROUND

      In 1972, the NASD adopted Schedule E to the By-Laws to regulate the potential conflicts of interest that exist when a member participates in the public distribution of its own securities or the securities of an affiliate. The presumptions contained within Schedule E used to determine affiliation are generally either voting control through ownership of equity securities or common control of management through interlocking officerships or director-ships. Schedule E addresses the conflicts by requiring a qualified independent underwriter to render an opinion on the price of the securities offered, conduct due diligence, and participate in the preparation of the registration statement and prospectus. The qualified independent underwriter also assumes underwriter's liability for the offering. The NASD believes that the objectivity and independence provided by a qualified independent underwriter resolves these conflicts.

      Last year, the NASD Board of Governors asked the Corporate Financing Committee to consider whether the ownership of debt of an issuer by an NASD member that intends to distribute the issuer's securities creates a conflict of interest and, if so, whether the conflict should be regulated by the provisions of Schedule E.

      In December 1989, the Committee concluded, after review of numerous leveraged buy-out offerings and discussions with several member firms, that a potential conflict of interest exists when a member owns debt, preferred equity, or voting or nonvoting common equity of an issuer while engaged in an offering of the issuer's securities. As a result, the Board of Governors is soliciting comments on a proposal to apply the provisions of Schedule E to any public distribution of the securities of an issuer when a member that proposes to participate in the distribution or its associated persons, parent, or affiliates own 10 percent or more of the aggregate dollar amount of the outstanding debt of the issuer, 10 percent or more of the aggregate dollar amount of the outstanding preferred stock of the issuer, or 10 percent or more of the combined voting and nonvoting common stock of an issuer.

      EXPLANATION

      The proposed changes to Schedule E include modifications to the general provisions of the Schedule, the addition of four definitions, and modifications to four sections of the Schedule. A section-by-section analysis of the proposed modifications appears below. Initially, the NASD proposes to modify the title of Schedule E by adding "... Conflicts of Interest" to more appropriately describe the proposed breadth of the Schedule.

      Section 1 — General

      A new subsection (b) is proposed that will provide that no member or person associated with a member shall participate in the distribution of a public offering of debt or equity securities of a company if the member, its associated persons, parent, or affiliates have a conflict of interest with the company. The holdings of debt or equity by a member and its associated persons and affiliates will be aggregated to determine whether the prohibition will be applicable. However, holdings by one or more members will not be aggregated.

      Section 2 — Definitions

      The proposal would amend Section 2 of Schedule E to add four definitions. The principal definition to be added is "conflict of interest." A conflict of interest will be deemed to exist if the member owns 10 percent or more of the dollar amount of a company's aggregate debt outstanding. Similarly a conflict will be deemed to exist if the member owns in the aggregate 10 percent or more of the dollar amount of the preferred stock outstanding without regard to class, whether voting or nonvoting, convertible or nonconvertible. Finally, a conflict will be deemed to exist if a member owns 10 percent or more of the total number of shares of common stock outstanding without regard to class, whether voting or nonvoting, convertible or nonconvertible.

      The definition of conflict of interest does not include conflicts that may arise as a result of an issuer owing 10 percent or more of the aggregate debt, aggregate preferred stock, or voting and non-voting common equity of a member. The NASD seeks comment on whether a conflict should be deemed to exist and, if so, whether the provisions of the Schedule should apply.

      With respect to the ownership of debt, a conflict of interest would exist when the member owns 10 percent or more of the short- and long-term outstanding debt of the issuer. For purposes of calculating the percentage of debt, the NASD would include all long-term debt as well as the current portion of long-term debt, bank credit facilities, and bridge loans. A member's ownership of the preferred equity of a company would be measured by comparing the aggregate capital invested by all persons in the preferred equity outstanding with the member's holdings of preferred equity without regard to whether one or more classes of preferred stock are outstanding or whether the preferred stock has any distinguishing characteristics such as convertibility or exchangeability.

      The amendments also propose to aggregate all shares of all classes of common stock outstanding, whether voting or nonvoting, convertible or nonconvertible, and compare that amount to the shares of common stock of the company owned by the member, its associated persons, parent, or affiliates to determine whether a conflict exists.

      Definitions of debt, common equity, and preferred equity are also proposed to be added to the Schedule. Common equity is defined as the total number of shares of common stock outstanding without regard to class, voting rights, or other distinguishing characteristics as reflected on the consolidated financial statements of the company.

      The term debt is defined as the short- and long-term debt as reflected on the consolidated financial statements of the company. The term preferred equity is defined to include the aggregate capital invested by all persons in the preferred securities outstanding without regard to class, voting rights, or other distinguishing characteristics as reflected on the consolidated financial statements of the company.

      Section 3 — Participation in Distribution of Securities of Member or Affiliate

      It is proposed that Section 3 be retitled "Participation in Distribution of Securities." Subsection (a) has been modified by the addition of a prohibition on any member underwriting or participating as a member of the underwriting syndicate or selling group or otherwise assisting in the distribution of a public offering of the securities of a company with which the member or its associated persons, parent, or affiliates have a conflict of interest unless the member complies with subsection 3(b) and subsection 3(c).

      Subsection 3(b) remains unchanged. The majority of the Board of Directors of the member that is deemed to have a conflict with the issuer must have been actively engaged in the investment banking or securities business as that term is defined in Article I, Section l(h) of the NASD By-Laws. Section 3(c) has been amended to indicate that if a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of securities of a company with which it or its associated persons, parent, or affiliates have a conflict, one or more of the three criteria of Section 3(c) must be met.

      As proposed under subsection 3(c)(l), if a member has a conflict of interest with an issuer, in order for the member to participate in the distribution of a public offering of the issuer's securities, a qualified independent underwriter that satisfies the objective criteria of the definition found at subsection 2(1) must be engaged. The qualified independent underwriter will be required to participate in the preparation of the registration statement and the prospectus or offering circular or other similar document and exercise the usual standards of due diligence in respect thereto. It will also be required to issue an opinion that the price at which an equity issue or the yield at which a debt issue is to be distributed to the public has been established at a price no higher or a yield no lower than that which it recommends.

      Alternatively, if the public offering is of a class of equity securities for which a bona fide independent market exists as of the date of filing and as of the effective date of the registration statement, or if the offering is a class of securities rated investment grade by a nationally recognized rating agency, then a qualified independent underwriter will not be required.

      Section 4 — Disclosure

      As proposed, Section 4 of Schedule E would be amended at subsection (b) to require the disclosure in the registration statement, offering circular, or similar document that the offering is being made pursuant to the provisions of Schedule E because member(s) that have a conflict of interest with the company are participating in the distribution.

      Section 11 — Suitability;

      Section 12 — Discretionary Accounts

      Similarly, the suitability provisions of Section 11 and the prohibition on sales to discretionary accounts contained within Sections 11 and 12 of Schedule E, respectively, are being modified to require compliance by member(s) if the offering is one in which a conflict of interest exists.

      The NASD encourages all members and other interested persons to comment on the proposed amendments to Schedule E. Comments should be directed to:

      Mr. Lynn Nellius, Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506.

      Comments should be received no later than July 5, 1990. Comments received by this date will be considered by the Corporate Financing Committee and the NASD Board of Governors. Any changes to the Schedule that are approved by the Board must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions regarding this notice may be directed to Charles L. Bennett, Assistant Director, NASD Corporate Financing Department, at (202) 728-8258.

      NASD MANUAL SCHEDULES TO THE BY-LAWS

      Schedule E

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

      Distribution of Securities of Members and Affiliates — Conflicts of Interest

      Section 1 — General

      (a) No member or person associated with a member shall participate in the distribution of a public offering of debt or equity securities issued or to be issued by the member, the parent of the member, or an affiliate of the member and no member or parent of a member shall issue securities except in accordance with this Schedule.
      (b) No member or person associated with a member shall participate in the distribution of a public offering of debt or equity securities issued or to be issued by a company if the member and/or its associated persons, parent, or affiliates have a conflict of interest with the company as defined herein, except in accordance with this Schedule.

      Section 2 — Definitions

      Note: Definitions in this section appear in alphabetical order designated by letters. Existing definitions will be given new letters on adoption of the proposed amendments to maintain alphabetical order.

      * * * * *

      (e) Common Equity — the total number of shares of common stock outstanding without regard to class, whether voting or nonvoting, convertible or nonconvertible, exchangeable or nonexchangeable, redeemable or nonredeemable, as reflected on the consolidated financial statements of the company.

      * * * * *

      (g) Conflict of Interest — shall be deemed to exist if:
      (1) a member and/or its associated persons, parent, or affiliates in the aggregate beneficially own 10% or more of the outstanding debt of a company or its parent;
      (2) a member and/or its associated persons, parent, or affiliates in the aggregate beneficially own 10% or more of the common equity of a company, or its parent which is a corporation, or in the case of a partnership, beneficially own a general, limited, or special partnership interest, in 10% or more of the distributable profits or losses of a company or its parent;
      (3) a member and/or its associated persons, parent, or affiliates in the aggregate beneficially own 10% or more of the preferred equity of a company or its parent.
      (h) Debt — the short- and long-term debt as reflected on the consolidated financial statements of the company.

      * * * * *

      (m) Preferred Equity — the aggregate capital invested by all persons in the preferred securities outstanding without regard to class, whether voting or nonvoting, convertible or nonconvertible, exchangeable or nonexchangeable, redeemable or nonredeemable, as reflected on the consolidated financial statements of the company.

      Section 3 — Participation in Distribution of Securities [of Member or Affiliate]

      (a) No member shall underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of an issue of debt or equity securities issued or to be issued by the member or an affiliate of the member, or of a company with which the member or its associated persons, parent, or affiliates have a conflict of interest, unless the member is in compliance with subsection 3(b) and subsection 3(c) below.

      * * * * *

      (c) If a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of its own or an affiliate's securities or proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of securities of a company with which it or its associated persons, parent, or affiliates have a conflict of interest, subject to this Section without limitation as to the amount of securities to be distributed by the member, one or more of the following three criteria shall be met:

      * * * * *

      Section 4 — Disclosure

      * * * * *

      (b) All offerings included within the scope of this Schedule shall disclose in the underwriting section of the registration statement, offering circular or similar document that the offering is being made pursuant to the provisions of this Schedule, that the offering is being made by a member of its own securities or those of an affiliate, or those of a company with which the member or its associated persons, parent, or affiliates have a conflict of interest, the name of the member acting as qualified independent underwriter, if any, and that such member is assuming the responsibilities of acting as a qualified independent underwriter in pricing the offering and conducting due diligence.

      Section 11 — Suitability

      Every member underwriting an issue of its securities, or securities of an affiliate, or the securities of a company with which it has a conflict of interest, pursuant to the provisions of Section 3 hereof, who recommends to a customer the purchase of a security of such an issue shall have reasonable grounds to believe that the recommendation is suitable for such customer on the basis of information furnished by such customer concerning the customer's investment objectives, financial situation, and needs, and any other information known by such member. In connection with all such determinations, the member must maintain in its files the basis for its determination.

      Section 12 — Discretionary Accounts

      Notwithstanding the provisions of Article III, Section 15 of the Corporation's Rules of Fair Practice, or any other provisions of law, a transaction in securities issued by a member or an affiliate of a member, or by a company with which a member has a conflict of interest shall not be executed by any member in a discretionary account without the prior specific written approval of the customer.

    • 90-38 Proposed Concept for Continuing Assessment of Registered Representatives in the Form of Amendment to Part HI, Section (1)(d) of Schedule C to the NASD By-Laws; Last Date for Comment: July 31, 1990

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Registration
      Training

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

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed concept for the continuing assessment of registered representatives and a proposed enabling amendment to Part III, Section (1)(d) of Schedule C to the NASD By-Laws. The manner in which the proposed continuing assessment program for registered representatives would be conducted is discussed in detail in the body of this notice. The NASD Board of Governors invites comments on all aspects of this major regulatory initiative which, if adopted, will have a substantial impact on member firms.

      BACKGROUND

      A significant aspect of the NASD's regulatory activity involves the qualification and registration of registered representatives and principals associated with member firms. To date, this activity has been focused on the initial qualification of registered representatives and of persons assuming principal functions for the first time. This focus on initial qualification may no longer be sufficient.

      The decade of the eighties brought a quantum increase in the rate of change in the securities industry. New products proliferated, new tax effects took hold, and new laws and regulations came into being to address the problems that became apparent during the course of the last decade. These and many other changes took place within a rapidly changing economic landscape that is now global in scope. The magnitude of these changes invites the question of whether it is in the best interests of the industry and the investing public to establish a formal regulatory program to provide better assurances that minimum knowledge levels are being maintained by securities industry professionals after their initial registration.

      These concerns are building at the state level where continuing education requirements have been in place for many years in other fields such as insurance, real estate, law, and medicine. The North American Securities Administrators Association (NASAA) has advised the NASD that seven state securities administrators are now 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 would differ widely among the states. Compliance with similar state-based programs in the insurance field is already a difficult and costly matter for many NASD members whose representatives are subject to numerous state jurisdictions. This situation would be compounded if differing state requirements were also established in the securities field.

      If there were a time to establish a national program that addresses concerns about the continuing qualifications of securities industry professionals, it would appear to be now, before the momentum shifts to the individual states. If the below described proposal were adopted by the NASD and thereafter approved by the Securities and Exchange Commission (SEC), NASD and NASAA committees would work together to implement a national program.

      The concept proposed herein would not institute continuing education requirements such as those that have been established in the insurance, real estate, legal, and medical professions; this is not to question the worth of well conceived continuing education programs. The proposed concept implicitly recognizes, however, that formal continuing education requirements, mandated by regulatory organizations, have proven cumbersome to administer and have often been implemented with vague standards as to what exactly such programs are meant to accomplish.

      As a consequence, regulatory continuing education programs have often led to situations where mere attendance at a program becomes the measure of performance rather than a straightforward demonstration of knowledge gained from a course. Most of the traditional continuing education programs also treat all participants alike under the requirements; that is, even persons who have maintained a high level of expertise are required to attend the same number of hours of instruction as someone who has barely kept up with the field. There is a concern that a traditional continuing education approach would not be a cost-effective program in the securities industry.

      These considerations have led to the proposition that the most appropriate role for the NASD is to assure that certain minimum levels of knowledge are being maintained by registered representatives. Accordingly, the NASD Board is circulating for member comment a continuing assessment program for registered representatives. In this program, aggregate performance of each firm's registered representatives would be monitored against a standard as a means to assure member involvement in the continuing education of their registered representatives. The manner in which such levels are maintained, that is by self-study, firm training programs, or educational courses, is a matter left to each member firm and its registered representatives. The structure of the proposed continuing assessment program is contained in the following sections.

      Persons Subject to the Proposed Assessment Program and Assessment Cycle

      The continuing assessment program, if adopted, would apply only to registered representatives. Member firms are required today to provide significant training support for principals pursuant to the provisions of Article III, Section 27 of the NASD Rules of Fair Practice. The NASD district offices are responsible for ensuring such ongoing programs for principals are adequately carried out by members. This proposal addresses the continuing assessment of registered representatives only.

      The proposed assessment of registered representatives would be conducted every three years, using each representative's registration anniversary date as the scheduling mechanism. Representatives would be required to sit for the reassessment during the third year. A representative who neglects to sit for the triannual assessment requirement would be suspended at the end of the third year until the assessment is satisfied. If no such action is taken within two years of the suspension date, the person would be subject to the normal entry-level qualification requirement before the registration could be instituted again. The status of each registered representative would be monitored by the Central Registration Depository (CRD), which would generate appropriate notices to members regarding the assessment requirements of registered representatives.

      Grandfathering

      All persons registered as of the inauguration date of the continuing assessment program would be grandfathered. This step is suggested for three reasons. First, grandfather provisions have been a traditional part of the NASD's qualification process since it was established in the mid-1950s. At that time, practicing registered representatives were grandfathered when the first testing requirement was established by the NASD. Similar grandfather provisions were available when the principal qualification process was instituted in 1965. Second, on the basis of current turnover rates in the industry in three years, approximately 50 percent of the registered representatives would be subject to the assessment program, while approximately 90 percent would be subject to the program within 10 years.

      Grandfathering would be a fair means of introducing a new regulatory program of this magnitude, and its staged implementation would provide a practical means for both members and regulators to become familiar with the operation of the continuing assessment program. Third, grandfathering is a useful transition step in order to implement the major regulatory initiative embodied in the continuing assessment program. It is possible that, at the urging of the states, grandfathering privileges may not be extended to representatives who were subject to certain disciplinary actions in the past. Furthermore, it is contemplated that disciplinary actions taken after the proposed assessment program becomes effective could result in loss of grandfather status as one of the possible sanctions imposed by the NASD or state regulators.

      Implementation

      If the continuing assessment proposal goes forward, the program would be implemented on a specified date following SEC approval. All representatives registered after the inauguration date would be subject to the assessment requirement, with the first assessments taking place in the third year of registration. This would provide sufficient time for the industry oversight committees and NASD staff to develop the assessment programs, the supporting information systems, and the more specific rules governing various details of the program. The assessment would be conducted daily on the NASD automated testing system, and a fee schedule appropriate to the cost of administering the continuing assessment program would be established.

      Assessment Objectives

      Persons subject to the continuing education program would be required to submit to periodic assessments of their knowledge against a standard to be established by the NASD Board. This standard would be expressed in two ways. First, a body of objectives would be identified that would precisely define the kinds of knowledge and skills registrants would be required to demonstrate. These objectives would parallel the knowledge or skill measured in the test questions used in the assessment program. In effect, any test question used in the assessment program would be reflected in a clearly stated behavioral objective, and the sum of the behavioral objectives would equate to a course outline for anyone preparing representatives for the periodic assessment. This set of objectives would be available to firms, training organizations, and representatives on a real-time basis; that is, the objectives would be updated at any time a change is made to the question bank used to support the assessment program.

      The second element of the assessment program would be the identification of performance standards, for both individuals and aggregate performance of each member firm. The individual performance standard would be similar to the scores reported today on the entry level of exams. The standards for a firm would identify the proportion of its candidates that should achieve a certain score level in the assessment program. Firms would be expected to meet the performance standard and would be continuously monitored in this regard. Prolonged sub-par performance by a firm could ultimately lead to disciplinary action by the NASD.

      Assessment Content

      The assessment tests would not be as broad in scope as are the entry-level qualification examinations. The latter programs are designed as entry-level tests that address all the subject matter relevant to a particular registration category. Each assessment test would be more selective in the choice of subject matter, focusing instead on the minimal maintenance level of knowledge and new developments in the industry. Such tests would also be shorter in duration than the entry-level examinations. While the details here would be the responsibility of the industry oversight committee for each assessment test, the content of each assessment program would focus on assessing registrant understanding of sales-practice regulation, investment risk, customer suitability, and new product, tax, or regulatory developments appropriate to the various registration categories.

      The proposed assessment tests would also contain an educational interaction with registered representatives. While registrant initial responses would be recorded for scoring purposes, the computer program administering the assessment would be designed to confirm correct responses and to explain why an incorrect choice is wrong. In this way, the assessment process itself can serve a stronger educational purpose than the usual testing process.

      The assessment program would parallel the structure of the entry-level qualification program with separate assessment tests for the different categories of registration. The industry oversight committees working with the staff on these programs would also coordinate with NASAA to ensure that the various assessment programs address the concerns of the states and that the proposed continuing assessment program emerges as a uniform, national regulatory effort.

      Information System

      The operation of the continuing assessment program, described in general terms above, depends on the development of a sophisticated information system in the qualification area. As indicated above, the assessment question bank must be accompanied by a complementary bank of behavioral objectives relevant to the program, and this set of behavioral objectives must be available on a real-time basis to the membership. Secondly, it would be necessary to track individual performance in a detailed fashion so as to provide the maximum amount of feedback to the member for each registrant coming through the assessment program. The level of reporting would extend to the actual behavioral objectives of the items answered incorrectly by the candidate. In this way, the candidate would have a precise definition of those areas in which he or she is weak and can then take steps to improve understanding on those matters.

      A similar data base would need to be constructed for each firm in order to identify performance overall and in each of the major sections of the assessment program, down to the proportion of people who answer correctly the different behavioral objectives in the assessment program. This would be invaluable information for a firm in any effort to upgrade its internal training programs to meet the assessment standards and would be provided to the firm under the applicable fee structure for the candidate assessments. The information systems envisioned here would also be expanded to permit direct access by member firms in order to foster a real-time awareness of firm performance and to permit member firms and training organizations to identify subsets of their assessed population in order to analyze results in greater detail.

