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  • 1993

    • For Your Information

      Bulletin Board Designated As "Qualifying Electronic Quotation System"

      On December 30, 1992, the Securities and Exchange Commission (SEC) granted the NASD's request for interim designation of the OTC Bulletin Board® service (OTCBB) as a "Qualifying Electronic Quotation System" for purposes of certain penny-stock rules that became effective on January 1, 1993. The SEC adopted these rules pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Essentially, this action permits broker/dealers to utilize inside bid/ask prices displayed in the OTCBB to make certain price determinations and disclosures that are now required by the new rules.

      Generally, these rules apply to broker/dealer transactions in penny stocks with or for customer accounts. The SEC's designation of the OTCBB as a qualifying system should facilitate a broker/dealer's compliance with Securities Exchange Act Rules 15g-3, 15g-4, and 15g-6. Additionally, the designation will assist firms in determining whether a security's price (based on an inside bid) causes it to be classified as a penny stock under Securities Exchange Act Rule 3a51-1. If you have any questions, please contact Michael Kulczak in the General Counsel's Office at (202) 728-8811 or Susan McDougall in Trading & Market Services at (202) 728-8150.

      SEC Participates in CRD Phase II

      Effective January 25, 1993, the Central Registration Depository (CRD) will begin processing broker/dealer filings for the Securities and Exchange Commission (SEC). Member firms that amend their Uniform Application for Broker-Dealer Registration (Form BD) on or after that date need only file the change with the NASD.® Because it will be able to review those amendments through CRD, the SEC will no longer accept hard-copy filings. For further details please refer to SEC Release No. 34-31660.

      The SEC and the NASD view this as a major step toward "one stop" filing for the broker/dealer community because it eliminates the burden of duplicative filings.

      Currently, 49 states and the Chicago Board of Options Exchange participate in CRD Phase II. Member firms considering registration changes should contact specific jurisdictions to determine if any submissions in addition to those made to CRD are necessary.

      In the same release, the SEC authorized the NASD to process Form BD applications and Uniform Request for Broker-Dealer Withdrawal (Form BDW) on its behalf. The SEC will use CRD to review initial applications filed with the NASD and will accept them if all SEC criteria are met.

      In addition, filing the Form BDW with the CRD for processing will constitute filing with the SEC. If you have any questions regarding these changes, call NASD Member Services Phone Center at (301) 590-6500.

      North Carolina Increases Agent Registration, Re-registration, and Renewal Fees

      Effective January 1, 1993, North Carolina increased its agent fees. Agent registration, re-registration, and renewal fees rose from $45 to $55. Agent renewal fees also increased to $55. This increase was effective with the 1992-93 renewal program. If you have any questions regarding these changes, call NASD Member Services Phone Center at (301) 590-6500.

      Operation of The Nasdaq Stock MarketSM on December 31, 1993

      The Nasdaq Stock MarketSM and the securities exchanges will be open for trading on December 31, 1993. When a determination is made concerning the observance of New Year's Day, January 1, 1994, information will be circulated regarding the trade date-settlement date schedule.

      Questions regarding this item should be directed to the Uniform Practice Department at (212) 858-4341.

      NASD Member Voting Results

      As a member service, the NASD publishes the result of member votes on issues presented to them for approval in the monthly Notices to Members. Most recently, members voted on the following issues:

      • Notice to Members 92-56 — Proposed Recision of the Guidelines Regarding Communications With the Public About Investment Companies and Variable Contracts (Guidelines) and Proposed Amendments to Article III, Section 35 of the Rules of Fair Practice to Incorporate Items From the Guidelines. Ballots For: 1,768; Against: 154; and Unsigned: 18.

      • Notice to Members 92-57 — Proposed Amendments to Schedule E to the NASD By-Laws Regarding Potential Conflicts of Interest. Ballots For: 1,675; Against: 231; and Unsigned: 29.

      Questions regarding this item should be directed to Stephen Hickman, President's Office, at (202) 728-8381.

      NASD Mails New Edition of Guide to Information & Services

      With this issue of Notices to Members, NASD members are receiving the December 1992 edition of the NASD Guide to Information & Services. This publication, updated semiannually, is arranged by subject and includes names and phone numbers of persons members may call for information and assistance.