      Consequences of Poor Performance

      Individual candidates would not fail the proposed assessment in the same way that someone would fail an entry-level examination. In the latter program, candidates for representative registration who fail are simply not permitted to engage in the securities business. Persons who do poorly on an assessment test — that is, below the established performance standard — would be provided with detailed feedback and would be required to return for a follow-up assessment within 90 calendar days. The firm would be required to place the representative under closer-than-normal supervision. Continued poor performance would require continued assessments in consecutive 90-day periods and continued closer-than-normal supervision. After three consecutive assessments below the defined standard, the employing member firm would be required to submit a plan, satisfactory to the NASD district office having jurisdiction over the representative, that would:

      1. Identify the procedures the firm has implemented and will maintain for closer- than-normal supervision of such representative's activities in the securities business until such time as the representative meets the assessment standard; and,
      2. Identify the educational program the firm will provide for the representative before the next formal assessment, such assessment to take place during a time frame satisfactory to the District but in no event more than 90 days from the last failed assessment.

      Very few, if any, representatives are likely to fail the assessment standard at this point, but the possibility does exist. Final NASD action at this stage would bring the continuing assessment process to a conclusion and could include revocation of a representative's registration. The representative would then be subject to re-qualification via the usual entry-level examinations in order to be registered again.

      A performance standard for firms would also be established by the Board or the appropriately delegated assessment review committee. This standard would be expressed as the proportion of registrants required to achieve a minimum performance level on the individual assessments and could be expanded to include subsets of the subject matter within the assessment program. The information systems supporting the entire operation would monitor in real-time successive samples of registrants by firm coming through the assessment program. Comparison with the performance standard would be made using standard statistical quality control techniques. Permissible variations from this standard would be calibrated on the basis of the number of assessed candidates from a firm, so that a band of variation would be permitted around the performance standard. Firms with a small number of registrants would be permitted greater variability than a firm with a large number of people, an approach fully consistent with quality control measurement systems used in a variety of fields.

      A member firm initially failing to achieve the performance standard would receive a warning and would be required, within a stipulated period of time, to bring the performance of the registrants up to the standard. Failure to meet the standard within the prescribed period of time, in the absence of mitigating circumstances, could lead to the NASD requiring remedial action in the member firm. Other actions would also be available to a firm. For example, if a firm's registrants were subject to an assessment program that incorporated material that was not part of their business, the firm could reconsider the registration categories of the registrants and reconfigure its registrations to comport to the types of business being done by the firm. Thus, a general securities representative who specializes in investment banking could change the registration to corporate securities representative and sit for an assessment more geared to his or her activities in the industry.

      SUMMARY OF PROPOSED AMENDMENT TO PART III (1)(D) OF SCHEDULE C TO THE NASD BY-LAWS

      In order for the continuing assessment program to be effective, it would be necessary to adopt a rule that would subject new registered representatives to the continuing assessment program. The following amendment to Part III (l)(d) of Schedule C to the By-Laws would create the continuing assessment requirement for all representatives who first become registered on or after the effective date of the amendment. The continuing assessment requirement would also apply to previously registered representatives who are required to requalify by entry-level examination due to the expiration of the two-year registration termination grace period pursuant to Part III, Section (l)(c) of Schedule C to the NASD By-Laws. It is anticipated that a number of other rule amendments would be proposed for Schedule C in the two-year period after the inauguration of the continuing assessment program and before the administration of the first continuing assessment examination. These rules would address the specific performance standard for individuals and member firms, the standards for closer-than-normal supervision of representatives performing poorly on an assessment examination, the procedures for revocation of registration in those situations where a representative does poorly on four consecutive assessment examinations, and such other adjudicative and administrative provisions as may be necessary to fully implement a continuing assessment program.

      * * * * *

      The NASD encourages all members and other interested persons to comment on this important regulatory initiative and the proposed amendment to Schedule C to the By-Laws. Comments should be directed to:

      Mr. Lynn Nellius
      Corporate Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, D.C. 20006-1506

      Comments must be received no later than July 31, 1990. All comments will be made available for public inspection. Comments received by this date will be considered by the NASD's Membership Committee and the NASD Board of Governors. If approved by the Board, the amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to Frank J. McAuliffe, Vice President, Qualifications Department, at (301) 590-6694 or David Uthe, Senior Qualifications Analyst, at (301) 590-6695.

      PROPOSED AMENDMENT TO SCHEDULE C OF THE NASD BY-LAWS III

      REGISTRATION OF REPRESENTATIVES

      (Note: New language is underlined.)

      (1) Registration Requirements
      (a) All Representatives Must Be Registered
      (b) Definition of Representative
      (c) Requirement for Examination on Lapse of Registration
      (d) Requirement for Periodic Assessment of Representatives - Any person whose initial registration in any category of representative registration becomes effective, pursuant to Part III, Section (2) hereof, on or after (the effective date of this provision) shall be subject to periodic assessment and requalification in the third year of every consecutive three-year period following the initial effective date of registration in such category. The periodic assessment and requalification of representatives shall be conducted using examinations and/or such other assessment methods as may be deemed appropriate by the Board of Governors to each of the registration categories contained in Part HI, Section (2) hereof. Any person required after (the effective date of this provision) to pass a Qualification Examination for Representatives pursuant to Part HI, Section (l)(c) above shall be subject to the assessment and requalification requirements of this section.

    • 90-37 Proposed New Rule Re: Handling Customer Limit Orders; Last Voting Date: July 5, 1990

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Trading
      Training

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

      MAIL VOTE

      In Notice to Members 85-12 (February 15, 1985), the NASD set forth its views that, on accepting a customer limit order, a member undertakes a fiduciary obligation and cannot trade for its own account at prices more favorable than the customer limit order unless there is an understanding by the customer as to the priorities that will govern the order. At the time it issued Notice to Members 85-12, the NASD contemplated an amendment to the Rules of Fair Practice that would codify this position. Because an appeal of an NASD disciplinary action involving this issue was pending, however, the NASD did not proceed with such rule making. The Commission ruled in that disciplinary action and affirmed the conclusion reached by the NASD.1

      The NASD Board, therefore, determined that it was appropriate to provide guidance to NASD member firms as to the type of communication with customers that would satisfy member firms' obligations with respect to the handling of customer limit orders. To this end, the NASD set forth a proposal in Notice to Members 89-39 (May 1989). Based on concerns raised by the SEC staff relating to the form and frequency of the disclosure contemplated by the 1989 proposal, the NASD Board of Governors decided to make certain modifications to the rule.

      The proposed rule change provides that each member firm that accepts and holds an unexecuted customer limit order, and anticipates continuing to trade in the security that is the subject of this order for its own market-maker account at prices equal to or better than the limit price, shall not be deemed to have acted in a manner inconsistent with Article III, Section 1 of the Rules of Fair Practice if it provides a separate written statement to each existing customer at the time the rule is adopted and to each new customer upon the opening of an account, clearly disclosing the circumstances under which the firm accepts limit orders and the policies and procedures followed by the firm in handling those orders.

      The rule further provides that additional disclosure shall be provided in the form of a separate statement that is either distributed annually or enclosed with confirmations of limit-order transactions. The text of a model disclosure statement that the NASD deems to constitute adequate disclosure of the fact that a firm may accept a limit order but not grant the order priority over its own market-making activities is also included. Lastly, the rule requires that nonstandardized disclosure documents be filed with the NASD at or before the time they are first used. The documents will not be pre-approved, but will be reviewed for compliance.

      The NASD Board of Governors believes the proposed rule amendments will provide necessary guidance to NASD members on what steps they must take to ensure that customers placing limit orders with the firm are treated in a manner consistent with the firm's obligations under Article III, Section 1 of the Rules of Fair Practice. Thus, the Board believes the proposed amendments 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 July 5, 1990.

      Questions concerning this notice may be directed to T. Grant Callery, Vice President and Deputy General Counsel, at (202) 728-8285.

      PROPOSED NEW SECTION 45 TO ARTICLE III OF THE NASD RULES OF FAIR PRACTICE

      Sec. 45. Customer Limit Orders

      (a) A member firm that has accepted and holds an unexecuted limit order from a customer and continues to trade the subject security for its own market-maker account at prices equal to or better than the limit order price shall not be deemed to have acted in a manner inconsistent with Article III, Section 1 of the Rules of Fair Practice if the member firm provides to its existing customers as of the effective date of this rule, and to each new customer at the time his or her account is opened, a separate document containing a written statement clearly disclosing:
      (i) the circumstances in which the firm accepts limit orders, and
      (ii) the policies and procedures followed by the firm in handling such orders; and subsequently provides additional disclosure in the form of a separate notice either distributed annually or enclosed with each confirmation of a limit order transaction.
      (b) If it is the policy of a member firm that acts as a market maker to accept limit orders from its customers but not to grant priority to such orders over transactions for its own market-maker account, a written statement substantially as follows provided by the member firm would be deemed to constitute adequate disclosure to its customers for purposes of paragraph (a) of this Section:
      "By accepting your limit order for transactions in securities in the NASDAQ or over-the-counter market, we undertake to monitor the interdealer market and to seek to execute your order only if the inside bid (in the case of a limit order to sell, the highest price at which a dealer is being quoted as willing to buy securities) or the inside asked (in the case of a limit order to buy, the lowest price at which a dealer is being quoted as willing to sell securities) reaches your limit price. We reserve the right, while your limit order remains unexecuted, to trade for our own market-maker account at prices equal to or better than your limit order price and not to execute your order against incoming orders from other customers. For example, if the inside market is 10 bid, 10 1/4 asked and you place a limit order to sell securities at 10 1/8, we will seek to execute your order only if the inside bid reaches your limit price of 10 1/8 (exclusive of any mark-down or commission equivalent that we may charge in connection with the transaction) and, while your order remains unexecuted, we may continue to sell securities for our market-maker account at prices at or above 10 1/8."
      (c) In the event a member firm chooses to use non-standardized disclosure documents, examples of these documents must be filed with the Associa tion at the time they are first used or made public. The advance filing of such documents shall not, however, constitute approval of the statements by the Association.

      1In the Matter of E.F. Hutton & Co., Exchange Act Release No. 25587 (July 6, 1988).


    • 90-36 Proposed Amendments to the NASD By-Laws Implementing the Recommendations of the Special Committee on NASD Structure and Governance; Last Voting Date: July 5, 1990

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance

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

      MAIL VOTE

      EXECUTIVE SUMMARY

      NASD members are invited to vote on amendments to the NASD By-Laws implementing the recommendations of the Special Committee on NASD Structure and Governance ("Special Committee"). The amendments were previously submitted to the membership for comment. They provide for a reduction in the size of the Board and changes to its composition. In addition, they provide for changes in the number and configuration of the NASD districts. The amendments have been adopted by the Board of Governors ("Board") and now require membership approval. Prior to becoming effective, the amendments must be filed with, and approved by, the Securities and Exchange Commission (SEC). The full text of the amendments follows this notice.

      BACKGROUND

      The By-Laws of the NASD govern the composition of the Board and the number and configuration of the districts. The amendments are necessary to implement the recommendations of the Special Committee relating to the Board and the districts. These recommendations result from an intensive study conducted by the Special Committee of the structure and governance of the NASD and its subsidiaries. The amendments are designed to ensure that the NASD's governance process fairly represents the increased diversity of the securities industry and continues to command the respect and confidence of investors, issuers, and our members.

      The recommendations of the Special Committee were approved for comment by the Board in March 1990. Proposed amendments implementing the recommendations were submitted to the membership for comment as part of Notice to Members 90-19.1 Comment letters were received from 11 members and from one association representing the life insurance industry. A number of these comments were general endorsements of the amendments and the recommendations of the Special Committee, while others raised concerns about specific aspects of the amendments. After careful consideration of the comments received, the Board approved and adopted the amendments as originally proposed.

      PROPOSED AMENDMENTS

      The proposed amendments to the By-Laws address the size and composition of the Board and the number and configuration of the districts.

      The Board of Governors

      The By-Laws currently provide for a Board of 31 Governors. The amendments would give the Board the authority to adjust its size between 25 and 29 Governors.2 The Board has resolved to reduce its size to 29 Governors upon approval of the amendments.

      Under the current By-Laws, the Board is composed of 21 Governors elected from the districts; nine Governors elected by the Board from the securities industry, issuers, and the public; and the President. The amendments implement the Special Committee recommendation that a greater proportion of Governors be elected by the Board based on:

      • The need to fairly and effectively represent the many types of participants in the securities industry,3 some of which traditionally have not been represented through the district election process.
      • The need to recruit candidates with a broad range of backgrounds and with specialized expertise in the international, technology, and other diverse issues that must be addressed effectively by the Board to fulfill the mission of the NASD.
      • The desire to improve the NASD's ability to recruit candidates who may be able to make significant contributions to the Board and to the NASD's mission, but who are unable to commit the time required for service at both the Board and district level.
      • The need for domestic and overseas issuer representation in the heightened competitive environment in which the NASDAQ® market operates.
      • The need for substantial public representation on the Board.
      • The practical limitations on the size of the Board.

      The amendments decrease the number of Governors elected from the districts. The amendments also incorporate two recommendations of the Special Committee to ensure that this would not jeopardize fair representation of local and regional firms â€" which both distinguishes the NASD from other self-regulatory organizations and is necessary for effective nationwide regulation and enforcement. First, each district will be represented on the Board by at least one Governor; and second, the number of Governors elected from the districts will constitute an absolute majority of the Board.

      Some commenters expressed concern that the reduction in the proportion of industry Governors would reduce the level of industry expertise and experience on the Board and would make the Board less representative of the industry. The Special Committee addressed these concerns in making its recommendations and concluded that they were outweighed by the need for additional issuer and investor representation on the Board. In addition, the amendments insure that industry Governors elected from the districts will constitute an absolute majority of the Board and that all industry Governors combined would constitute at least two-thirds of the Board.4

      The amendments provide for continued representation on the Board of the insurance and investment company sectors of the securities industry.5 One commenter urged the Board to increase insurance industry representation on the Board in light of the increasing impact of NASD actions on the insurance industry.6 The Special Committee considered whether to expand the number of Governors representative of specified sectors of the securities industry. It rejected such an approach as inconsistent with the objectives of providing the Board with increased flexibility to determine its composition and of enhancing its opportunity to elect the best candidates for Governor to the Board. Instead, the amendments provide that the Board shall elect at least three Governors representative of members in addition to those elected by the districts. These three Governors can be elected from any sector of the securities industry. The substance of this comment can therefore be addressed by the Board and its National Nominating Committee during the nominating process.7

      The amendments give the Board of Governors the authority to provide for compensation of Governors, the Chairman of the Board, and members of committees. The Special Committee considered the issue of compensation and found that the lack of compensation has not to date adversely affected the recruitment of highly qualified candidates for service as Chairman or on the Board or its committees. Consequently, the Special Committee did not recommend, and the Board does not envision, providing compensation at this time. The Special Committee did recommend, however, that the Board be given the flexibility to provide for such compensation in the event the Board finds it necessary to ensure the successful recruitment of highly qualified candidates for service as Chairman or on the Board or its committees.8

      Districts

      The NASD's district structure, and its role in the selection of Governors, is an essential element of the governance of the NASD that distinguishes the NASD from other self-regulatory organizations in the securities industry. The Special Committee found that changes to the existing district structure, consistent with fair and effective district representation on the Board, were necessary to address significant demographic shifts in the NASD's membership as well as the revisions to the composition of the Board recommended by the Special Committee.

      The amendments give the Board the authority to change the number and borders of the districts and the number of Governors nominated from each district to ensure fair representation of members and districts on the Board.9

      The Board has adopted, subject to member and SEC approval of the amendments, the changes to the districts recommended by the Special Committee.10 The Board has determined that these changes are necessary in view of the NASD's obligation under the Securities Exchange Act of 1934, as amended ("Exchange Act"), to ensure fair representation of its members in the selection of Governors11 and the requirement of the By-Laws that the Board consider from time to time the fairness of the representation of the various districts on the Board.12 The changes yield somewhat fewer, but larger, districts which the Board believes will benefit the NASD by lessening the disparities among districts in terms of members and regulatory responsibilities, providing a larger pool of candidates from which to elect District Committee and Board members, and improving the NASD's ability to administer and supervise the districts.

      The number of districts would be reduced from 13 to 11. These 11 districts would be represented on the Board by 15 of its 29 Governors. The 11 new districts would be as follows:13

      • New District 1 — This district would comprise the portion of existing District 2 referred to as District 2N. It would include northern California (the counties of Monterey, San Benito, Fresno, and Inyo, and the remainder of the state north or west of such counties), northern Nevada (the counties of Esmeralda and Nye, and the remainder of the state north or west of such counties) and Hawaii. It would elect one Governor.
      • New District 2 — This district would comprise the portion of existing District 2 referred to as District 2S. It would include southern California (that part of the state south or east of the counties of Monterey, San Benito, Fresno, and Inyo) and southern Nevada (that part of the state south or east of the counties of Esmeralda and Nye). It would elect one Governor.
      • New District 3 — This district would comprise existing Districts 1 (Seattle) and 3 (Denver). It would include Alaska, Arizona, Colorado, Idaho, Montana, New Mexico, Oregon, Utah, Washington, and Wyoming. It would elect one Governor.
      • New District 4 — This district would comprise most of existing District 4 (Kansas City) and certain neighboring states. It would include Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. This district would elect one Governor.
      • New District 5 — This district would comprise most of existing District 5 (New Orleans) and certain neighboring states. It would include Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma, and Tennessee. This district would elect one Governor.
      • New District 6 — This district would comprise existing District 6 (Dallas), consisting of Texas. It would elect one Governor.
      • New District 7 — This district would comprise most of existing District 7 (Atlanta) and one neighboring state. It would include Florida, Georgia, North Carolina, South Carolina, Puerto Rico, the Canal Zone, and the Virgin Islands. This district would elect two Governors.
      • New District 8 — This district would comprise most of existing Districts 8 (Chicago) and 9 (Cleveland) and part of upstate New York. It would include Illinois, Indiana, Michigan, Ohio and Wisconsin, and part of upstate New York (the counties of Monroe, Livingston and Steuben, and the remainder of the state west of such counties). This district would elect two Governors.
      • New District 9 — This district would comprise most of existing Districts 10 (Washington, D.C.) and 11 (Philadelphia). It would include the District of Columbia, Delaware, Maryland, Pennsylvania, Virginia, West Virginia, and southern New Jersey (the counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem). This district would elect one Governor.
      • New District 10 — This district would comprise existing District 12 (New York) and northern New Jersey. It would include the five boroughs of New York City and the adjacent Counties in New York (the counties of Nassau, Orange, Putnam, Rockland, Suffolk, Westchester) and northern New Jersey (the state of New Jersey, except for the counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem). This district would elect three Governors.
      • New District 11 — This district would comprise existing District 13 (Boston), with the exception of part of upstate New York. It would include Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, and New York (except for the counties of Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester; the counties of Monroe, Livingston, and Steuben; the remainder of the state west of such counties; and the five boroughs of New York City). This district would elect one Governor.

      The reconfiguration of the districts drew the most comments from members. One commenter suggested that Oklahoma should be part of District 6 (Dallas) instead of new District 5 (New Orleans). This suggestion was not accepted because it would result in a less even distribution of members among the districts. Another commenter suggested eliminating new District 5 (New Orleans) and reconfiguring new Districts 4 (Kansas City), 6 (Texas), and 8 (Chicago), including dividing new District 8 into two districts. This comment was not accepted since it would require significant additional changes to the district configuration without substantially improving the fairness of district representation.

      A number of commenters criticized the formation of new Districts 3 (Denver/Seattle) and 9 (Philadelphia/Washington, D.C.). These commenters generally expressed the concern that there would be a reduction in service to members from the district offices and a loss of the working relationships that they have developed with the district office staff. The concerns expressed are best answered by the NASD's continuing commitment to provide all members, regardless of location, with superior service from its district offices. Further, the elimination of a district does not necessarily mean that its local NASD office will be closed. The NASD does not intend to close any of its offices at this time. Accordingly, the Board determined not to change the proposed amendments in response to these comments.

      Commenters also criticized the geographic size of new District 3 (Denver/Seattle) and the burdens this may impose on District Committee members. The Board decided not to change proposed new District 3 as its size is largely a result of the relatively low density of members in the area and the high density of members on the West Coast. To address the concerns regarding caseload and travel burdens on members, the District Committees in the merged districts (new Districts 3, 8, and 9) will consider establishing subcommittees of their District Committees and the District Business Conduct Committees as an effective means of improving representation at the district level and reducing travel time for committee members.14

      REQUEST FOR VOTE

      The complete text of the proposed amendments to the By-Laws follows. These proposed amendments merit members' immediate attention. Prior to becoming effective, the proposed amendments must be approved by the NASD membership and thereafter by the SEC.

      The NASD Board of Governors believes these proposed amendments to be 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 July 5, 1990.

      Questions concerning this notice should be directed to Derek W. Linden, Associate General Counsel, Office of General Counsel, at (202) 728-8810, or Lynn Nellius, Secretary of the NASD, at (202) 728-8381.

      TEXT OF PROPOSED AMENDMENTS TO THE BY-LAWS

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

      ARTICLE I

      Definitions

      When used in these By-Laws, and any rules of the Corporation, unless the context otherwise requires, the term:

      * * * * *

      (r) "Board" means the Board of Governors of the Corporation.
      (s) "Governor" means a member of the Board.

      ARTICLE VII

      Board of Governors

      Composition of Board

      Sec. 4. (a) The management and administration of the affairs of the Corporation shall be vested in a Board of Governors composed of from twenty-five to twenty-nine Governors [thirty-one members], as determined from time to time by the Board. The Board shall consist of: (i) at least thirteen but not more than fifteen Governors [twenty-one] to be elected by the members of the various districts in accordance with the provisions of subsection[s] (b) [(1) through (5)] hereof; [,] (ii) at least eleven but not more than thirteen Governors [nine] to be elected by the Board [of Governors] in accordance with the provisions of subsection[s] (c) [(b)(6), (7) and (8)] hereof; [,] and (iii) the President of the Corporation to be selected by the Board [of Governors] in accordance with the provisions of Article X, Section 2 of the By-Laws. The Board, in exercising its power to determine its size and composition under this subsection (a), shall be required to select its members in a manner such that when all vacancies, if any, are filled, the number of Governors elected by the members of the various districts in accordance with subsection (b) hereof shall exceed the number of Governors (including the President) not so elected.

      (b) The several districts shall be represented on the Board [of Governors]. Each district shall elect at least one Governor. The Board shall determine from time to time which districts, if any, shall elect more than one Governor, to provide fair representation of its members and of the various districts. The determination of which districts shall elect more than one Governor need not be submitted to the membership for approval and shall become effective at such time as the Board may prescribe. [The elected members of the Board of Governors shall be chosen as follows:] The Board shall, from time to time, consider the fairness of the representation of members and of the various districts on the Board. Whenever the Board finds any unfairness in such representation to exist, it shall make appropriate changes in the number or boundaries of the districts or the number of Governors elected by each district to provide fair representation of members and districts.
      [(1) Three members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 2;
      (2) Two members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 8;
      (3) Five members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 12;
      (4) Two members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 13;
      (5) One member of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in each of the remaining districts not referred to in Subsections (1), (2), (3) and (4) of this Section;]
      (c) The Board shall elect (i) at least three Governors representative of investors, none of whom are associated with a member or any broker or dealer; (ii) at least three Governors representative of issuers, at least one of whom is not associated with a member or any broker or dealer; (iii) at least three Governors chosen from members; (iv) at least one Governor representative of the principal underwriters of investment company shares or affiliated members; and (v) at least one Governor representative of insurance companies or insurance company affiliated members.
      [(6) One member of the Board of Governors shall be elected by the Board of Governors from among the principal underwriter members of investment company shares, and he shall be designated a Governor-at-Large;
      (7) One member of the Board of Governors shall be elected by the Board of Governors from among insurance company members or insurance company affiliated members of the Corporation and he shall be designated a Governor-at-Large;
      (8) Seven members of the Board of Governors shall be elected by the Board of Governors and they shall be designated Governors-at-Large. Any Governor-at-Large initially filling a Governor-at-Large office shall be elected at such time as the Board of Governors in its discretion deems appropriate;
      (9) At least one member of the Board of Governors shall be representative of issuers and not be associated with a member, broker or dealer and at least one member of the Board of Governors shall be representative of investors and not be associated with a member, broker or dealer;
      (10) The Board of Governors shall, from time to time, consider the fairness of the representation of the various districts on the Board of Governors, and whenever it finds any unfairness in such representation to exist, it shall recommend appropriate changes in these By-Laws to assure fair representation of all districts.]

      Term of Office of Governors

      Sec. 5. Each [elected] Governor [member of the Board of Governors, including the Governors-at-Large], except as otherwise [herein] provided by these By-Laws or the Certificate of Incorporation, shall hold office for a term of three years, and until his successor is elected and qualified, or until his death, resignation or removal. The President of the Corporation shall serve as a member of the Board [of Governors] until his successor is selected and qualified, or until his death, resignation or removal.

      Succession to Office

      Sec. 6.(a) The office of a retiring Governor [member of the Board of Governors] elected under subsection[s (1) through (5)] (b) of Section 4 [3(b)] of this Article shall be filled by the election of a Governor [member] from the same district as that of the retiring Governor [member]. The office of a retiring Governor [-at-Large] elected under subsection (c) of Section 4 of this Article shall be filled by election by the Board [of Governors] as provided in subsection[s] (c) [(6), (7) and/or (8)] of Section 4 [3(b)] of this[e] Articled as the case may be].

      (b) Notwithstanding subsection (a) of this Section 6, the Board shall prescribe the succession of office in cases affected by a change in the number of Governors constituting the Board, the composition of the Board, the number or boundaries of districts, or the number of Governors elected by a district.

      Election of Board Members

      Sec. 7. The [elected members of the Board of] Governors elected under subsection (b) of Section 4 of this Article shall be chosen as follows:

      Procedure for Nominations by Nominating Committees

      (a) Before June 1 of each year, the Secretary of the Corporation shall notify in writing the Chairman of the respective District Committees of the expiration of the term of office of any member of the Board [of Governors] elected under subsection[s](1) through (5)] b of Section 4 [3(b)] of this Article which will expire during the next calendar year. The said Chairman shall thereupon notify the Nominating Committee elected for such District pursuant to the provisions of Section 3 of Article IX of the By-Laws and such Nominating Committee shall proceed to nominate a candidate from such District for the office of each such member of the Board [of Governors] whose term is to expire. Nominating Committees in nominating candidates for the office of [member of the Board of] Governor[s] shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the Board [of Governors] of all classes and types of members engaged in the investment banking and securities business. No Nominating Committee shall nominate an incumbent member of the Board [of Governors] to succeed himself unless it first takes appropriate action by a written ballot sent to the entire membership within the District to ascertain that such nomination is acceptable to a majority of the members voting on such ballot in the District except where the incumbent member of the Board [of Governors] is serving pursuant to the provisions of Section 8[7](a) of this Article. Before October 1 of each year, [E]each candidate nominated by the Nominating Committees shall be certified to the respective District Committee [by September 1 and]. W[w]ithin five (5) days [there] after certification, a copy of such certification shall be sent by the District Committee to each member of the Corporation eligible to vote in the district. Such candidate shall be designated the "regular candidate."

      * * * * *

      Transitional Procedures

      (d) Notwithstanding subsections (a), (b) and (c) of this Section 7, the Board shall prescribe the nomination and election procedures in cases affected by a change in the number of Governors constituting the Board, the composition of the Board, the number or boundaries of districts, or the number of Governors elected by a district.

      Filling of Vacancies on Board

      Sec. 8. All vacancies in the Board [of Governors] other than those caused[s] by the expiration of a Governor's term of office, shall be filled as follows:

      (a) If the unexpired term of a Governor elected under subsection[s] (b) [(1) through (b)(5)] of Section 4 [3] of this Article, is for less than twelve months, such vacancy shall be filled by appointment by the District Nominating Committee of a representative of a member of the Corporation eligible to vote in the same district.
      (b) If the unexpired term of a Governor elected under subsection[s] (b) [(1) through (b)(5)] of Section 4 [3] of this Article, is for twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as practicable in accordance with the provisions of Section 7 [6] of this Article.
      (c) If the unexpired term is that of a Governor[-at-Large] elected by the Board, such vacancy shall be filled in accordance with the provisions of subsections (c)(i) through (c)(v) [(b)(6), (b)(7), and/or (b)(8)] of Section 4 [3] of this Article as the case may be.

      ARTICLE VIII

      District Committees

      Administrative Districts

      Sec. 1. For the purpose of administration, the United States is hereby divided into districts, the boundaries of which shall be established by the Board [of Governors]. The Board [of Governors] may from time to time make such changes in the number or boundaries of such districts as it deems necessary or appropriate. Neither the establishment nor any change in the number or boundaries of such districts need be submitted to the membership for approval, and the number or boundaries, as established or changed, shall become effective at such time as the Board [of Governors] may prescribe. The Board shall prescribe such policies and procedures as are necessary or appropriate to address the implementation of a new district configuration in the event of a change in the number or boundaries of the districts.

      District Committees and District Business Conduct Committees

      Sec. 2. (a) For the purpose of effectuating a maximum degree of local administration of the affairs of the Corporation, each of the districts created under Section 1 of this Article shall elect a District Committee, as hereinafter provided. Each such District Committee shall determine the number of its members so elected, but [in] no [event shall any] District Committee shall consist of more than twelve members[;] unless otherwise provided[,] [however, that] by resolution of the Board, [of Governors by resolution may increase, upon request, any such District Committee to a larger number.]

      * * * * *

      Election of District Committee Members Procedure for Nominations by Nominating Committees

      Sec. 4 (a) ***** Before October 1 of each year, [E]each candidate nominated by the Nominating Committees shall be certified to the respective District Committee [by September 1 and]. W[w]ithin five (5) days [thereafter certification, a copy of such certification shall be sent by the District Committee to each member of the Corporation eligible to vote in the district. Such candidate shall be designated the "regular candidate."

      * * * * *

      Transitional Provisions

      Sec. 12. The Board, by resolution amending or supplementing the provisions of this Article and Article IX, shall have the authority to establish the policies and procedures applicable to District Committees affected by a change in the number or boundaries of the districts, including, without limitation, prescribing the procedures for nomination and election of District Committee members.

      ARTICLE IX

      Nominating Committees

      Composition of Nominating Committees

      Sec. 1. (a) Each of the Districts created under Section 1 of Article VIII of the By-Laws shall elect a Nominating Committee, as provided in Section 3 of this Article. Each such Nominating Committee shall consist of five members; provided, however, that the Board [of Governors] by resolution may increase any such Nominating Committee to a larger number. Members of the Nominating Committee in each District shall be members of the Corporation having places of business in the respective District, but shall not be members of the District Commitee. All Nominating Committees shall include a majority of persons who have previously served on a [the] District Committee [and/] or who are current or former [on the Board of] Governors, and shall [, insofar as practicable,] include at least one current or former [member of the Board of] Governor[s].

      * * * * *

      Election of Nominating Committees Procedures for Nominations by Nominating Committees

      Sec. 3(a) ***** Before October 1 of each year, [E]each candidate nominated by the Nominating Committees shall be certified to the respective District Committee [by September 1 and]. W[w]ithin five (5) days [there] after certification, a copy of such certification shall be sent by the District Committee to each member of the Corporation eligible to vote in the district. Such candidate shall be designated the "regular candidate."

      * * * * *

      Transitional Provisions

      Sec. 7. The Board, by resolution amending or supplementing the provisions of this Article and Article VIII, shall have the authority to establish the policies and procedures applicable to District Nominating Committees affected by a change in the number or boundaries of the districts, including, without limitation, prescribing the procedures for nomination and election of District Nominating Committee members.

      ARTICLE X

      [Restrictions on] Compensation of Board and Committee Members

      Sec. 6. [No member of] The Board [of Governors (except the President of the Corporation or the President pro tem), no member of any District Committee and no member of any other Committee, other than an Extended Hearing Committee as defined in Article I of the Corporation's Code of Procedure shall be entitled to] may provide for reasonable [received any] compensation from the Corporation of the Chairman of the Board, Governors, and the members of any committee of the Board or any District Committee, [for any work done in connection with his duties as a member of the Board of Governors, any District Committee or any other committee. However, such persons shall be entitled to] The Board may also provide for reimbursement of [for] reasonable expenses incurred by such persons in connection with the business of the Corporation.

      ARTICLE XI

      Committees

      National [Standing] Committees

      Sec. 1. The Board [of Governors] may appoint such [standing and other] committees or subcommittees as it deems necessary or desirable, and it shall fix their powers, duties and terms of office. Any such committee or subcommittee consisting of one or more Governors, to the extent provided by these By-Laws or by resolution of the Board, shall have and may exercise all powers and authority of the Board in the management of the business and affairs of the Corporation.

      [District Standing] Committees of the Districts

      Sec. 2. Each District Committee, in the exercise of its powers and performance of its duties as provided in the By-Laws, may, except as otherwise herein provided, appoint such [standing or other] committees or subcommittees as it deems necessary or desirable, and shall fix their powers, duties and terms of office.

      Removal of Committee Member

      Sec. 3. Any member of any committee or subcommittee appointed pursuant to [Sections 1 or 2 of] this Article XI may be removed from office, after appropriate notice from the District Committee appointing such member, or from the Board [of Gov-ernors], if it is the appointing authority, for refusal, failure, neglect or inability to discharge his duties, or for any cause the sufficiency of which shall be decided by the District Committee or the Board [of Governors], whichever is the appointing authority.

      ARTICLE XIV

      Powers of Board to Prescribe Sanctions

      * * * * *

      (d) refusal by a member or person associated with a member to abide by an official ruling of the Board [of Governors] or [Uniform Practice Committee acting within its appropriate authority] any committee exercising powers delegated by the Board with respect to any transaction which is subject to the Uniform Practice Code; or
      (e) failure by a member or a person associated with a member to adhere to any ruling, order, direction or decision of, or to pay any penalty, fine or costs, imposed by, the Board [of Governors], the National Business Conduct Committee, the Market Surveillance Committee, any other committee exercising powers delegated by the Board or any District Business Conduct Commitee.

      1A copy of the final Report of the Special Committee on NASD Structure and Governnance was included with Notice to Members 90-19.

      2The Special Committee recommended that the size of the Board be reduced to enhance the participation of individual Governors and the efficiency of the Board. The Special Committee also recommended that the Board be no smaller than 25 Governors, since the Board must represent a variety of interests and experience and since much of its work is assisted by a large number of committees on which Governor service is highly desirable.

      3This would include representation of banks, pension funds, and other institutions (both domestic and international), specialty or limited-purpose broker-dealers, and continued representation of insurance companies and underwriters of investment company shares.

      4The actual proportion of industry Governors would vary with the size of the Board. It also would depend on the number of Governors elected by the Board who are not required to be associated with members under the By-Laws, but who are in fact associated with members (i.e., a Governor elected to represent issuers who may also be associated with a member).

      5The By-Laws provide that one Governor elected by the Board shall be representative of the insurance sector and one Governor shall be representative of the investment company sector of the securities industry. The amendments retain these requirements, but expand the applicable provisions of the By-Laws to ensure that representatives of these sectors who are associated with affiliates of members can serve as Governors in appropriate

      6This commenter also suggested that the Board establish a committee to address concerns of insurance company members. The NASD staff will be discussing the matter with the commenter with a view to active consideration of this suggestion by the Board.

      7The Special Committee specifically addressed this issue on page 12 of its Report, concluding that:

      "In nominating candidates from the securities industry the National Nominating Committee should be sensitive to the concern that no facet of the industry should dominate the Board and should apply the principle that the self-regulatory responsibilities of the NASD can best be carried out if there is satisfactory representation of all facets of the industry."

      8One commenter opposed compensation for Governors. Compensation of members of the governing boards of self-regulatory organizations in the securities industry is not uncommon. For example, the New York Stock Exchange and the American Stock Exchange provide compensation to their directors comparable to that provided to directors of public companies.

      9The amendments guarantee that each district will be represented by at least one Governor and that the number of Governors elected from the districts constitutes an absolute majority of the Board.

      10The need for these changes in the districts is illustrated by a comparison of District 9 (Cleveland) and District 7 (Atlanta). Today, each district is represented by one Governor, although District 9 has only 166 members and employs 16 staff members, while District 7 has 547 members and a staff of 48.

      11Section 15 A(b)(4) of the Exchange Act requires that "[T]he rules of the association [NASD] assure a fair representation of its members in the selection of its directors and administration of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the association, broker, or dealer."

      12Article VII, Section 4(b)(10) of the By-Laws. The amendments include a similar provision at Article VTI, Section 4(b).

      13The Report of the Special Committee contains a table and map showing the proposed configuration of the districts, the number of members in each district, and the number of Governors representing each district. Notice to Members 90-19 contains the proposed revisions to Schedule B of the By-Laws that would implement the changesin the districts.

      14These District Committees, since they will include members of the District Committees of two or more existing District Committees, will have additional members to staff subcommittees and to address transitional issues.


    • 90-35 SEC Approval for and Startup of the OTC Bulletin Board

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Systems
      Trading

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

      EXECUTIVE SUMMARY

      The OTC Bulletin Board is scheduled to start June 1. The OTC Bulletin Board includes the first real-time display of firm and nonfirm quotation information on potentially more than 10,000 thinly traded securities. It allows market makers to register in whatever number of the securities they wish and to view, enter, and update information on those securities instantaneously. The OTC Bulletin Board is expected to bring increased visibility to these securities as well as provide more efficiency and better regulation.

      ADVANTAGES OF THE OTC BULLETIN BOARD

      A one-year pilot of the OTC Bulletin Board will start up June 1, following its May 1 approval by the Securities and Exchange Commission (SEC). More than 50 market makers are expected to participate. The OTC Bulletin Board captures and displays on a real-time basis, during market hours, firm and nonfirm quotation information (as well as unpriced indications of interest) entered by NASD member firms that function as market makers in eligible securities. This group consists of all equity securities not listed on NASDAQ or any U.S. securities exchange.

      Market makers can use the OTC Bulletin Board to view, enter, and update information on their Bulletin Board securities instantaneously. They may enter either one- or two-sided priced quotes that may be firm or indicative. They also may have unpriced entries (bid wanted, offer wanted), or they may merely enter a trading identifier and telephone number. Participation in the OTC Bulletin Board is voluntary, and market makers may register in as few or as many securities as they wish. They also can use an electronic scan function to view all securities in which they are registered.

      The OTC Bulletin Board will allow all NASD members that are NASDAQ Level 2 or Level 3 subscribers to view on their terminals quotes or indications of interest on potentially more than 10,000 eligible securities. Up until now, only static quote information was available electronically or in print in the "Pink Sheets"™ published by the National Quotation Bureau.

      The new OTC Bulletin Board will bring increased visibility to these securities, many of which are thinly traded, although a number of them are well-capitalized. This visibility will enable smaller companies to enjoy the benefits of a nationwide quotation medium that will help them grow to the point where they may qualify for listing on NASDAQ.

      HOW THE OTC BULLETIN BOARD WILL OPERATE

      NASD member firms will be able to retrieve and view OTC Bulletin Board information by means of Harris terminal devices or PC workstations authorized either for Level 2 or Level 3 NASDAQ service.

      Features of the OTC Bulletin Board's pilot operation include:

      • Market makers electing to participate will incur no minimum obligation as to time or the number of securities that they may quote in the OTC Bulletin Board;
      • Securities chosen by participating market makers will be separately identified by the numeral "3" before the security's four- or five-letter symbol code and accessed by a special key ("P");
      • A participating market maker will be permitted to enter two-sided or one-sided quotes at a specified price, to designate whether a priced bid or priced offer is firm for one unit of trading (i.e., 100 shares), to solicit a bid or offer without stipulating a price (bid wanted/offer wanted), or to advertise a general interest in trading a particular security without specifying a price (telephone number entry only);
      • NASDAQ and exchange-listed securities are not eligible for quotation in the OTC Bulletin Board; and
      • Several hundred American Depository Receipts (ADRs) and foreign securities will be eligible for the OTC Bulletin Board, but the quotes on them will be eligible for updating only twice each day â€" at the opening (9 to 9:30 a.m. Eastern Time) and at mid-day (12 to 12:30 p.m.). Because of this constraint, the OTC Bulletin Board will not carry firm quotes in foreign issues or ADRs.