      Questions regarding this item may be directed to Sharon Lippincott, Communication Services, at (202) 728-8278.

      What Do You Think of Our New Look?

      Beginning with this edition, Notices to Members incorporates a modern look to make it more appealing and easier to read. This redesign is part of a general reformatting of all NASD publications that will continue through the coming year.

      These changes are also intended to facilitate production of next year's edition of the Notices to Members bound volume collection. These Notices to Members bound volumes provide you with each year of Notices in a handy, ready-to-use format.

      For more information on NASD publications, please call NASD Corporate Communications at (202) 728-6900. Or, if you have any questions or comments on Notices, please direct them to Thomas Mathers, Editor, at (202) 728-8267 or Sharon Lippincott, Associate Editor, at (202) 728-8278.

      Major Medical Plan for Individuals Adjusts Rates in Most Cost Areas

      Despite the national trend toward higher costs for medical coverage, our plan administrators report that premiums for the majority of those participating in the National Casualty HealthGuard Plus program will remain virtually the same as they have been since April 1992, and in many cases will be lower. Those in the high cost geographic areas, however, will experience some increase in keeping with the national trend.

      In response to numerous requests, the Plan has added another deductible option of $5,000 per calendar year — also available as of April 1 — and the premium discount for covering spouses will automatically increase from 10 percent to 15 percent, applicable to both insured and spouse.

      Additionally, on April 1, 1993, the lifetime maximum benefit will double to $2,000,000 and the maximum age for application for coverage will rise from 59 to 64. These changes reflect plan growth and the insurers' willingness to provide greatest possible flexibility.

      For more information, call Benefits Administrators, Inc., at (800) 336-0883.

      New Products Added to Series 7

      The Series 7 examination will soon include questions on collateralized mortgage obligations (CMOs), long-term equity options, and capped index options. These products are not presently tested on the examination. The questions will be added to the pretest (unscored) group beginning April 12, 1993. After the pretest period, as early as May 12, 1993, acceptable questions will be scored. The total number of questions selected for each topic area in the examination will remain unchanged.

      Questions dealing with long-term equity options and capped index options will be included among the questions on exchange-traded equity options (section 4.7.2) and exchange-traded index options (section 4.7.3), respectively. The questions will test the candidate's knowledge of underlying securities, exercise settlement, and other basic product information.

      CMOs will be given equal weight with other types of mortgage-backed securities included in the content outline (section 4.3.2). The questions will cover the general characteristics and structure of CMOs, as well as the types of risk.

      For further explanation, contact David Uthe at (301) 590-6695.

      Correction to Notice to Members 93-12 (February 1993)

      Due to an editing error, footnote 7 on page 54 of Notice to Members 93-12 (February 1993), "Questions and Answers About New NASD Rules Governing Investment Company Sales Charges — Article III, Sections 26(b) and (d) of the Rules of Fair Practice," is incorrect. The correct footnote language is:

      7The SEC has stated that "[w]hether particular shareholder or other services are 'primarily intended to result in the sale of fund shares' and, therefore, must be paid under a 12b-1 plan, will depend on the surrounding circumstances." Investment Company Act Release No. 1643 (June 13, 1985).

      Members Warned Against Fictitious Japanese Bond Refund Certificates

      Responding to the fraudulent use of fictitious certificates called "Kanpukin Zandaka Kakuninsho," the Japanese Ministry of Finance has issued the following warning:

      • A "Kanpukin Zandaka Kakuninsho" is a fictitious certificate, allegedly issued by the Japanese Ministry of Finance, that certifies the existence of a remaining balance on a Japanese government bond refund. It claims to confirm that the Japanese Ministry of Finance will exchange the amount specified for an equivalent amount of Japanese government bonds. The Japanese government has already found several kinds of such fictitious certificates with face values ranging from 10 billion to 500 billion yen.

      • Although the police have arrested some persons attempting to use these certificates, the fraudulent use of these fictitious certificates seems to have been occurring repeatedly both in Japan and overseas. The Japanese Ministry of Finance has received frequent inquires, especially from abroad, as to whether the certificates are genuine.