      The display of quotation information in the OTC Bulletin Board will look like this:

      P3

      ABCD

      ABC Development Corp.

      BADR

      10

      F

      11

      F

      800-250-1620

      DBCC

      10

      F

      11

      F

      212-646-1000

      WALC

      10 1/8

      F

      11

      202-898-1000

      MATS

      9.5

      F

      11.

      25

      800-909-2100

      BAGN

      10

      13

      800-243-6120

      BOTE

      10 1/2

      11

      1/2

      303-525-4230

      RJAA

      b.w.

      800-126-1423

      DANI

      641-202-2087

      This hypothetical display reflects the trading interests of eight market makers that have elected to participate in the OTC Bulletin Board by entering information on the stock of ABC Development Corp. The ranking of market-maker information shown on the screen display is determined by the system design.

      For example, market makers BADR and DBCC appear at the top because they have entered two-sided, firm ("F") quotes. Market makers WALC and MATS appear next because both have firm bids, but nonfirm offers. Because WALC's firm bid is higher in price, WALC is listed ahead of MATS.

      BOTE and BAGN follow all market makers displaying a firm bid price because their priced bids are not designated as "firm." However, BAGN ranks ahead of BOTE on the basis of time priority. Finally, RJAA and DANI are listed below all other market makers because neither firm has made a priced entry. Multiple firms with unpriced entries in a particular security will be listed by time priority. In this example, RJAA appears ahead of DANI solely because of the former's indication of "bid wanted" ("b.w.").

      All firms registering as market makers in Bulletin Board securities must enter their respective telephone numbers. These will be displayed regardless of whether the firm inserts a priced entry.

      Bulletin Board information will be differentiated from market data displays for NASDAQ issues by the numeral "3" that appears before the security's symbol and by the need to use a special key (P) to retrieve information on securities included in the OTC Bulletin Board.

      The new market will be separate and distinct from NASDAQ. The differences include that NASDAQ has listing standards while there are none for the OTC Bulletin Board; NASDAQ quotations must be firm, while OTC Bulletin Board quotes do not have to be; and the NASDAQ System transmits price and volume information on its securities to market data vendors and press wire services, while the OTC Bulletin Board, at least during its pilot, will not.

      REGULATORY ISSUES

      Market makers participating in the OTC Bulletin Board are still subject to the information maintenance requirements established by Securities Exchange Act Rule 15c2-ll. Generally, if a market maker now satisfies these information maintenance requirements (which apply on a security-by-security basis) respecting the Pink Sheets™ publication, the firm will not incur an additional compliance burden by entering quotes or other indications of interest in the OTC Bulletin Board.

      During the OTC Bulletin Board's first 60 days of operation, securities quoted in the Pink Sheets™ publication will be given "grandfathered" status for purposes of Rule 15c2-ll. In most instances, market makers may initiate quotation of these securities in the OTC Bulletin Board without having to submit Rule 15c2-ll information.

      AGREEMENT WITH CCH/NQB

      As part of the OTC Bulletin Board, the NASD has entered into a working agreement with the Commerce Clearing House, Inc./National Quotation Bureau, Inc. (CCH/NQB). The agreement provides for CCH/NQB's processing of Rule 15c2-ll information (coordinating those functions with the NASD) in connection with market makers' entries of quotations in the OTC Bulletin Board as well as the Pink Sheets™.

      In addition, the NASD will provide to CCH/NQB, twice daily, a static transmission of data captured in the OTC Bulletin Board's data base. The first transmission will occur at approximately 12 noon Eastern Time and be used in connection with publication of the next day's Pink Sheets™. The second transmission, consisting of end-of-day information, will occur after the OTC Bulletin Board closes and be provided to subscribers of CCH/NQB's electronic delivery service the following morning.

      For both the Pink Sheets™ and CCH/NQB's electronic delivery service, the priced entries of market makers utilizing the OTC Bulletin Board will appear in the form of a stringline. Each market maker will be identified by a four-character alpha symbol followed by the firm's bid and/or offered prices, and an indicator to designate whether the bid and/or offer price is firm. In instances where a market maker enters only a bid or an offer price, a prefix designating the price as a bid or offer will appear.

      CHARGES FOR THE OTC BULLETIN BOARD

      During the pilot, NASD market makers in Bulletin Board securities will incur the following charges for displaying their trading interest through the OTC Bulletin Board:

      • $85 per month for the first 10 or fewer listings, and
      • $37 per month for each additional lot of one to five listings, or
      • $74 per month for each additional lot of 6 to 10 listings.

      * * *

      For additional information on the OTC Bulletin Board, call NASD Market Operations at (800) 635-6485. To order the OTC Bulletin Board or to obtain contracts for it, call NASD Subscriber Services at (301) 948-6162.

    • 90-34 NASDAQ National Market System (NASDAQ/NMS) Additions, Changes, and Deletions As of April 12, 1990

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading

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

      As of April 12, 1990 the following 18 issues joined NASDAQ/NMS bringing the total number of issues to 2,670:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      BKCO

      Bankers Corp.

      3/16/90

      1000

      DVLG

      DeVlieg-Bullard, Inc.

      3/16/90

      1000

      BORAY

      Boral Limited

      3/19/90

      200

      ELRRF

      Elron Electronic Industries, Ltd. (Rts)

      3/19/90

      500

      MMDI

      Momentum Distribution Inc.

      3/19/90

      1000

      MMIC

      Mass Microsystems, Inc.

      3/20/90

      1000

      ELMF

      Elm Financial Services, Inc.

      3/26/90

      1000

      TKOS

      Tokos Medical Corporation (Delaware)

      3/26/90

      200

      SYNL

      Syntellect Inc.

      3/29/90

      500

      WEXCP

      Wolverine Exploration Company (Pfd)

      3/30/90

      1000

      FUND

      America's All Season Fund, Inc.

      4/3/90

      500

      HOSS

      Hornbeck Offshore Services, Inc.

      4/3/90

      1000

      TTRA

      TETRA Technologies, Inc.

      4/3/90

      1000

      ULAB

      Unilab Corporation

      4/3/90

      1000

      VFIC

      VeriFone, Inc.

      4/3/90

      1000

      VICR

      Vicor Corporation

      4/3/90

      200

      PKTN

      Pinkerton's, Inc.

      4/4/90

      1000

      PMSV

      Pharmacy Management Services, Inc.

      4/5/90

      200

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since March 13, 1990.

      New/Old Symbol

      New/Old Security

      Date of Change

      ASBI/ASBI

      Ameriana Bancorp/Ameriana Savings Bank, F.S.B.

      3/20/90

      STBYE/STBYE

      Stansbury Holdings Corp./Stansbury Mining Corp.

      3/28/90

      CETH/CETH

      United Thermal Corp./Catalyst Thermal Energy Corp.

      4/2/90

      ELRRF/ELRRF

      Elron Electronic Industries, Ltd. (4/20/90 Rts)/Elron Electronic Industries, Ltd. (4/6/90 Rts)

      4/4/90

      DMNG/AMMG

      Damon Group Inc./American Magnetics Corp.

      4/5/90

      DCBI/USBI

      Dartmouth Bancorp, Inc./United Savers Bancorp, Inc.

      4/12/90

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      CIBA

      Citizens Bank

      3/15/90

      SVMHF

      Silver Hart Mines, Ltd.

      3/15/90

      DBIO

      Damon Biotech, Inc.

      3/16/90

      MIND

      Mindscape Inc.

      3/16/90

      DSMI

      Dallas Semiconductor Corporation

      3/19/90

      CHEY

      Cheyenne Software, Inc.

      3/20/90

      BRAE

      BRAE Corporation

      3/22/90

      AWST

      American Western Corporation

      3/26/90

      MGRE

      Merry-Go-Round Enterprises, Inc.

      3/27/90

      TNII

      Telecommunications Network, Inc.

      3/29/90

      KEVN

      Kimmins Environmental Service Corp.

      3/30/90

      METB

      Metropolitan Bancorp, Inc.

      3/30/90

      CGIC

      Continental General Corporation

      4/2/90

      VFSB

      Virginia First Savings Bank, F.S.B.

      4/2/90

      BENJ

      Benj. Franklin Federal Savings and Loan Association (The)

      4/6/90

      MRAC

      Microamerica, Inc.

      4/10/90

      RSDLE

      Resdel Industries

      4/10/90

      UESSE

      United Education & Software, Inc.

      4/10/90

      CALIQ

      Calumet Industries, Inc.

      4/11/90

      XTGXQ

      TGX Corporation

      4/11/90

      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.

    • 90-33 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 28, 1990 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 18

      May 25

      May 30

      21

      29

      31

      22

      30

      June 1

      23

      31

      4

      24

      June 1

      5

      25

      4

      6

      28

      Markets Closed

      29

      5

      7

      These settlement dates should be used by brokers, dealers, and municipal securities dealers 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)(l) 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)(l), 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."


    • 90-32 Revised Forms U-4 and U-5 Go Into Effect

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Registration
      Training

      *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 nine new categories of registration and the deletion of one category no longer in use, as well as changes to the certification language on page 4 of the form. The changes to Form U-5 include the addition of a Disclosure Reporting Page (DRP-5) to streamline the submission of disciplinary information relating to Items 13-15 on the form.

      BACKGROUND

      The NASD, New York Stock Exchange (NYSE), and North American Securities Administrators Association periodically review the registration and termination forms with an eye toward streamlining the registration process or addressing areas that may have caused concerns for regulators and/or members and their associated persons. As a result of the most recent review, changes have been adopted to Forms U-4 and U-5 to reflect new categories of registration and clarify the certification language. The changes also address the need to continually update agent records with information that comes to light after termination and streamline the disclosure of disciplinary information for a terminating agent through the use of a Disclosure Reporting Page for Form U-5.

      CHANGES TO FORM U-4

      Two major changes have been made to Form U-4. The changes appear on pages 1 and 4 of the form. On page 1, Item 11 has been updated to reflect the additional categories of registration utilized by the NASD, NYSE, and states. These categories are S-7 Securities Trader (NYSE), S-7 Trading Supervisor (NYSE), S-11 Assistant Representative/Order Processing, S-28 Introducing Broker-Dealer/Financial and Operations Principal, Securities Lending Representative, Securities Lending Supervisor, Approved Person, and Agent of the Issuer. The form also now contains a box to request the Series 65 Uniform Investment Adviser Law Examination, which may be required for investment adviser registration by some jurisdictions. In addition, one category, the Series 54 exam, has been deleted because it is no longer in use by the Municipal Securities Rulemaking Board (MSRB).

      The other change to Form U-4 involves the consent language on page 4 of the form. A new item 7 has been added at the request of the NYSE and with the approval of the SEC. This item is designed to facilitate more effective service of notice of investigations or proceedings by self-regulatory organizations. Minor changes were made to the remaining items on page 4 that were then renumbered to account for the inclusion of the new item 7.

      CHANGES TO FORM U-5

      The majority of changes to this form were necessary to implement the use of the Disclosure Reporting Page (DRP-5) to report information relating to Items 13-15 on the form. As with the DRP adopted for Form U-4 last year, the DRP-5 consists of nine questions, eight of which are mandatory, designed to solicit the pertinent information needed to affect full disclosure of all matters relating to Items 13-15. As with the DRP, it is vital that firms fully complete the DRP-5 to report any information relating to these questions, as well as to update information previously reported, as the changes occur.

      The signatory box on the bottom of Form U-5 now reflects the fact that the appropriate signatory must verify the accuracy and completeness of the information contained in and with the form. In addition, minor changes to the form have been made to allow more space for the explanations of reasons for termination in Item 12.

      The instructions for Form U-5 have been revised to reflect the incorporation of the DRP-5 in a new item 4. In addition, a new instruction (number 5) has been included to remind firms that they have a continuing obligation to amend and update items 13-15 until final disposition of a reported matter, as well as the obligation to report matters that occur or become known after initial submission of Form U-5.

      Copies of these new forms have been included with this mailing for your convenience. To request additional copies of the forms, contact NASD Member and Market Data Services at (301) 590-6500. Questions regarding this notice should be addressed to Ellen Badler, Assistant Director, Special Registration Review, at (301) 590-6743.

    • 90-31 Electronic Filing of Forms LJ-5 and Amendments to Form U-4

      SUGGESTED ROUTING*

      Internal Audit
      Legal & Compliance
      Registration
      Training

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

      EXECUTIVE SUMMARY

      On March 5, 1990, the NASAA/NASD Central Registration Depository (CRD) began accepting the electronic submission of amendments to page 1 of Form U-4, the Uniform Application for Securities Industry Registration or Transfer, and nondisciplinary Forms U-5, the Uniform Termination Notice for Securities Industry Registration. All NASD member firms that subscribe to the NASD Firm Access Query System (FAQS) are eligible to file electronically these forms that all CRD regulatory participants accept.

      BACKGROUND

      Recognizing the need to streamline the agent registration process, the NASD Registration Committee and Board of Governors approved a resolution in March 1988 calling for the electronic filing of agent registration and termination forms with the CRD. In addition, the staff was directed to develop an Electronic Filing Pilot, which began in January 1989 with 30 NASD member firms and two regulatory participants, the NASD and the state of Georgia, participating.

      In February 1990, the North American Securities Administrators Association (NASAA) endorsed the implementation of the Electronic Filing Program for all CRD regulatory participants. With full participation in the program by all of CRD's regulatory participants, the Electronic Filing Program was implemented on March 5, 1990, for the members that participated in the pilot program. Members that subscribe to FAQS and did not participate in the pilot program received training in late March and are now participating in the Electronic Filing Program. The program is now available for participation by all NASD members.

      SCOPE OF PROGRAM AND FILING REQUIREMENTS

      The implementation of the Electronic Filing Program allows member firms to electronically file all amendments to page 1 of Form U-4 and all non-disciplinary Forms U-5 without submitting follow-up paperwork to CRD. While members must retain manually signed copies of electronically filed forms, the Electronic Filing Program eliminates the delays associated with submitting forms to the CRD for processing, and it provides immediate notification of registration requests and terminations to the applicable self-regulatory organizations (SROs) and states.

      Through the Electronic Filing Program, members may process Form U-4, page 1 amendments requesting state registrations, SRO registrations, and examinations. Electronic page 1 amendments can also be filed to update or clear deficiencies associated with a representative's employment date, billing code, office of employment address, and information regarding dual registration. In addition, the program permits members to electronically file nondisciplinary Forms U-5, those forms on which questions 13 through 15 are answered "No," to effect full termination of a representative's registrations or partial termination of only specified registrations. In the summer of 1990 functions will be added to the program to enable the processing of page 2 amendments to Form U-4 and all Forms U-5.

      To participate in the Electronic Filing Program, a member firm must subscribe to FAQS and complete an electronic filings Addendum to the FAQS Subscribers Agreement. Participants in the Electronic Filing Program agree to maintain sufficient funds in their CRD account to pay for any registration, examination, and termination fees resulting from electronic filings, retain manually signed copies of any form filed electronically, and make available, within 10 days, copies of any electronically filed form requested by any jurisdiction or SRO participating in the CRD. Members should not submit the hard-copy forms supporting their electronic filings to the CRD.

      Since electronic filings do not require the submission of paper forms, the program eliminates any processing delays incurred in the mailing of forms to the CRD. Member firms participating in the program during the first month of operation (when 4,999 forms were processed electronically) report that electronic filings have not only reduced regular and express mail costs, but have reduced staff time needed to prepare documents sent to the CRD and the need for copying forms. In addition, members have found that the electronic filing program enables registered individuals to become quickly productive in newly requested states.

      Members subscribing to FAQS have direct access to the CRD records of their representatives and can monitor the status of registration requests. Other services provided through FAQS include enabling members to transfer registrations through the Temporary Agent Transfer Program (TAT), obtaining overnight notification of registration approvals and examination results, accessing disciplinary information on prospective employees, and communicating directly with NASD Information Services through an electronic mail service. Members filing electronically are charged only for fees resulting from the registration or termination request and do not incur any FAQS communication charges while performing an electronic filing.

      For more information on the Firm Access Query System (FAQS) and the Electronic Filing Program, contact NASD Firm Services at (301) 590-6715.

    • 90-30 New NASDAQ Listing and Maintenance Standards

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Syndicate
      Trading

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

      EXECUTIVE SUMMARY

      The NASD Board of Governors has approved and filed with the Securities and Exchange Commission amendments to Schedule D of the By-Laws that increase the initial and continued inclusion criteria for securities traded in the NASDAQ System. The SEC has published the proposal for public comment.

      BACKGROUND

      The NASD's consideration of changes to the NASDAQ listing criteria for entry and maintenance was prompted by a number of factors. The first of these was the receipt of a letter dated January 10, 1990, relating to Exchange Act Rule 15c2-6, which became effective January 1, 1990. In that letter, the Commission's Division of Market Regulation expressed concerns that certain promoters might attempt to circumvent the requirements of the Rule by seeking NASDAQ listing. The NASD was also concerned that the effects of inflation since these criteria were last amended in 1981 had seriously eroded the effectiveness of these criteria.

      In response to the effectiveness of Rule 15c2-6 and to the Division's letter, various proposals for modification of the NASDAQ entry and maintenance criteria were considered by a number of NASD committees and by the Board of Governors at its March 1990 meeting. The Board determined at this meeting that it would be consistent with the public interest and the protection of investors to amend Schedule D of the By-Laws to increase the initial and continued inclusion criteria for issues on the NASDAQ System.

      SUMMARY OF PROPOSED AMENDMENTS

      The rule change will increase the requirements for initial listing in the NASDAQ System to $4 million in total assets and $2 million in total capital and surplus, and require $1 million in market value of public float and a minimum bid price of $3 per share. Other entry standards for listing would be retained without change.

      The rule change would also increase the NASDAQ maintenance requirements to $2 million in total assets and $1 million in capital and surplus, and would require two market makers, $200,000 in market value of public float, and a minimum bid price of $1 share.

      The proposed amendments would treat U.S. and Canadian issuers in an equal manner but would exempt non-Canadian foreign issues and American Depositary Receipts from the price per share and the related market value of public float requirements. The NASD believes that treating Canadian and domestic issues alike is appropriate and consistent with positions taken by the Securities and Exchange Commission in the past. (See Exchange Act Release 20624, October 6, 1983). Furthermore, the NASD believes that trading characteristics of non-Canadian foreign issuers warrant an exclusion, at this time, from the price per share and related market value of float requirements.

      The increase in the maintenance requirements will be delayed until January 1, 1991 to allow issuers additional time to comply with the increased standards and is contingent upon the NASD-operated OTC Bulletin Board service being in operation at that time.

      The NASD will make the rule changes to the initial inclusion criteria effective and applicable to all issuers on Commission approval. On February 15, 1990, the NASD filed with the SEC a proposal for certain interim changes to the NASDAQ entry standards. In that filing, the NASD expressed its intent that issuers that applied and were authorized for NASDAQ inclusion on or after February 15, 1990, but prior to the approval of the interim standards by the Commission, would be required to demonstrate compliance with the interim standards within 90 days of SEC approval of those standards or be subject to removal from the NASDAQ System.

      The NASD has withdrawn that earlier filing and incorporated its provisions regarding the effectiveness of the new requirements into the permanent filing. The proposed entry requirements will, therefore, be applicable to issuers having applied on or after February 15, 1990, ninety (90) days after the Commission's approval of the rule changes.

      Applications for NASDAQ inclusion filed prior to February 15, 1990, shall be deemed to have been withdrawn, and a new application will be required if the issuer has not entered the NASDAQ System within ninety (90) days of Commission approval of the proposal.

      The new criteria may result in certain NASDAQ companies being deleted from the system. In addition, certain issuers that would qualify under the existing entry requirements may not qualify under the proposed entry requirements.

      The NASD has addressed these issues in several ways. First, the NASD intends to delay the effectiveness of the increased maintenance criteria until January 1, 1991, to allow existing NASDAQ issuers a reasonable period of time to take appropriate action to remedy any deficiencies that may exist. In addition, the NASD is providing an alternative trading medium for companies that will not be eligible for NASDAQ inclusion, or that may be deleted from NASDAQ, through its proposed OTC Bulletin Board service, which will provide a viable market for issuers having securities that are not included in the NASDAQ System. The "Bulletin Board" will operate on a real-time basis, allowing member firms, for the first time, to enter, update, and view quotation information on OTC securities that are not included in the NASDAQ System. As previously indicated, the effectiveness of the proposed new maintenance standards is predicated on implementation of the Bulletin Board.

      Finally, the procedures for obtaining exceptions to the qualification requirements pursuant to Part II, Section 3 of Schedule D, the procedural safeguards provided pursuant to Article IX of the NASD Code of Procedure, and review of such determinations by the Commission will continue to be available to the affected issuers.

      The NASD has also considered the effect these proposed changes will have on the capital formation process. It is unquestionable that inclusion in the NASDAQ System aids in the capital formation process. However, this should not impede the ability of the NASD to impose meaningful standards for the initial and continued listing of securities in a credible marketplace. Such credibility is most important to the capital formation process, and the proposed increased standards will further enhance such credibility.

      In addition, there are currently more than 10,000 securities that are publicly traded and regularly quoted outside of the NASDAQ and exchange markets that have, at some point, accessed the public capital markets without seeking inclusion in NASDAQ or an exchange. In its discussions on this issue, the NASD Board noted that traditional sources for financing of small companies have included, among others, private placements, venture capital investments, and offerings under Regulation A, all of which are still available. There is no reason to believe that such access to capital will not continue, and even be enhanced, once the increased visibility of the Bulletin Board becomes available.

      Questions concerning this notice may be directed to John T. Wall, Executive Vice President, Marketing and Market Operations, at (202) 728-8200, or T. Grant Callery, Vice President and Deputy General Counsel at (202) 728-8285.

      NASDAQ QUALIFICATIONS STANDARDS

      Entry Standards

       

      Present

      Proposed

      Total Assets

      $2 million

      $4 million

      Capital & Surplus

      $1 million

      $2 million

      Public Float

      100,000 shares

      100,000 shares

      Market Value of

         

      Public Float

      None

      $1 million

      Market Makers

      2

      2

      Bid Price

      None

      $3

      Maintenance Standards

      To Be Effective 1/1/91 Contingent Upon OTC Bulletin Board Being Operational at That Time

       

      Present

      Proposed

      Total Assets

      $750,000

      $2 million

      Capital & Surplus

      $375,000

      $1 million

      Public Float

      100,000 shares

      100,000 shares

      Market Value of

         

      Public Float

      None

      $200,000*

      Market Makers

      1

      2*

      Bid Price

      None

      $1*

      Shareholders

      300

      300


      *A deficiency in the maintenance standards for market value of public float, market makers, and bid price will be determined if the issue fails the individual stated requirement for 10 consecutive trading days. If failure of the 10-day test occurs, the issuer will be notified promptly and will be given 90 calendar days in which to comply with the entry-level standard of the specific area failed.


    • 90-29 SEC Approval of New Schedule I to the NASD By-Laws Establishing and Setting Rules for The PORTALSM Market for Primary Distributions and Secondary Trading of Private Placements

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Institutional
      Legal & Compliance
      Municipal
      Mutual Fund
      Research
      Syndicate
      Systems
      Trading
      Training

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

      EXECUTIVE SUMMARY

      The SEC approved April 19 an NASD rule change adopting new Schedule I (PORTAL Rules) to the NASD By-Laws. The Schedule establishes a marketplace for primary distributions and secondary trading of private placements. The PORTAL Rules meet the requirements of simultaneously approved SEC Rule 144A under the Securities Act of 1933. The PORTAL Market is based on full clearing and settlement of domestic and foreign debt and equity securities that are immobilized within a dedicated custodial network. The network provides appropriate record keeping and controls to provide for multi-currency settlements. It also controls the exit of the unregistered securities into the domestic U.S. retail market. The text of the PORTAL Rules follows this notice.

      BACKGROUND

      The SEC on April 19, 1990, adopted Rule 144A, which provides a safe harbor from its registration requirements under Section 5 of the Securities Act of 1933 ("Securities Act") for resales of securities that comply with the new rule. Rule 144A aims to maximize the potential of the private placement market for capital formation. These private offerings are playing an increasing role, as shown by the rise of private placements from 22 percent to 43 percent of total new corporate financing in the U.S. between 1980 and 1988.The primary market in private placements is currently about $171 billion a year, and the potential secondary market is much larger.

      The rule seeks to further develop the secondary market by allowing qualified institutional investors freely to trade privately placed securities among themselves. Previously, such trading was hampered by a variety of regulations governing the original purchase and the period of time a private placement security must be held by the original investor before it could be resold.

      The SEC also approved new Schedule I (the PORTALSM Rules) to the NASD By-Laws. The PORTAL Market provides a safe harbor for compliance with Rule 144A since all PORTAL securities and participants are prequalified. The new market, developed by the NASD, systematically allocates and distributes primary offerings as well as facilitates secondary trading. It allows participants access to all quotes and permits flexibility in quotation display by offering both two-sided and one-sided quotations, as well as indications.

      Qualified NASD members are able to enter and retrieve quotations from The PORTAL Market's central data bank. All sales are negotiated, and the participants report price and volume details of the transactions to the data base. Qualified investors have access to the information through the dealers in the market.

      In addition, The PORTAL Market offers global standardization of clearance and settlement (five days) by electronic book entry in a worldwide clearing and depository system. It is able to settle in multiple currencies and to provide locked-in settlement to reduce currency-exchange risk.

      With all these features, The PORTAL Market instantly taps a universe of prequalified buyers and sellers. The increased exposure and visibility result in more favorable pricing in both primary and secondary markets. Because all eligible securities and participants are prequalified, The PORTAL Market also provides peace of mind and saves time and money through reducing back-office requirements and legal procedures.

      Settlement in The PORTAL Market occurs much faster than does physical delivery or traditional European clearance and settlement, which may take weeks. And as the only U.S.-located fully automated clearance and settlement mechanism, The PORTAL Market virtually eliminates the previously frequent problem of uncompared transactions.

      SUMMARY OF PORTAL RULES

      The PORTAL Rules are comprised of eight parts. Part I defines terms used in the Rules. Part II sets forth the requirements applicable to securities in The PORTAL Market. Part III delineates the requirements for NASD members that wish to participate in The PORTAL Market. Part IV provides the requirements applicable to investors wishing to participate in The PORTAL Market. Part V specifies the procedure for handling grievances concerning the designation of a security in The PORTAL Market or the registration of participants. Part VI sets forth requirements for the operation of and transactions in The PORTAL Market. Part VII delineates the applicability of the NASD Rules of Fair Practice to transactions in The PORTAL Market. Part VIII makes available to participants the facilities of the Association's Arbitration Department and Code of Arbitration Procedure to settle disputes arising from PORTAL transactions.

      Securities approved pursuant to the requirements of Part II of the PORTAL Rules are considered designated as "PORTAL securities." To be PORTAL securities, they must be eligible to be sold pursuant to SEC Rule 144A. NASD members must meet the requirements of Part III applicable to "PORTAL dealers" or "PORTAL brokers" to participate in The PORTAL market on a principal or agency basis. The distinction between the two categories is that PORTAL dealers must be eligible to purchase securities under Rule 144A, and PORTAL brokers are prohibited from executing a principal transaction in a PORTAL security.

      Investors must be designated as "PORTAL qualified" investors pursuant to Part IV to buy and sell PORTAL securities in The PORTAL Market. The major requirement is that the investor be eligible to purchase securities pursuant to SEC Rule 144A. PORTAL qualified investors may execute purchase or sale "transactions" in PORTAL securities only through a PORTAL dealer or a PORTAL broker with another PORTAL qualified investor or in a "qualified exit transaction" to an account outside The PORTAL Market.

      A "qualified exit transaction" is one meeting the requirements of Section 18 to Part I of the PORTAL Rules. That section restricts transactions in PORTAL securities with an account outside The PORTAL Market to transactions (1) registered under the Securities Act, (2) exempt from Securities Act registration by reason of compliance with SEC Regulation S (adopted simultaneously with Rule 144A), SEC Rules 144 and 145, or because of repurchase by the issuer, (3) exempt from Securities Act registration by reason of compliance with Rule 144 A, so long as an opinion of counsel is reviewed by the Association prior to the transaction, or (4) exempt from registration and resulting in the purchaser holding freely tradable securities, so long as information concerning the exit is reviewed by the Association prior to the transaction. Furthermore, PORTAL participants are prohibited from transferring PORTAL securities out of The PORTAL Market except in a "qualified exit transfer," which restricts transfers exiting the market to the return of borrowed securities and a transfer to the participant's non-PORTAL account.

      PORTAL dealers, PORTAL brokers, and PORTAL qualified investors (together defined as "PORTAL participants") must be members of (or have a relationship providing them access to) a "PORTAL depository system" that is composed of one or more organizations designated by the NASD to perform the functions of a securities depository with respect to PORTAL securities. Currently, the designated PORTAL depositories are Centrale de Livraison de Valeurs Mobilieres S.A. Luxembourg (Cedel) with respect to foreign securities and The Depository Trust Company (DTC) with respect to U.S. securities.

      PORTAL dealers and PORTAL brokers (or their agent) must be members of a "PORTAL clearing system," which consists of one or more organizations designated by the Association to perform the clearance and settlement functions with respect to PORTAL securities. The PORTAL clearing organizations designated by the NASD are the International Securities Clearing Corporation (ISSC) with respect to foreign securities and DTC with respect to U.S. securities.

      PORTAL participants also are required to participate in a "PORTAL account instruction system," which consists of one or more communications systems designated by the Association to transfer information concerning PORTAL account activities between a PORTAL qualified investor, the agent providing it access to the PORTAL depository system, PORTAL dealers, and PORTAL brokers. The PORTAL account instruction systems designated by the NASD are the International Institutional Delivery System (IID) and the Institutional Delivery System (ID), owned and operated by The Depository Trust Company.

      The normal PORTAL Market hours of operation are between 9:30 a.m. and 4 p.m., Eastern Time. However, Section 1 to Part VI of the PORTAL Rules permits the NASD to establish different hours. The PORTAL Market accepts prices and quotations that are one- or two-sided, and firm or indicative. Transactions in The PORTAL Market settle five business days after the date of transactions, except as otherwise agreed between the parties to the transactions. In addition, the transaction can settle in any currency accepted by the PORTAL clearing organization.

      Each PORTAL dealer and PORTAL broker that executes a transaction or effects a qualified exit transfer must enter a PORTAL transaction report in The PORTAL Market that includes necessary information regarding the transaction or transfer. Any modification, correction, or cancellation of the PORTAL transaction report also has to be entered into The PORTAL Market. PORTAL participants must either affirm or reject a PORTAL transaction report in The PORTAL Market to obtain a compared PORTAL transaction report.

      "When, as and if trading of a new issue of securities is permitted in The PORTAL Market subsequent to effectiveness of the designation of the securities as PORTAL securities so long as the managing underwriter establishes a settlement date for the securities based on their anticipated availability and enters a corrected PORTAL transaction report designating a substitute settlement date if settlement is delayed.

      Short-sale transactions are permissible in The PORTAL Market, and securities may be borrowed from another PORTAL Market account or from outside The PORTAL Market to meet delivery requirements. The requirements applicable to short sales are based on those presently found in the Interpretation of the Board of Governors — Prompt Receipt and Delivery of Securities, Article III, Section 1 of the NASD's Rules of Fair Practice. A provision is also included that gives the NASD authority to adopt additional restrictions regarding short sales and the borrowing and return of securities as the NASD deems necessary to prevent violation of the registration requirements of the Securities Act.

      The PORTAL Rules specify that stabilizing bids are permitted in The PORTAL Market. The Rules also incorporate the close-out and buy-in procedures in Sections 15, 59, and 60 of the NASD's Uniform Practice Code, with modifications to reflect the context of transactions in The PORTAL Market. The close-out procedures are not mandatory. The PORTAL Rules also contain provisions setting forth the applicability of the NASD's Rules of Fair Practice to transactions and business activities relating to The PORTAL Market, distinguishing between provisions that are applicable, those applicable with exceptions, those applicable to members regardless of their participation in The PORTAL Market, and those that are not applicable.

      The PORTAL Rules also provide that any NASD determination to deny, suspend, or terminate the designation of a PORTAL security or registration of a participant may be reviewed on application by the aggrieved person pursuant to Article IX of the Association's Code of Procedure. A conforming amendment to Article IX of the Code of Procedure also has been approved by the SEC expanding the jurisdiction of the article to cover grievances related to The PORTAL Market. Moreover, as stated above, the facilities of the NASD's Arbitration Department and the procedures of the Code of Arbitration Procedure are available to PORTAL participants to resolve disputes arising from PORTAL transactions or activities related to them.

      The PORTAL Rules provide authority for the NASD to impose a fee on PORTAL dealers, PORTAL brokers, or PORTAL qualified investors for PORTAL transactions, or such other fees that the NASD may determine are appropriate. It is not now the NASD's intention to impose a fee with respect to transactions in The PORTAL Market for the first six months of the market's operation.

      The PORTAL Rules are scheduled to become effective on publication of the SEC-adopting release in the Federal Register.

      Questions regarding the operation of The PORTAL Market may be directed to S. William Broka, Vice President, Business Development, at (212) 480-4231. Questions regarding The PORTAL Market Rules may be directed to Frank J. Wilson, General Counsel, at (202) 728-8319 or Suzanne E. Rothwell, Associate General Counsel, at (202) 728-8247.

      THE PORTALSM MARKET RULES

      Schedule I to the NASD By-Laws

      Part I

      DEFINITIONS1

      For purposes of Schedule I, unless the context requires otherwise:

      Sec. 1 "Association" means the National Association of Securities Dealers, Inc. ("NASD") or its wholly-owned subsidiary, NASD Market Services, Inc., as determined by the NASD.

      Sec. 2 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time.

      Sec. 3 "Execution" means entering into a purchase, sale or transfer of a PORTAL security.

      Sec. 4 "PORTAL" or "PORTAL Market" means the Association's market for designated foreign and domestic securities through an automated quotation and communications system that facilitates private offerings, resales, trading, clearance and settlement by PORTAL participants.

      Sec. 5 "PORTAL account instruction system" means one or more communications systems designated by the Association to transfer information concerning PORTAL account activities between a PORTAL qualified investor, its agent providing it access to the PORTAL depository system, PORTAL dealers and PORTAL brokers.

      Sec. 6 "PORTAL broker" means any member of the Association that is currently registered as a PORTAL broker in the PORTAL Market pursuant to Part III, Section 2 of the PORTAL Rules.

      Sec. 7 "PORTAL clearing organization" means a clearing organization that is part of the PORTAL clearing system and is designated by the Association to perform clearance and settlement functions with respect to PORTAL securities.

      Sec. 8 "PORTAL clearing system" means the system consisting of one or more organizations designated by the Association to perform clearance and settlement functions with respect to PORTAL securities.

      Sec. 9 "PORTAL dealer" means any member of the Association that is currently registered as a PORTAL dealer in the PORTAL Market pursuant to Part III, Section 1 of the PORTAL Rules, and is thereby also registered as a PORTAL qualified investor.

      Sec. 10 "PORTAL depository organization" means a depository organization that is part of the PORTAL depository system and is designated by the Association to perform the functions of a securities depository with respect to PORTAL securities.

      Sec. 11 "PORTAL depository system" means the system consisting of one or more organizations designated by the Association to perform the functions of a securities depository with respect to PORTAL securities.

      Sec. 12 "PORTAL Exit Report" means a report manually or electronically filed with NASD Market Surveillance within one (1) business day after a sale or transfer of a PORTAL security by a PORTAL participant pursuant to Part III, Section 3(b)(5) and Part IV, Section l(b)(ll) of the PORTAL Rules.

      Sec. 13 "PORTAL participant" means a PORTAL dealer, a PORTAL broker and a PORTAL qualified investor.

      Sec. 14 "PORTAL qualified investor" means any investor that is currently registered as a PORTAL qualified investor in the PORTAL Market pursuant to Part IV of the PORTAL Rules.

      Sec. 15 "PORTAL Rules" means the PORTAL Market rules as included in Schedule I to the NASD By-Laws.

      Sec. 16 "PORTAL security" means a security which (i) is of a class that is currently designated by the Association for inclusion in the PORTAL Market pursuant to Part II of the PORTAL Rules and (ii) is or will be deposited in the PORTAL depository system pursuant to the requirements of the participating PORTAL depository organization.

      Sec. 17 "PORTAL transaction report" means a report entered into the PORTAL Market pursuant to Part VI, Section 5 of the PORTAL Rules.

      Sec. 18 "Qualified exit transaction" means the sale of PORTAL securities to an account outside the PORTAL Market by or through a PORTAL dealer or PORTAL broker:

      (a) in a transaction registered with the SEC under Section 5 of the Securities Act;
      (b) in a transaction not subject to registration under the Securities Act by reason of compliance with:
      (1) Securities Act Release No. 4708 (July 9, 1964), 29 F.R. 9828 or with Regulation S when adopted, as it may be amended from time to time;
      (2) Rules 144 or 145 adopted thereunder, as they may be amended from time to time;
      (3) transfer of the securities to the issuer or an affiliate of the issuer; or
      (4) Rule 144A adopted thereunder, as determined by the Association, upon the submission of an opinion of counsel prior to the transaction; or
      (c) in any other transaction which is exempt from registration under Section 5 of the Securities Act and results in the purchaser acquiring securities that may be freely resold without registration under the Securities Act, as determined by the Association, upon the submission of any information that may be required by the Association prior to the transaction.

      Sec. 19 "Qualified exit transfer" means:

      (a) the return of borrowed PORTAL securities to an account outside the PORTAL Market from which the securities were borrowed; and
      (b) the transfer of PORTAL securities by a PORTAL participant from its PORTAL account to an account of the PORTAL participant outside the PORTAL Market.

      Sec. 20 "Restricted securities" means securities that meet the definition of that term contained in Rule 144(a)(3) under the Securities Act.

      Sec. 21 "Rule 144A" means Rule 144A adopted under the Securities Act, as amended from time to time.

      Sec. 22 "SEC" means the United States Securities and Exchange Commission.

      Sec. 23 "Securities Act" means the Securities Act of 1933, as amended from time to time.

      Sec. 24 "Short sale" means any sale of a security that meets the definition of that term contained in Rule 3b-3 adopted under the Exchange Act.

      Sec. 25 "Transaction" or "trade" means the purchase or sale of a PORTAL security.

      Sec. 26 "Transfer" means the movement of a PORTAL security from or to a PORTAL account not related to a purchase or sale transaction, including borrowing, lending, and the receipt or return of borrowed securities.

      Sec. 27 "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction.

      Part II

      REQUIREMENTS APPLICABLE TO PORTAL SECURITIES

      Sec. 1 Application for Designation

      (a) Application for designation as a PORTAL security shall be in the form required by the Association and shall be filed by a PORTAL participant. Applications may be made with or without the concurrence of the issuer. The application shall demonstrate to the satisfaction of the Association that the security meets or exceeds the qualification requirements set forth in Section 2.
      (b) Designation of a security as a PORTAL security shall be declared effective within a reasonable time after determination of qualification. The effective date of designation as a PORTAL security shall be determined by the Association giving due regard to the requirements of the PORTAL Market.

      Sec. 2 Qualification Requirements for PORTAL Securities

      (a) To qualify for inclusion in the PORTAL Market, a security shall, at the time application is made:
      (l) be eligible to be sold pursuant to Rule 144A under the Securities Act;
      (2) be in negotiable form and not subject to any restriction, condition or requirement that would impose an unreasonable burden on any PORTAL participant;
      (3) be eligible for deposit into and have been or will be deposited into the PORTAL depository system by the issuer or a PORTAL participant;
      (4) in the case of convertible debt, convertible preferred stock, rights, warrants and other derivative products, the underlying or related security shall satisfy the criteria herein; and
      (5) satisfy such additional criteria or requirements as the Association may prescribe.
      (b) A PORTAL security shall be deposited into the PORTAL depository system no later than the date specified by the relevant PORTAL depository organization.
      (c) The application to the Association with respect to a proposed PORTAL security shall include information sufficient for the Association to make a determination that the security is eligible to be sold under Rule 144A, which may include:
      (1) a statement of counsel who:
      (i) has demonstrated experience, expertise and familiarity with the United States securities laws, including Rule 144A and the PORTAL Rules;
      (ii) is admitted to practice law before the highest court of any state in the United States, the District of Columbia, or any territory or possession of the United States;
      (iii) is not an employee or affiliate of the issuer of the security, provided, however, that counsel may be the senior legal counsel to the issuer;
      (iv) in providing its statement, has (a) reviewed information detailing the capital structure of the issuer; (b) reviewed other documents and pertinent information obtained by counsel; and (c) has made inquiries of the issuer of the security and received responses if counsel determines that such further review and inquiry are necessary and relevant to determine whether the security is eligible to be sold pursuant to Rule 144A; and
      (v) has determined that the security for which designation is requested (and the underlying security, if the security is convertible debt, convertible preferred, rights, warrants or any other derivative product) is eligible to be sold pursuant to Rule 144A; or
      (2) a statement of a certified public account ant who:
      (i) is permitted to practice before the SEC pursuant to Rule 2-01 of SEC Regulation S-X;
      (ii) in providing its statement, has reviewed (a) information detailing the capital structure of the issuer; (b) other documents and pertinent information obtained by the certified public accountant; and (c) made inquiries of the issuer of the security and received responses if the certified public accountant determines that such further review and inquiry are necessary and relevant to determine whether the security is eligible to be sold pursuant to Rule 144A; and
      (iii) has determined that the security for which designation is requested (and the underlying security, if the security is convertible debt, convertible preferred, rights, warrants or any other derivative product) is eligible to be sold pursuant to Rule 144A; or
      (3) a certification of the Chief Executive Officer of the issuer of the security for which designation is requested that the security (and the underlying security, if the security is convertible debt, convertible preferred, rights, warrants or any other derivative product) is eligible to be sold pursuant to Rule 144A; and
      (4) any other information that the Association, in its discretion, may require to be submitted to the Association.