      • In response, the Ministry of Finance has said that it never issued such "Kanpukin Zandaka Kakuninsho," and that such certificates are illegal.

      Quarterly Press Release Now Included in Notices to Members

      Beginning with this issue, we are now including the quarterly press release on The Nasdaq Stock MarketSM in Notices to Members. We hope you find the statistical information in this report useful.

      Arkansas Increases Agent Registration, Re-Registration, and Renewal Fees

      On April 7, 1993, Arkansas authorized the CRD to begin collecting agent registration, re-registration, and renewal fees of $75. This is an increase from the current $50 fee. Firm registration and renewal fees will remain at $300. If you have any questions regarding these changes, please call the Arkansas Securities Department at (501) 324-9260.

      Paper and Pencil Series 7 Available in Spokane, Washington June 5

      Effective June 5, 1993, candidates may take the General Securities Representative Examination (Series 7) at the Paper & Pencil Examination Center (Center) in Spokane, Washington, on the first Saturday of each month. In addition to the Spokane Center, candidates may take the Series 7 at the Centers in Anchorage, Alaska; Honolulu, Hawaii; and Great Falls, Montana.

      To take the Series 7 examination at one of these locations, candidates must make an appointment by telephoning the NASD Member Services Phone Center in Rockville, Maryland at (301) 590-6500.

      Appointments must be made with the NASD eight business days before the desired examination session.

      Examination Revisions Announced

      Effective July 1, 1993, some NASD examinations will reflect various recently implemented NASD and SEC rule changes. Please note that these changes will affect only the examinations that currently cover these rules.

      • The Net Capital Rules (SEC Rule 15c3-1) — the changes to the minimum net capital requirements, by class of broker/dealer, effective July 1 to December 31, 1993, as well as amendments to the securities haircuts, aggregate indebtedness, and contractual charges (refer to Notice to Members 92-72).

      • The small issue exemption from the registration requirements of the Securities Act of 1933 under Regulation A.

      • NASD Rules of Fair Practice — Section 10 (refer to Notice to Members 93-8); Section 35 (refer to Notice to Members 93-18); and Section 45 (refer to Notice to Members 92-60).

      For further explanation, contact Carole Hartzog at (301) 590-6696.

      Pennsylvania Increases Agent Registration, Re-registration, and Renewal Fees

      On May 4, 1993, Pennsylvania increased its agent registration and re-registration fees to $75 to be effective on CRD as of May 7, 1993. Agent renewal fees increased to $60. Firm registration and renewal fees will remain at $250. If you have any questions regarding these changes, please call the NASD's Member Services Phone Center at (301) 590-6500.

      NASD Member Voting Results

      As a member service, the NASD publishes the result of member votes on issues presented to them for approval in the monthly Notices to Members. Most recently, members voted on the following issue:

      • Notice to Members 93-15 — Proposed Amendments to Articles VII and XII of the By-Laws and Article III of the Rules of Fair Practice to Make All Rule Approval Procedures Under the NASD's By-Laws Uniform. Ballots For: 1,683; Against: 478; and Unsigned: 11.

      Questions regarding this item should be directed to Stephen Hickman, President's Office, at (202) 728-8381.

      Educational Programs Added to Conference Schedule

      The following educational programs are now on the 1993 NASD conference schedule:

      October 13-14 Variable Insurance Products Compliance Seminar Washington, DC

      A compliance seminar emphasizing advertising and distribution of variable annuity and variable life insurance.

      Contact:
      Carolyn Thrower (202) 728-6977

      October 21-22 CRD Conference Rockville, Maryland An educational program addressing key registration issues including Special Registration Review (SRR), Firm Access Query (FAQS), the 1993 renewal process, CRD redesign, and NASD quality and service teams. Contact:
      Richard Sheridan (301) 590-6523
      Genevieve Fedorowicz (301) 590-6929

      Look for program details and registration information in late August.