      Sec. 3 Exceptions

      The Association may make exceptions to the criteria contained in Part II, Subsections 2(a)(2) and (4) of the PORTAL Rules as it deems appropriate. The fact that a security meets the applicable criteria in Part II, Section 2 of the PORTAL Rules does not necessarily mean that an application for designation as a PORTAL security will be approved.

      Sec. 4 Suspension or Termination of a PORTAL Security Designation

      (a) The Association may, in its discretion, suspend or terminate designation as a PORTAL security if it determines that:
      (1) the security is not in compliance with the requirements of the PORTAL Rules;
      (2) a holder or prospective purchaser that requested issuer information pursuant to Rule 144A(d)(4) did not receive the information;
      (3) any application or other document relative to such securities submitted to the Association contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading; or
      (4) failure to withdraw designation of such securities would for any reason be detrimental to the interests and welfare of PORTAL participants or the Association.
      (b) The Association will promptly notify PORTAL participants and the PORTAL clearing system and PORTAL depository system of the suspension or termination of a security's designation as a PORTAL security. Such notification may be made through the facilities of the PORTAL Market. Suspension or termination shall become effective in accordance with the terms of notice by the Association.
      (c) Notwithstanding the suspension or termination of designation as a PORTAL security, any security within the PORTAL Market shall remain subject to all rules of the Association applicable to the PORTAL Market until the security is sold in a qualified exit transaction or is dealt with in accordance with the terms of notice by the Association of the suspension or termination.
      (d) No PORTAL participant shall trade through the PORTAL Market a PORTAL security as to which designation in the PORTAL Market has been suspended or terminated unless such transaction is a qualified exit transaction or is in accordance with the terms of notice of the Association of the suspension or termination.

      Part III

      REQUIREMENTS APPLICABLE TO PORTAL DEALERS AND PORTAL BROKERS

      Sec. 1 Registration Requirements of PORTAL Dealers

      (a) No member of the Association shall participate in a principal transaction in the PORTAL Market unless the Association has approved its registration as a PORTAL dealer and such registration has not been suspended or terminated. A member of the Association that registers as a PORTAL dealer shall also be registered as a PORTAL qualified investor.
      (b) To register as a PORTAL dealer, a member shall apply to the Association in the form required by the Association and shall demonstrate to the satisfaction of the Association that it:
      (1) is eligible to purchase securities under Rule 144A as it applies to a dealer registered under Section 15 of the Exchange Act, and shall submit the member's most recent Audited Financial Statements filed with the SEC pursuant to Rule 17a-5(d) under the Exchange Act, with the supporting schedules required pursuant to sub-paragraph (3) thereof, and any other information that the Association, in its discretion, may require to be submitted to the Association;
      (2) is a member of the Association and qualified to do business as a general securities firm;
      (3) agrees to maintain an account for PORTAL transactions at its agent (providing it access to the services of a PORTAL depository organization) that is segregated from all other accounts it may have at the agent, if applicable;
      (4) is a participant in (or its agent, providing it access to the services of the PORTAL depository system, is a participant in) the PORTAL account instruction system, as necessary;
      (5) is a member of, or its agent is a member of, a PORTAL clearing organization and a PORTAL depository organization and, with respect to the PORTAL depository organization, has directed that its account or accounts therein for PORTAL securities be segregated from all other accounts it may have at the depository;
      (6) agrees to deposit and maintain all PORTAL securities in its segregated PORTAL account at the PORTAL depository organization and at its agent, if applicable, until the PORTAL securities are (i) sold or transferred to a PORTAL account in a transaction or transfer in the PORTAL Market or (ii) sold or transferred to a non-PORTAL account in compliance with the restrictions on qualified exit transactions and qualified exit transfers;
      (7) has authorized and directed both the relevant PORTAL clearing organization and PORTAL depository organization (or has authorized its agent to authorize and direct the PORTAL clearing organization and PORTAL depository organization) to release information in respect of its PORTAL account activity to the Association or its designee and, with respect to the PORTAL clearing organization, to submit data to the PORTAL account instruction system on behalf of the PORTAL dealer, as may be required;
      (8) has established supervisory procedures reasonably designed to achieve compliance with the restrictions on qualified exit transactions and qualified exit transfers, including (i) preserving information demonstrating compliance with respect to each exit transaction and exit transfer pursuant to Rule 17a-4(a) under the Exchange Act and (ii) filing a PORTAL Exit Report with NASD Market Surveillance within one (1) business day after the execution of the transaction or transfer;
      (9) agrees to comply with the requirements of the PORTAL Rules, including the filing of such documents and the payment of such fees as may be required by the Association; and
      (10) agrees to purchase PORTAL securities only for PORTAL qualified investors or for their own account.

      Sec. 2 Registration Requirements for PORTAL Brokers

      (a) No member of the Association shall participate in an agency transaction in a PORTAL security in the PORTAL Market unless the Association has approved its registration as a PORTAL dealer or as a PORTAL broker, and such registration has not been suspended or terminated.
      (b) To register as a PORTAL broker, a member shall apply to the Association in the form required by the Association and shall demonstrate to the satisfaction of the Association that it meets or exceeds the criteria in Part III, Sections l(b)(2) through l(b)(9) of the PORTAL Rules and agrees to purchase PORTAL securities only for PORTAL qualified investors.

      Sec. 3 Continuing Requirements for PORTAL Dealers and Brokers

      (a) No PORTAL broker shall execute a principal transaction in a PORTAL security, provided, however, that for purposes of compliance with the PORTAL Rules a PORTAL broker may participate in an underwriting of PORTAL securities on a "best-efforts" basis.
      (b) No PORTAL dealer or PORTAL broker shall:
      (1) execute a transaction or a transfer in a PORTAL security except through the PORTAL Market or in a qualified exit transaction or qualified exit transfer;
      (2) execute a transaction or a transfer in a PORTAL security through the PORTAL Market with any party other than a PORTAL participant, except in a qualified exit transaction or a qualified exit transfer;
      (3) execute a transaction in a PORTAL security as to which designation in the PORTAL Market has been suspended or terminated, unless the transaction is a qualified exit transaction or in accordance with the terms of notice by the Association of the suspension or termination;
      (4) accept a PORTAL qualified investor's purchase order for any PORTAL security, except an order for less than a single unit of trading, unless it has first ascertained that the PORTAL qualified investor placing the order, or its agent, agrees to receive securities in an amount equal to any execution, even though such an execution may represent the purchase of only a part of a larger order; or
      (5) sell or transfer a PORTAL security to an account outside the PORTAL Market unless (i) the transaction or transfer is in compliance with the restrictions on qualified exit transactions or qualified exit transfers, (ii) information demonstrating such compliance is preserved pursuant to Rule 17a-4(a) under the Exchange Act, and (iii) a PORTAL Exit Report is filed with NASD Market Surveillance within one (1) business day after the execution of the sale or transfer.
      (c) For a PORTAL dealer to continue to be eligible to participate as a PORTAL dealer in the PORTAL Market, the PORTAL dealer shall annually (or more frequently if required by Rule 144A) demonstrate to the satisfaction of the Association that it continues to be eligible to purchase securities under Rule 144A as it applies to a dealer registered under Section 15 of the Exchange Act.
      (d) For a PORTAL dealer or PORTAL broker to continue to be eligible to participate in the PORTAL Market, the PORTAL dealer or PORTAL broker shall notify the Association2 on a timely basis of any change in:
      (1) its PORTAL depository organization, PORTAL clearing organization or PORTAL account instruction system;
      (2) the account numbers identifying its segregated PORTAL accounts in its PORTAL depository organization or PORTAL clearing organization; and
      (3) any change in the supervisory procedure accepted by the Association pursuant to Part III, Subsection l(b)(7) of the PORTAL Rules.
      (e) The Association shall suspend or terminate the registration of a PORTAL dealer or PORTAL broker if it:
      (1) fails to maintain membership for purposes of maintaining segregated PORTAL accounts in the PORTAL depository system or the PORTAL clearing system, or membership in the PORTAL account instruction system, as necessary;
      (2) fails to maintain its account or accounts in the PORTAL depository system for PORTAL securities segregated from all other accounts the PORTAL dealer or PORTAL broker may have at the depository; or
      (3) rescinds its authorization to the PORTAL clearing organization or PORTAL depository organization of which the PORTAL dealer or PORTAL broker is a member to release information in respect of its activities in its PORTAL account to the Association or its designee.
      (f) The Association may suspend or terminate the registration of a PORTAL dealer or PORTAL broker if:
      (1) it fails to comply with any requirement of the PORTAL Rules with respect to any PORTAL security;
      (2) any application or other document submitted by or on behalf of it contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading; or
      (3) it fails to file any documents or to pay any fee as may be required by the Association.
      (g) Nothing in paragraphs (e) and (f) shall prohibit the Association from taking such other action as it deems necessary under the circumstances against a PORTAL dealer or a PORTAL broker for violations of the requirements of the PORTAL Rules, any other rule or regulation of the Association, or any rule or regulation of the SEC.
      (h) Notwithstanding the suspension or termination of a PORTAL dealer, such dealer shall:
      (1) remain subject to all rules of the Association applicable to the PORTAL Market in respect of any PORTAL securities in the dealer's PORTAL trading and PORTAL proprietary account; and
      (2) only engage in transactions in PORTAL securities in the dealer's PORTAL trading and PORTAL proprietary account in accordance with the terms of notice by the Association of the PORTAL dealer's suspension or termination.

      Part IV

      REQUIREMENTS APPLICABLE TO PORTAL QUALIFIED INVESTORS

      Sec. 1 Registration Requirements for PORTAL Qualified Investors

      (a) No investor shall participate in a transaction in a PORTAL security in the PORTAL Market unless the Association has approved its registration as a PORTAL qualified investor and such registration remains in effect.
      (b) To register as a PORTAL qualified investor in the PORTAL Market, an investor shall apply in the form required by the Association and shall demonstrate to the satisfaction of the Association that:
      (1) it is eligible to purchase securities in accordance with Rule 144A;
      (2) the purchase or sale by it of PORTAL securities would be exempt from the securities registration and broker-dealer registration requirements of applicable state securities laws;
      (3) it is a member of, or its agent is a member of, a PORTAL depository organization which will maintain PORTAL securities in an account segregated from all other accounts the investor or its agent may have at the depository;
      (4) it agrees to maintain an account for PORTAL transactions at its agent (providing it access to the services of a PORTAL depository organization) that is segregated from all other accounts it may have at the agent, if applicable;
      (5) it has authorized and directed the PORTAL depository system (or has authorized and directed its agent providing it access to the services of the PORTAL depository system to authorize and direct the PORTAL depository system) to release information in respect of its PORTAL account activities to the Association or its designee;
      (6) it is (and its agent, providing it access to the services of the PORTAL depository system, is) a participant in the PORTAL account instruction system, as necessary;
      (7) it understands that it may purchase a PORTAL security from a PORTAL qualified investor who may rely on an exemption from the provisions of Section 5 of the Securities Act pursuant to Rule 144A;
      (8) it agrees to deposit and maintain all PORTAL securities in its segregated PORTAL account at the PORTAL depository organization and at its agent, if applicable, until the PORTAL securities are (i) sold or transferred to a PORTAL account in a transaction or transfer in the PORTAL Market or (ii) sold or transferred to a non-PORTAL account in compliance with the restrictions on qualified exit transactions and qualified exit transfers;
      (9) it agrees it will only transfer ownership of a PORTAL security in a transaction or transfer through the PORTAL Market, except that (i) transfers between accounts managed by the investor and among investment companies registered under the Investment Company Act of 1940 constituting part of a family of investment companies are permitted so long as the investor is eligible to purchase securities on behalf of the managed accounts or investment companies under Rule 144A and (ii) qualified exit transactions and qualified exit transfers will be permitted;
      (10) it agrees to purchase PORTAL securities for its own account or for an account that the investor is eligible to make purchases for under Rule 144A;
      (11) it agrees that it will not sell or transfer PORTAL securities to an account outside the PORTAL Market except in qualified exit transactions and qualified exit transfers and will file a PORTAL Exit Report with NASD Market Surveillance within one (1) business day after the execution of a transfer not executed through a PORTAL dealer or PORTAL broker; and
      (12) it agrees to provide the Association, upon its request and at its discretion, with any information or document necessary to verify compliance with the restrictions on exit transactions and exit transfers in the PORTAL Rules.
      (c) The Association may classify PORTAL qualified investors in such manner as it deems advisable for the purpose of conforming with Rule 144A.
      (d) The investor's application to the Association, other than an investor that is a dealer registered under Section 15 of the Exchange Act, shall include information regarding the securities investments of the investor that is sufficient for the Association to make a determination that the investor is eligible to purchase securities under Rule 144A which may include:
      (1) information that is publicly available as permitted by Rule 144A(d)(l)(i) and (ii), except that material filed with a foreign governmental agency or foreign self-regulatory organization must be in or translated into English and financial information must be expressed in U.S. dollars; or
      (2) information that is contained in a statement of the investor's securities and is accompanied by an accountant's report, as defined in Rule 1-02 of SEC Regulation S-X, that is prepared in compliance with Rule 2-02 of SEC Regulation S-X by a certified public accountant permitted to practice before the SEC pursuant to Rule 2-01 of SEC Regulation S-X; or
      (3) statement of counsel who:
      (a) has demonstrated experience, expertise and familiarity with the United States securities laws, including Rule 144A and the PORTAL Rules;
      (b) is admitted to practice law before the highest court of any state in the United States, the District of Columbia, or any territory or possession of the United States;
      (c) is not an employee or an affiliate of the investor;
      (d) in providing its statement, has reviewed information detailing the securities investments of the investor and has requested and reviewed other documents and pertinent information and made inquiries of the investor and received responses, if counsel determines that such further review and inquiry are necessary and relevant to determine whether the investor is eligible to purchase securities in accordance with Rule 144A; and
      (e) has determined that the investor is eligible to purchase securities in accordance with Rule 144A; and
      (4) any other information that the Association, in its discretion, may require to be submitted to the Association.
      (e) The PORTAL qualified investor's application to the Association of a dealer registered under Section 15 of the Exchange Act shall include the dealer's most recent Audited Financial Statements filed with the SEC pursuant to Rule 17a-5(d) under the Exchange Act, with the supporting schedules required pursuant to subparagraph (3) thereof, and any other information that the Association, in its discretion, may require to be submitted to the Association.

      Sec. 2 Continuing Requirements for PORTAL Qualified Investors

      (a) For an investor to continue to be eligible to participate as a PORTAL qualified investor in the PORTAL Market, the investor shall:
      (1) annually (or more frequently if required by Rule 144A) demonstrate to the satisfaction of the Association that the investor is eligible to purchase securities in accordance with Rule 144A; and
      (2) advise the Association3 on a timely basis of any change in its agent, PORTAL depository organization or PORTAL account instruction system or its PORTAL account numbers therein.
      (b) Transactions in PORTAL securities, including transactions to a non-PORTAL account, by PORTAL qualified investors shall be executed:
      (1) through a PORTAL dealer or a PORTAL broker; and
      (2) through the PORTAL Market or in a qualified exit transaction.
      (c) The Association shall suspend or terminate the registration of a PORTAL qualified investor if:
      (1) the investor sells or transfers a PORTAL security to an account outside the PORTAL Market in a manner not in compliance with the restrictions on qualified exit transactions or qualified exit transfers;
      (2) any application or document submitted by or on behalf of the PORTAL qualified investor contained an untrue statement of material fact or omitted to state a material fact necessary to make the statements therein not misleading;
      (3) the investor fails to comply with any requirements of the PORTAL Rules, or to file any documents or to pay any fee as may be required by the Association; or
      (4) the investor rescinds its authorization to its PORTAL depository organization to release information in respect of its or its agent's PORTAL account activity to the Association or its designee.
      (d) Nothing in paragraph (c) shall prohibit the Association from taking such action as it deems necessary under the circumstances against a PORTAL qualified investor that is also a member of the Association for violations of the requirements of the PORTAL Rules, any other rule or regulation of the Association, or any rule or regulation of the SEC.
      (e) Notwithstanding the suspension or termination of a PORTAL qualified investor, such investor shall:
      (1) remain subject to all rules of the Association applicable to the PORTAL Market with respect to any PORTAL securities owned by such investor; and
      (2) engage in transactions in PORTAL securities owned by such investor only in accordance with the terms of notice by the Association of the suspension or termination.

      PartV

      DENIAL, SUSPENSION OR TERMINATION PROCEDURES

      A determination by the Association to deny, suspend or terminate the designation of a PORTAL security or registration of a PORTAL participant may be reviewed upon application by the aggrieved person pursuant to the provisions of Article IX of the Code of Procedure.

      Part VI

      PORTAL MARKET TRANSACTIONS

      Sec. 1 Normal PORTAL Market Hours Of Operation

      The PORTAL Market shall be open for business from 9:30 a.m. Eastern Time to 4:00 p.m. Eastern Time, or as otherwise determined by the Association.

      Sec. 2 PORTAL Quotations

      The PORTAL Market will accept prices and quotations from PORTAL dealers and PORTAL brokers that are one- or two-sided, firm or indicative.

      Sec. 3 Deposit of PORTAL Securities

      PORTAL securities that are deposited into the PORTAL depository system shall remain in the depository system until such time as the depository receives appropriate settlement instructions from a PORTAL dealer or PORTAL broker to deliver such securities out of the depository system in connection with a qualified exit transaction or qualified exit transfer.

      Sec. 4 PORTAL Settlement

      (a) Transactions in the PORTAL Market will settle five (5) business days after the date of the execution of the transaction, except as otherwise agreed between the PORTAL participants, in any currency accepted by the PORTAL depository organization.
      (b) PORTAL securities and funds will be transferred on the books of the PORTAL depository system upon receipt from the PORTAL clearing system of the necessary settlement instructions from the appropriate PORTAL dealer or PORTAL broker and subject to the purchaser meeting the requirements of the relevant PORTAL depository organization concerning deposit and availability of funds in accordance with the depository organization's procedures.

      Sec. 5 PORTAL Transaction Reports

      (a) Each PORTAL dealer or PORTAL broker that executes a transaction or a qualified exit transfer in a PORTAL security shall enter in the PORTAL Market a PORTAL transaction report that includes, as applicable, the identity of the PORTAL participants in whose accounts the transaction will settle (or, in the case of a qualified exit transaction or qualified exit transfer, the contra-party and delivery destination for the securities on settlement date), whether the transaction is on an agency or principal basis, whether the transaction is a purchase or sale, whether a sale is a "short" sale, the settlement date if different from the standard five-day settlement, the quantity of the security, the price of the security expressed in the currency in which the security was quoted in the PORTAL Market, the currency in which the transaction will settle, the total value of the transaction in the currency in which the transaction will settle, whether the settlement is "free" or "against payment", and such additional information as the Association may require.
      (b) Modification, correction or cancellation of a PORTAL transaction report must be entered in the PORTAL Market.
      (c) PORTAL transaction reports shall be entered in the PORTAL Market the same business day of the execution of the transaction. If a transaction is executed during hours that the PORTAL Market does not accept PORTAL transaction reports, the PORTAL transaction report shall be entered when the PORTAL Market is next open, with the trade date of the date of execution of the transaction. The Association, in its discretion, will establish hours for and time limitations on the entry of PORTAL transaction reports.

      Sec. 6 Comparison of PORTAL Transaction Reports

      (a) Each PORTAL qualified investor shall affirm or reject the PORTAL transaction report entered by the PORTAL qualified investor's executing PORTAL dealer or PORTAL broker.
      (b) Each PORTAL dealer and PORTAL broker that executes a transaction in a PORTAL security shall:
      (1) accept a PORTAL transaction report entered by the contra-party by entering in the PORTAL Market a matching PORTAL transaction report with the same terms as the first PORTAL transaction report;
      (2) reject a PORTAL transaction report entered by the contra-party by entering a second PORTAL transaction report with different terms than included in the first PORTAL transaction report; or
      (3) enter an affirmation or rejection with respect to the PORTAL transaction report entered by the contra-party.

      Sec. 7 PORTAL Contracts

      The existence and terms of each PORTAL contract shall be conclusively established by the compared PORTAL transaction report pertaining to the underlying transaction in a PORTAL security. Notwithstanding the foregoing, the parties to any PORTAL contract may modify or correct the terms of any transaction in a PORTAL security in a manner consistent with the rules of the PORTAL Market.

      Sec. 8 PORTAL Fees

      PORTAL participants shall pay to the Association a fee for PORTAL transactions or such other fees as determined by the Association. The Board of Governors shall have the power to impose, alter, or amend such fees from time to time pursuant to Article VI, Section 1 of the By-Laws.

      Sec. 9 "When, As and If Issued" Trading

      PORTAL securities that are of a new issue of securities, primary or secondary, may trade "when, as and if issued" in the PORTAL Market subsequent to effectiveness of the designation of the securities as PORTAL securities, provided, however, that the lead manager shall:

      (a) establish a settlement date for the securities based on their anticipated availability; and
      (b) in event of any subsequent delay in the established settlement date, shall enter in the PORTAL Market a corrected PORTAL transaction report designating a substitute date for settlement and cancel the existing PORTAL transaction report.

      Sec. 10 Transfers of PORTAL Securities

      PORTAL securities deposited in the PORTAL depository system may not be transferred to an account outside the PORTAL Market, provided, however, that this section shall not prohibit a qualified exit transaction and a qualified exit transfer.

      Sec. 11 "Short" Sales

      (a) "Short" sale transactions in PORTAL securities may be entered in the PORTAL Market. "Short" sale transactions shall be identified as such in the PORTAL transaction report.
      (b) The settlement date for "short" sales in PORTAL securities shall be negotiated by the parties.
      (c) Securities obtained from outside the PORTAL Market may be used to cover the "short" position if they are promptly deposited into the PORTAL depository system.
      (d) "Short" sale transactions in the PORTAL Market are subject to the following requirements:
      (1) No PORTAL dealer or PORTAL broker shall accept a "short" sale order for any PORTAL qualified investor in any PORTAL security unless the dealer or broker makes an affirmative determination that it will receive delivery of the security from the PORTAL qualified investor or that it can borrow the security on behalf of the PORTAL qualified investor for delivery by settlement date.
      (2) No PORTAL dealer shall effect a "short" sale for its own account in any security unless the PORTAL dealer makes an affirmative determination that it can borrow the securities or otherwise provide for delivery of the securities by settlement date. This requirement will not apply to any transaction by a PORTAL dealer which (a) is a bona fide market making transaction where the PORTAL dealer is publishing a two-sided quotation in the PORTAL Market or (b) results in fully hedged or arbitraged positions.
      (3) A PORTAL dealer or PORTAL broker shall indicate on the memorandum for the sale of any security whether the order is "short."
      (4) The Association may adopt such restrictions on "short" sales, and the borrowing and return of securities, as it may deem necessary to prevent violation of the registration requirements of the Securities Act in connection with transactions in the PORTAL Market.

      Sec. 12 Stabilizing Bids

      (a) A PORTAL dealer may enter a stabilizing bid in the PORTAL Market subject to compliance with Rules 10b-6 and 10b-7 under the Exchange Act, which bid shall be identified in the PORTAL Market. When a stabilizing bid is entered, it shall be available for all outstanding securities in the PORTAL Market of the same class being offered.
      (b) A PORTAL dealer shall notify the Association4 in writing prior to the first day in which the stabilizing bid is to appear in the PORTAL Market. The notice shall include:
      (1) the name of the security and its PORTAL symbol;
      (2) the date on which the distribution of the security will commence; and
      (3) a copy of any offering document related to the distribution. The PORTAL dealer shall contact the Association4 for authorization on the day that the dealer wishes to enter the stabilizing bid.
      (c) A PORTAL dealer shall not enter a stabilizing bid at the same time it is quoting any other bid or offer in the issue.

      Sec. 13 Partial Delivery

      A PORTAL qualified investor is required to accept a partial delivery on any PORTAL contract due, provided the portion remaining undelivered is not an amount that includes an odd-lot which was not part of the original transaction.

      Sec. 14 Close-out Procedures - "Buying-In"

      A PORTAL contract which has not been completed by the seller according to its terms may be closed by the buyer not sooner than the third business day following the date delivery was due, in accordance with the following procedure:

      (a) Notice of "Buy-In"
      (1) Written notice of "buy-in" shall be delivered to the seller at the seller's office not later than 12 noon, the seller's local time, two business days preceding the execution of the proposed "buy-in."
      (2) For purposes of this provision, written notice shall include an electronic notice through a medium that provides for an immediate return receipt capability. Such electronic media shall include but not be limited to facsimile transmission and a computerized network facility.
      (b) Information Contained in the "Buy-In" Notice
      (1) Every notice of "buy-in" shall state the date of the PORTAL contract to be closed, the quantity and contract price of the PORTAL securities covered by said contract, the settlement date of said PORTAL contract and any other information deemed necessary to properly identify the PORTAL contract to be closed. Such notice shall state further that unless delivery is effected at or before a certain specified time, which may not be prior to 2:30 p.m. Eastern Standard Time, the PORTAL security may be "bought-in" on the date specified for the account of the seller.
      (2) Notice may be redelivered immediately to another PORTAL dealer or PORTAL broker from whom the securities involved are due in the form of a re-transmitted notice ("re-transmit"). Re-transmitted notice of buy-in must be delivered to subsequent PORTAL dealers or PORTAL brokers not later than one business day preceding the time and date of execution of the proposed buy-in.
      (c) Seller's Failure to Deliver After Receipt of Notice
      On failure of the seller to effect delivery in accordance with the "buy-in" notice, or to obtain a stay as hereinafter provided, the buyer may close the PORTAL contract by purchasing all or part of the PORTAL securities necessary to satisfy the amount requested in the "buy-in" notice. Securities delivered subsequent to the receipt of the "buy-in" notice should be considered as delivered pursuant to the "buy-in" notice. Delivery of the requisite amount of securities as stated in the "buy-in" notice or execution will also operate to close-out all PORTAL contracts covered under retransmitted notices of buy-in issued pursuant to the original notice of buy-in. A "buy-in" may be executed by a PORTAL dealer from its long position and/or from customers' accounts maintained with such PORTAL dealer. In all cases, PORTAL dealers must be prepared to defend the price at which the "buy-in" is executed relative to the current market at the time of the "buy-in".
      (d) "Buy-In" Not Completed
      In the event that a "buy-in" is not completed pursuant to the provisions of subsection (b) hereof on the day specified in the notice of "buy-in," or as such date may be extended pursuant to the provisions of subsection (f) hereof, said notice shall expire at the close of business on the day specified in the notice of buy-in.
      (e) Partial Delivery by Seller
      Prior to the closing of a PORTAL contract on which a "buy-in" notice has been given, the buyer shall accept any portion of the PORTAL securities called for by the PORTAL contract, provided the portion remaining undelivered at the time the buyer proposes to execute the "buy-in" is not an amount which includes an odd-lot which was not part of the original transaction.
      (f) Securities in Transit
      If prior to the closing of a PORTAL contract on which a "buy-in" notice has been given, the buyer receives from the seller written or comparable electronic notice stating that the securities are (1) in transfer; (2) in transit; (3) are being shipped that day; or (4) are due from a depository and giving the certificate numbers, except for those securities due from the depository, then the buyer must extend the execution date of the "buy-in" for a period of seven (7) calendar days from the date delivery was due under the "buy-in."
      (g) Notice of Executed "Buy-In"
      The party executing the "buy-in" shall immediately upon execution, but not later than the close of business, local time where the seller maintains its office, notify the PORTAL dealer or PORTAL broker for whose account the securities were bought as to the quantity purchased and the price paid. Such notification should be in written or electronic form having immediate receipt capabilities. If this written media is not available, the telephone shall be used for the purpose of same day notification, and written or similar electronic notification having next day receipt capabilities must also be sent out simultaneously. In either case, formal confirmation of purchase along with a billing or payment (depending upon which is applicable) should be forwarded as promptly as possible after the execution of the buy-in. Notification of the execution of a "buy-in" shall be given to succeeding broker/dealers to whom a retransmitted notice was issued pursuant to subsection (b) using the same procedures stated herein. If a re-transmitted "buy-in" is executed, it will operate to close-out all contracts covered under the re-transmitted notices.
      (h) "Close-Out" under NASD or Exchange Rulings
      (1) When a national securities exchange makes a ruling that all open contracts with a particular member, who is also a PORTAL dealer or PORTAL broker, should be closed-out immediately (or any similar ruling), PORTAL dealers and PORTAL brokers may close-out contracts as directed by the exchange.
      (2) When the Association issues notification that all open contracts with the PORTAL dealer or PORTAL broker in question should be closed-out immediately, PORTAL dealers or PORTAL brokers may close-out contracts as directed by the Assocation.
      (3) Within the meaning of this section, to close-out immediately shall mean that (i) "buy-ins" may be executed without prior notice of intent to "buy-in" and (ii) "Sell-outs" may be executed without making prior delivery of the securities called for.
      (4) All close-outs executed pursuant to the provisions of this subsection shall be executed for the account and liability of the PORTAL dealer or PORTAL broker in question. Notification of all close-outs shall immediately be sent to such PORTAL dealer or PORTAL broker.
      (i) Failure to Deliver and Liability Notice Procedures
      (1) If a contract is for warrants, rights, convertible securities or other securities which (1) have been called for redemption; or (2) are due to expire by their terms; or (3) are the subject of a tender or exchange offer; or (4) are subject to other expiring events such as the record date for the underlying security and the last day on which the securities must be delivered or surrendered (the "expiration date") is the settlement date of the contract or any later day, the receiving member may deliver a Liability Notice to the delivering member as an alternative to the close-out procedures set forth in paragraphs (a) - (g) of this section. Such Notice must be is sued using written or comparable electronic media having immediate receipt capabilities no later than one business day prior to the latest time and date of the offer or other event in order to obtain the protection provided by this provision.
      (2) If the delivering PORTAL dealer or PORTAL broker fails to deliver the securities on the expiration date, the delivering PORTAL dealer or PORTAL broker shall be liable for any damages which may accrue thereby. A Liability Notice delivered in accordance with this provision shall serve as notification by the receiving member of the existence of a claim for damages. All claims for such damages shall be made promptly.
      (3) If the above procedures are not utilized, contracts may be "bought-in" without prior notice, after normal delivery hours established in the community where the buyer maintains its office, on the expiration date. Such buy-in execution shall be for the account and risk of the defaulting PORTAL dealer or PORTAL broker.
      (j) Information on Notices
      Notices of "buy-in" and "re-transmitted buy-in" shall include all information contained in the sample forms prescribed by the Association.
      (k) "Buy-In" Desk Required
      PORTAL dealers or PORTAL brokers shall have a "buy-in" section or desk adequately staffed to process and research all "buy-ins" during normal business hours.
      (l) "Buy-In" of Accrued Securities
      Securities in the form of stock, rights or warrants which accrue to a purchaser shall be deemed due and deliverable to the purchaser on the payable date. Any such securities remaining undelivered at that time shall be subject to the "buy-in" procedures as provided in this Section.

      Sec. 15 Close-Out Procedures - "Selling-Out"

      A contract which has not been completed by the buyer according to its terms may be closed by the seller in accordance with the following procedures:

      (a) Conditions Permitting "Sell-Out"
      Upon failure of the buyer to accept delivery in accordance with the terms of the contract, and lacking a properly executed Reclamation Form, the seller may, without notice, "sell-out" in the PORTAL Market and for the account and liability of the party in default all or any part of the securities due or deliverable under the contract.
      (b) Notice of "Sell-Out"
      The party executing a "sell-out" as prescribed above shall, as promptly as possible on the day of execution, by written or comparable electronic notice, notify the PORTAL dealer or PORTAL broker for whose account and risk such securities were sold of the quantity sold and the price received, and shall promptly mail or deliver formal confirmation of such sale.

      Part VII

      Rules of Fair Practice

      (a) The following Rules of Fair Practice and Interpretations and Policies adopted thereunder are specifically applicable to transactions and business activities relating to the PORTAL Market:
      (1) Article I, Sections 3, 4 and 5;
      (2) Article III, Section 1;
      (3) Interpretation of the Board of Governors — Forwarding of Proxy and Other Materials, Article III, Section 1;
      (4) Article III, Section 2;
      (5) Policy of the Board of Governors — Fair Dealing With Customers, Article III, Section 2;
      (6) Article III, Section 3 and 4;
      (7) Interpretation of the Board of Governors — NASD Mark-Up Policy, Article III, Section 4;
      (8) Article III, Section 5 and the Interpretation of the Board of Governors — Manipulative and Deceptive Quotations, Article III, Section 5;
      (9) Article III, Section 6 and Policy of the Board of Governors — Policy With Respect to Firmness of Quotations;
      (10) Article III, Sections 7, 9, 11-18, 22, 23 and 25;
      (11) Interpretation of the Board of Governors — Transactions Between Members and Non-Members, Article III, Section 25;
      (12) Article III, Section 27;
      (13) Article IV, Sections 1-5; and
      (14) Article V, Sections 1-3.
      (b) The following Rules of Fair Practice and Interpretations, Policies, and Explanations adopted thereunder are specifically applicable to transactions and business activities relating to the PORTAL Market, with the exceptions specified below:
      (1) Interpretation of the Board of Governors — Execution of Retail Transactions in the Over-the-Counter Market, Article III, Section 1, except for subsection D, which requires that a member obtain quotations from three dealers to determine the best inter-dealer market for the subject security;
      (2) Article III, Section 19 and Explanation of the Board of Governors — Explanation of Para graph (d), except for paragraph (d); and
      (3) Article III, Section 21, except subsection
      (c) The following Rules of Fair Practice are applicable to members and persons associated with members regardless of the member's participation in transactions in the PORTAL Market:
      (1) Article I, Sections 1 and 2;
      (2) Article II, Sections 1 and 2; and
      (3) Article III, Section 10, 28, 32, 35, 38-40, and 42.
      (d) The following Rules of Fair Practice and Interpretations adopted thereunder are not applicable to transactions and business activities relating to the PORTAL Market:
      (1) Interpretation of the Board of Governors — Review of Corporate Financing, Article III, Section 1;
      (2) Interpretation of the Board of Governors — Prompt Receipt and Delivery of Securities, Article III, Section 15;
      (3) Interpretation of the Board of Governors — "Free-Riding and Withholding", Article III, Section 1;
      (4) Article III, Sections 8, 20, 24, 26, 29, 30, 31,33, 34, 36, 37, and 41; and
      (5) Article VI.

      Part VIII

      Arbitration

      The facilities of the Association's Arbitration Department, and the procedures of the Code of Arbitration Procedure shall be available to PORTAL participants to resolve disputes arising from PORTAL transactions and transfers or activities related thereto.


      1The definitions in Part I to the PORTAL Rules shall include the plural form of the term and the past tense and the future tense of the term, as applicable.

      2Notification must be provided to NASDAQ Operations, 1735 K Street, NW, Washington, DC 20006-1506, (202) 728-8479.

      3Notification must be provided to NASDAQ Operations, 1735 K Street, NW, Washington, DC 20006-1506, (202) 728-8479.

      4Notification must be provided to PORTAL Operations, 33 Whitehall Street, New York, NY 10004, (800) 635-6485.

      5The applicable provisions of this Interpretation have been incorporated into Part III, Section 3(b)(4) and Part VI, Section 11 of the PORTAL Rules.

      PORTAL is a service mark of NASD Market Services, Inc.


    • 90-28 Automated Confirmation Transaction (ACT) Service Fees

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations
      Systems
      Trading

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

      EXECUTIVE SUMMARY

      In response to requests from members concerned about rising costs for comparison of negotiated trades, NASD Market Services, Inc. (MSI) is reducing the previously approved rates for the Automated Confirmation Transaction (ACT) service. Effective as of April 2, 1990, MSI is instituting a variable fee based on the size of the trade and is eliminating the late fee for trade-date entries into ACT. At the request of the MSI Board, revenues and costs will be reviewed at least annually so that appropriate rate adjustments can be considered.

      BACKGROUND

      Participation in the Automated Confirmation Transaction (ACT) service became mandatory March 1, 1990 for all self-clearing broker-dealers that are members of a registered clearing agency or have an access relationship with such a clearing-agency member (see Notice to Members 89-76). The ACT service is designed to shorten the comparison cycle for trades in NASDAQ securities that are eligible for comparison processing through registered clearing agencies.

      In response to industry concerns regarding overall comparison costs for negotiated trades, MSI did not charge ACT fees for the month of March, and, effective April 2, is instituting a modified service charge for broker-dealers participating in ACT.

      This change is made possible by altering the method of recovering development costs for ACT. Instead of recouping development expenditures over the traditional three-year period, MSI expanded the time frame to five years.

      THE NEW ACT CHARGES

      The resulting changes affect two components of the ACT service charge â€" the comparison charge and the charge for late reports submitted to the service on trade day.

      The original ACT comparison charge was a fixed fee of 25 cents per side and was calculated to recoup ACT development costs over three years and to cover current operating costs. Because many participants in ACT execute trades in small transactions, the Board believes that a variable fee based on the size of the trade would recover costs more equitably. Therefore, the new comparison fee will be 1.25 cents per 100 shares, with a minimum and maximum range of 400 to 7,500 shares.

      In addition to the variable comparison charge, MSI is eliminating the late fee for trade-date entries into ACT for the time being. The purpose of the late fee is to encourage timely reporting of transactions on trade day. However, late reporting of transactions in NASDAQ National Market System securities is a violation of NASD rules, and late reporting to ACT is a violation of ACT rules. Since the NASD recently submitted a proposal to the SEC emphasizing a member's trade-reporting obligations, MSI believes the late charge is not necessary at this time. The Board will review members' compliance with ACT reporting time frames and will consider charging late fees if necessary in the future.

      ACT RATES IN THE FUTURE

      The new rates for ACT were derived from projections of comparison traffic during the next five years. MSI should be able to recover development costs by that time if ACT traffic projections remain viable. The Board has directed the staff to monitor the actual ACT comparison traffic against the original projections to ensure cost recovery over the five-year period.

      Should ACT volume permit, there could be additional reductions in ACT charges in the future. Conversely, if the Board determines that the volume of trades reported to ACT for comparison processing falls significantly short of the levels set for recovery of ACT expenses, the Board will consider other means of cost recovery.

      For example, broker-dealers that use ACT for trade reporting, but send locked-in trades directly to clearing through the use of Qualified Special Representative (QSR) agreements with NSCC, in the future may have to pay a fee for transaction reporting through ACT. The Board intends to monitor closely members' use of ACT, whether for trade reporting alone or for both trade reporting and comparison, and anticipates future adjustments in ACT rates depending on the use made of the service.

      RATE SCHEDULE AS OF APRIL 2, 1990

      MSI will bill the ACT rates as of April 2, 1990. The entire schedule of service charges appears below and will also be in Schedule D to the NASD By-Laws.

      ACT Service Charges

      Comparison

      $.0125/side per 100 shares (minimum 400 shares, maximum 7,500 shares)

      Late Report â€" T+l

      $.25/side

      Browse/query

      $.25/side*

      Terminal Fee

      $50/month (ACT-only terminals)

      CTCI fee

      $500/month

      Service desk

      $50/month**


      *Each ACT query incurs the $.25 fee; however, the first accept or decline processed for a transaction is free, to ensure that no more than $.25 is charged per comparison. Subsequent queries for more data on the same security also will be processed free. Any subsequent query on a different security will incur the $.25 query charge.

      **The ACT Service Desk is available to ACT participants that do not have access to NASDAQ equipment and that average five or fewer trades per day during the previous calendar quarter (see Notice to Members 90-9).

      Questions regarding ACT fees may be directed to NASDAQ Subscriber Services at (301) 948-6162.

    • 90-27 Proposed Amendment to Article III, Section 26 of the NASD Rules of Fair Practice Re: Disclosure of Deferred Sales Charges on Confirmations of the Sale of Investment Company Shares; Last Voting Date: June 5, 1990

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Mutual Fund
      Operations

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

      IMPORTANT MAIL VOTE

      EXECUTIVE SUMMARY

      NASD members are invited to vote on proposed new subsection (n) of Article III, Section 26 of the NASD Rules of Fair Practice that, if adopted, would require disclosure on confirmations of share purchases when an investment company imposes a deferred sales charge on the redemption of shares.

      BACKGROUND

      In Notice to Members 89-77 (December 1989), the NASD distributed for comment a proposed amendment to Article III, Section 12 of the NASD Rules of Fair Practice that would require disclosure on confirmations when investment company shares may be subject to a deferred sales charge on redemption. The NASD received 23 comment letters.

      After reviewing the comments, the Investment Companies Committee recommended to the Board of Governors the following changes to the original proposal:

      The proposal would have involved an amendment to Section 12 of the NASD Rules of Fair Practice, which is a confirmation rule of general application to the sale of securities by NASD members. A number of commenters suggested that, since most separate accounts of insurance companies issuing variable contracts (variable annuities and variable life insurance) are registered with the Securities and Exchange Commission under the provisions of the Investment Company Act of 1940, the NASD should clarify that the proposed amendment to Section 12 was not intended to apply to variable contracts.

      The committee recommended that, to avoid uncertainty about the scope of the new requirement, the proposal should be made a part of Article III, Section 26 of the NASD Rules of Fair Practice rather than an amendment to Section 12. Section 26 is the investment company rule. It specifically exempts variable contracts from its provisions.

      The committee also recommended that the proposed disclosure legend should be required to be placed on the front of a confirmation to ensure that the disclosure is highly visible to a prospective investor.

      The Board of Governors agreed to both of these recommendations.

      Although most of the remaining commenters were in favor of the proposal, some raised the following objections:

      Two believe that current disclosure requirements in prospectuses and sales literature are adequate, while some thought that more prominent disclosure of a deferred sales charge should be made in prospectuses. Others believe that the proper place for disclosure is in the prospectus and not in a confirmation. Some commenters asked for more extensive disclosure language and requested that members be permitted to draft their own legend.

      The Board concedes that the proper place for most disclosures is the prospectus, but it regards the current proposal as an additional safeguard so that investors who have not read a prospectus will be alerted to the presence of a deferred sales charge. The Board does not agree that the proposed disclosure language should be expanded or that members should be permitted to develop their own disclosure legend. Space on confirmations is limited and, in the Board's view, the proposed legend is clear, concise, and will be readily understood by investors. The Board also considers that, in a disclosure of this type, there is great merit in uniformity.

      The Board of Governors believes the proposal is 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. Ballots must be postmarked no later than June 5, 1990.

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

      PROPOSED ADDITION OF NEW SUBSECTION (n) TO ARTICLE III, SECTION 26 OF THE NASD RULES OF FAIR PRACTICE

      (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.

    • 90-26 Proposed Amendments to Subsections (b)(4) and (d) of Article III, Section 26 of the NASD Rules of Fair Practice Re: Regulation of Asset-Based Sales Charges by the NASD; Last Date for Comment: May 31, 1990

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Mutual Fund
      Operations

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

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on proposed amendments to the NASD mutual fund maximum sales charge rule that would subject asset-based sales charges to the provisions of the rule.

      BACKGROUND

      Before 1980, the primary method used by mutual funds, the shares of which are offered to the public by NASD members, to finance sales-related expenses was a front-end sales charge deducted from the offering price of shares. In 1980, the Securities and Exchange Commission (SEC) adopted Rule 12(b)-l under the Investment Company Act of 1940 ("the Act") that permitted mutual funds to use their assets to finance sales-related expenses.

      During the 1980s, a further method of paying for sales and sales promotion expenses — the deferred sales charge on redemption — was introduced. In its most common form — the contingent deferred sales charge (CDSC) — a charge, which declines each year and eventually disappears, is made against redemption proceeds.

      Thus, there are now three major methods utilized, either alone or in combination, by mutual funds to finance sales-related expenses. For the purposes of this proposed rule amendment, they are described as front-end, deferred, and asset-based sales charges.

      REGULATION OF SALES CHARGES

      In 1970, amendments to the Act (Section 22(b)) by the U.S. Congress gave the NASD broad power to prohibit excessive sales charges on mutual fund shares offered by NASD members to investors. At that time, deferred and asset-based sales charges had not been introduced, and the resulting NASD maximum sales charge rule, which was adopted in 1976, was couched in terms of a front-end sales charge. Since then, its provisions also have been applied to deferred but not to asset-based sales charges.

      The NASD has always considered that it is anomalous to have a sales charge rule that does not encompass all charges that are sales-related (see letter to the SEC, September 15, 1978, in response to SEC Release IC-10252). The Association viewed with interest proposed amendments to Rule 12(b)(l), published for comment by the SEC in 1988, that, among other things, would require mutual fund directors to consider whether asset-based sales charges under Rule 12(b)(l) would exceed the sales charges permitted by the NASD sales charge rule and to disclose in the prospectus if and when this might occur.

      In December 1988, in its response to the SEC's request for comments on the proposed Rule 12(b)-l amendments (see letter dated December 29, 1988), the NASD reiterated its view that the Association should seek to expand the scope of its sales charge rule to govern asset-based sales charges. After researching the legality of such a course of action, the NASD determined that no legal impediment exists to prevent such an expansion of its authority.

      If adopted, the proposed amendments will subject asset-based sales charges to the NASD rule, and no NASD member will be permitted to offer the shares of mutual funds that do not comply with the provisions of the amended rule.

      THE NASD'S APPROACH TO REGULATION OF ASSET-BASED SALES CHARGES

      The thrust of the NASD's approach to the regulation of asset-based sales charges is to ensure, to the extent possible, that a majority of mutual fund shareholders who own shares of funds with asset-based sales charges pay no more for sales and sales-promotion expenses than is permitted by the provisions of the current NASD maximum sales charge rule.

      The current rule permits a maximum front-end sales charge of not more than 8.5 percent of the offering price of a mutual fund share graded down to 6.25 percent if one or more of three benefits are not offered. These benefits are dividends reinvested at net asset value, quantity discounts, and rights of accumulation.

      When a mutual fund has a front-end sales charge, investors incur, and pay for sales-related expenses at the time of the sale. Funds with only an asset-based and/or a deferred sales charge incur sales-related expenses at the time of the sale, but the revenue stream to defray these expenses is delayed. Underwriters that pay for up-front sales-related expenses incur liability that is amortized eventually by the revenue flowing from asset-based and/or deferred sales charges. Today, many funds use combinations of the three sales charges. Two popular variations are (1) a relatively low front-end sales charge and an asset-based sales charge and (2) no front-end sales charge, a CDSC, and an asset-based sales charge.

      Thus, to achieve approximate economic equivalency with a maximum permitted front-end sales charge, several variables must be considered — e.g., the percentage amount of an asset-based charge on fluctuating net assets, the interest charge on liability incurred by an underwriter that fronts sales expenses, the length of time investors own shares ("shareholder persistency"), and the frequency and amount of sales charges received on redemption.

      With so many variables, the time frames during which economic equivalency may be reached are infinite in their variety. For example, economic equivalency with a sales charge of 6.25 percent of gross sales, assuming an annual appreciation rate of 4 percent, interest rate of 10 percent, and asset-based charge of 75 basis points would be reached in 11.8 years. This does not take into account revenue from any deferred sales charges on redemption that would shorten the time period, as would any increase in the appreciation rate. Conversely, a decrease in the appreciation rate would lengthen the time period.

      One way to approach the issue would be to require individual shareholder accounting so that, when a shareholder has paid the economic equivalent of a front-end maximum sales charge, he or she would pay no further sales charges — deferred or asset-based. In the example above, when the aggregate of all sales charges exceeded 6.25 percent of the amount invested, no further charges would be assessed. Thus, a person investing $10,000 would never pay more than $625 in sales charges.

      The alternative would be to require fund-level accounting in which all sales charges terminate when a percentage of gross sales is reached. For example, assume a fund has $1 million of sales. In the example above, the maximum it could charge for sales-related expenses would be $62,500.

      The difference between the two methods is that, with individual shareholder accounting, each shareholder would never pay more than the economic equivalent of a front-end charge whereas, with fund-level accounting, long-term shareholders might pay more than the economic equivalent.

      Requiring mutual funds to introduce individual shareholder accounting would mandate extensive and expensive changes in the record-keeping methods and procedures utilized by mutual funds, disrupt current processing of sales and redemptions, and take several years to achieve. It would, initially, result in there being three classes of a fund's shares — those currently owned, those sold after the the rule is adopted, and those owned after a shareholder has paid the maximum sales charge permitted.

      The introduction of fund-level accounting could proceed rapidly and would not prevent the investment company industry from moving towards the adoption of individual shareholder accounting eventually. Indeed, the forces of competition might promote such an evolutionary trend.

      The NASD Board of Governors recognizes that, if a fund-level accounting requirement is adopted, an unknown and unpredictable minority of long-term shareholders might eventually pay more than the economic equivalent of the maximum sales charge permitted by the current NASD sales charge rule. A study of shareholder persistency, recently conducted by the Wyatt Company for the NASD, indicated that somewhere between 75 percent and 80 percent of mutual fund shareholders are likely to redeem their shares within 15 years of original purchase and that there is no statistically significant difference between the persistency ratios of shareholders in funds with traditional front-end sales charges and those with asset-based sales charges.

      The NASD Board of Governors considers that, if fund-level accounting were to be utilized, the fact that long-term shareholders might pay more than the economic equivalent of a front-end sales charge should be prominently disclosed in a mutual fund's prospectus.

      Fund-level accounting would, in the NASD Board's opinion, be the most practical and least burdensome way to proceed. It would provide maximum flexibility to the industry in the financing of sales-related expenses and ensure that most investors in mutual funds, regardless of the method of financing used, would pay no more for the expenses incurred for distribution than the current NASD rule permits.

      In the Board's view, adopting the proposed amendments to the rule would ensure continued compliance by the NASD and its members with the Congressional intent, expressed in Section 22(b)(l) of the Act, that such a rule "shall allow for reasonable compensation for sales personnel, broker/dealers and underwriters and for reasonable sales loads to investors."

      EXPLANATION

      A section-by-section analysis of the proposed amendments to Subsections (b)(4) and (d) of Article III, Section 26 of the NASD Rules of Fair Practice follows:

      Definitions Section

      (b)(4) The term "any person," as used in the current rule, is changed to "Investor" or "Investors." The current rule defines "any person" as it is defined in Rule 22(d)-l under the Act, which no longer contains such a definition. The term "investor" is used in Section 22(b)-(l) of the Act, which gives authority to the NASD to regulate excessive sales charges. The proposed amendment defines the term "investor" broadly.
      (8) Sales charges are defined in this subsection to include all charges and fees that are used to finance sales-related expenses. Included in the definition are front-end, deferred, and asset-based sales charges. Excluded from the definition are charges that are used to defray ministerial, recordkeeping, or administrative activities, and investment management fees. The definition contemplates that any fee or charge that is used, directly or indirectly, to finance sales-related expenses is a sales charge regardless of how it is charged. For example, a situation in which a charge is described as a management fee in a prospectus and part of the fee is used to pay for sales or sales promotion expenses would fall within the definition of a sales charge.

      Nominal charges incurred on redemption of shares for specific services in connection with a redemption are excluded from the definition of deferred sales charges as are redemption charges that are described in a prospectus as being levied to discourage short-term trading within one year of purchase of shares. Such nominal and short-term charges may not be used to pay for sales-related expenses and must be returned to the investment company.

      The term "asset-based sales charge" is not defined in terms of a specific rule such as Rule 12(b)-l. It is intended to encompass all charges against net assets that are utilized to pay for sales and sales promotion expenditures.

      (9) A service fee is defined to include a continuing payment, made by an investment company or its affiliates, to a member for personal service to investors who own shares of the investment company. Thus, it is not made in connection with a primary distribution of investment company securities.

      Sales Charges

      (d) This subsection reiterates the general obligation of the NASD under Section 22(b) of the Act to prevent excessive sales charges. A major restructuring of the rule was required to expand its provisions to include deferred and asset-based sales charges. This was accomplished by dividing the rule into two parts. Part one deals with funds that do not have an asset-based sales charge, and part two deals with funds that have such a sales charge.

      (1) Investment Companies Without an Asset-Based Sales Charge

      Part one, for the most part, reiterates the current rule with minor changes to expand the rule's provisions to include deferred sales charges. Subsections (1)(E) and (F) are new. Subsection (E) would not permit a member to offer a mutual fund that has an aggregate sales charge of more than 7.25 percent of the offering price if the fund offers a service fee, which could not be more than .25 percent of net assets per annum. Section (F) would not permit a member to receive a service fee from a mutual fund that does not reinvest dividends at net asset value.

      These new sections incorporate a principle underlying the sales charge rule that if charges are made for services, or if services are not offered but charges are incurred, an appropriate reduction will be made from the maximum permitted sales charge.

      (2) Investment Companies with an Asset-Based Sales Charge

      This part is new and expands the rule to govern mutual funds with asset-based sales charges that members offer to the public.

      (A) This paragraph places a cap of 6.25 percent of new gross sales, plus an appropriate interest rate, on the total sales charges — asset-based, front-end, and deferred — levied by a mutual fund that offers a service fee to members. The reduction from 8.5 percent, the maximum permitted sales charge under the rule, to 6.25 percent occurs because asset-based sales charges do not provide quantity discounts or rights of accumulation and because a member is offered a service fee for which a charge, not subject to the cap, is made.
      The amount of an appropriate interest rate has not been decided but the prime rate plus .25 percent has been recommended.
      (B) This paragraph permits mutual funds that do not offer a service fee to increase the cap described in paragraph 2(A) to 7.25 percent of total new gross sales plus an appropriate interest rate.
      (C) (i) This subparagraph would limit the amount of an asset-based sales charge levied by mutual funds sold by NASD members to .75 percent per annum of the net assets of the mutual fund. This would mean that, after the amendments are adopted, no mutual fund offered by NASD members could have an asset-based sales charge in excess of 75 basis points of net assets per annum. Underwriters that have outstanding liabilities from sales, made prior to the date of the adoption of the rule, under which current asset-based sales charges are in excess of 75 basis points of net assets per annum, would probably find that it would take a longer time than anticipated to amortize their prior liability. Essentially, the prior liability and the new cap (under paragraphs 2(A) or (B)) would be combined and amortized over time by an asset-based sales charge of not more than 75 basis points per annum of net assets and any CDSC.
      (C) (ii) This subparagraph would require that any deferred sales charges after the maximum caps described in paragraphs 2(A) or (B) are reached must flow into the mutual fund.
      (C) (iii) This subparagraph would not permit a member to offer a mutual fund that pays a service fee in excess of 25 basis points per annum of net assets.
      (C) (iv) Interest charges on any liability incurred in connection with sales made prior to the date of the adoption of the amendments would not be permitted to be added to the maximum percentages of gross sales described in paragraphs 2(A) and (B).
      (d) (3) This subsection would not permit the use of "no load" or "no sales charge" language, orally or in writing, in the offer of a fund that has an asset-based or deferred sales charge. The subsection assumes that no one would claim that a fund with a front-end sales charge does not have a sales charge.
      (4) As explained in the background information section, when fund-level accounting is utilized, it is possible that some long-term shareholders of funds with asset-based charges may pay more than the economic equivalent of the maximum sales charge permitted by the rule. Because of the number of variable factors that affect the length of time it would take to achieve economic equivalency, it is not possible to determine with any accuracy when such instances could occur. Thus, this sub-paragraph would require funds with asset-based sales charges to disclose that information in prospectuses in an area close to the fee table.

      The Board of Governors asks all members and interested persons to comment on the proposed amendment. Comments should be addressed to:

      Mr. Lynn Nellius, Secretary
      National Association of
      Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506

      Comments must be received no later than May 31, 1990. Amendments to NASD Rules of Fair Practice must be approved by the Board of Governors and by a vote of the membership and filed and approved by the SEC before becoming effective.

      Questions concerning this notice may be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202) 728-8329.

      Proposed Amendments to Subsections (b)(4) and (d) of Article III, Section 26 of the NASD Rules of Fair Practice

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

      DEFINITIONS SECTION

      (b) (4) ["Any person" shall mean "any person" as defined in subsection (a), or "purchaser" as defined in subsection (b), of Rule 22d-l under the Investment Company Act of 1940.] "Investor" or "Investors" as used in subsection (d) of this section shall mean any natural person or persons, a partnership, a corporation, an association or any other legal entity.
      (8) "Sales charge" and "sales charges" as used in subsection (d) of this section shall mean all charges or fees that are used to finance sales or sales promotion expenses, including front-end, deferred and asset-based sales charges, excluding expenses incurred for ministerial, record-keeping, or administrative activities and management fees.
      (A) a "front-end sales charge" is a sales charge that is included in the public offering price of the shares of an investment company.
      (B) a "deferred sales charge" is a sales charge that is deducted from the proceeds of the redemption of shares by an investor, excluding any such charges that are nominal and are for services in connection with a redemption, or to discourage short-term trading, that are not used to finance sales-related expenses and that are credited to the net assets of the investment company.
      (C) an "asset-based sales charge" is a sales charge that is deducted from the net assets of an investment company.
      (9) "Service fees" as used in subsection (d) of this section shall mean payments to a member by an investment company or its affiliates for the provision, by the member, of personal, continuing service to investors in the shares of the investment company.

      Sales Charges

      (d) No member shall offer or sell the shares of any open-end investment company or any "single payment" investment plan issued by a unit investment trust (collectively "investment companies") registered under the Investment Company Act of 1940 [if the public offering price includes a sales charge which is excessive, taking into consideration all relevant circumstances.] if the sales charges described in the prospectus are excessive. Aggregate [S]sales charges shall be deemed excessive if they do not conform to the following provisions:
      (1) Investment Companies Without an Asset-Based Sales Charge
      [(1)] (A) [The maximum sales charge on any transaction] Front-end and/or deferred sales charges described in the prospectus which may be imposed by an investment company without an asset-based sales charge shall not exceed 8.5% of the offering price.
      [(2)
      (A)] (B) (i) Dividend reinvestment shall be made available at net asset value per share to ["any person"] an investor who requests such reinvestment, [at least ten days prior to the record date subject only to the right to limit the availability of dividend reinvestment to holders of securities of a stated minimum value, not greater than $1200.]
      [(B)] (ii) If dividend reinvestment is not made available [on terms at least as favorable as those] as specified in subparagraph [(2)(A)](B)(i), the maximum aggregate sales charge [on any transaction] shall not exceed 7.25% of the offering price.
      [(3)
      (A)] (C) (i) Rights of accumulation (cumulative quantity discounts) shall be made available to ["any person"] an investor [for a period of not less than ten (10) years from the date of first purchase] in accordance with one of the alternative quantity discount schedules provided in subparagraph
      [(4)
      (A)] (D)(i) below, as in effect on the date the right is exercised.
      [(B]] (ii) If rights of accumulation are not made available on terms at least as favorable as those specified in subparagraph [(3)(A)](C)(i),the maximum aggregate sales charge [on any transaction] shall not exceed:
      [(i)] (a) 8% of the offering price if the provisions of subparagraph [(2)(A)](B)(i) are met; or
      [(ii)] (b) 6.75% of the offering price if the provisions of subparagraph [(2)(A)](B)(i) are not met.
      [(4)
      (A)] (D) (i) Quantity discounts shall be made available on single purchases by ["any person"] an investor in accordance with one of the following two alternatives:
      [(i)] (a) A maximum aggregate sales charge of 7.75% on purchases of $10,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more, or
      [(ii)] (b) A maximum aggrega