      West Virginia, Wyoming Increase Registration, Re-Registration, and Renewal Fees

      Effective July 1, 1993, West Virginia and Wyoming increased their agent registration, re-registration, and renewal fees as well as broker/dealer registration and renewal fees as follows:

      West Virginia: Agent registration, re-registration, and renewal fee to $55. Broker/dealer registration and renewal fee to $250.

      Wyoming: Agent registration, re-registration, and renewal fee to $35.

      Broker/dealer registration and renewal fee to $200.

      If you have any questions regarding these changes, please call the NASD® Member Services Phone Center at (301) 590-6500.

      Colorado and Maine Increase Registration, Re-Registration, and Renewal Fees

      Effective July 1, 1993, Colorado increased its agent registration, re-registration, and renewal fees to $23 and broker/dealer registration and renewal fees to $104. In addition, Maine increased its broker/dealer registration and renewal fees to $200. Maine's agent fees remained unchanged at $40.

      If you have any questions regarding these changes, please call the NASD Member Services Phone Center at (301) 590-6500.

      NASD Member Voting Results

      As a member service, the NASD publishes the result of member votes on issues presented to them for approval in the monthly Notices to Members. Most recently, members voted on the following issue:

      • Notice to Members 93-35 — Proposed Amendment to the Procedures for Filling Vacancies on NASD Nominating Committees. Ballots For: 1,964; Against 122; and Unsigned: 11.

      Questions regarding this item should be directed to Stephen Hickman, President's Office, at (2020)728-8381.

      "800 Portability" Means You Own Your 800 Telephone Number

      As the result of a Federal Communications Commission ruling that took effect May 1, 1993, your firm can now transfer your 800 telephone number from one longdistance company to another. Previously, firms wanting to change their long-distance carriers were inhibited by two factors: the direct costs associated with reprinting stationary, business cards, and marketing materials and the threat of lost business from customers not aware of the firm's new number. With "800 Portability" your firm can now switch long-distance carriers and retain your existing 800 number.

      The NASD/MCI Long Distance Program offers members MCI 800 Service at discounted rates of 21 to 27 percent off MCI's regular rates based on usage. In addition, the NASD rebates an additional amount to participating firms. The MCI 800 Service offers members both nationwide and international coverage, single-number dialing, choice of dedicated or switch lines, routing and coverage control, and Direct Termination Overflow (a feature designed to ensure that your customers never receive a busy signal by automatically switching your 800 line call overflow to your normal business lines).

      To compare your firm's existing 800 number features and costs with those available through the NASD/MCI Long Distance Program, or to find out about the other services available through the program, call (800) 688-8220.

      Rule Changes You Should Note

      Effective June 23, 1993, the Securities and Exchange Commission (SEC) approved amendments to Article III, Section 34, Appendix F, Section 5(e) of the Rules of Fair Practice that increased the limit on non-cash compensation or sales incentives that the sponsor of a Direct Participation Program or rollup may pay to an associated person from $50 to $100.

      Effective August 10, 1993, the SEC approved amendments to Article IX, Section 4 of the By-Laws that eliminated the special election provisions for filling vacancies on Nominating Committees. Under the new provisions, the Nominating Committee will fill any such vacancies by appointment with such appointment to be effective until the next regularly scheduled election.

      Applying the Free-Riding and Withholding Interpretation to Investment Partnerships Managed By Entities or Persons Associated With NASD Members

      In the June 1993 Notices to Members, the NASD solicited comments on proposed amendments to the Free-Riding and Withholding Interpretation under Article III, Section 1 of the Rules of Fair Practice. One of the proposed amendments involved using the "carve out" mechanism (August 1992 Notices to Members) at the management level for investment partnerships that are managed by NASD members, their associated persons, or related entities. Several commenters asked if the National Business Conduct Committee (NBCC) could grant interim relief so that such partnerships could use this "carve out" mechanism prior to the rule change being permanently adopted. The NBCC has determined to grant such interim relief on similar terms to its prior grant of such relief for partnerships that had restricted persons as investors. The NBCC wishes to point out that in granting this relief, performance based fees cannot be used for purchases in the new issue account.

      To obtain such interim relief, the investment partnership must establish the following policing mechanisms:

      1. The investment partnerships will establish a separate brokerage account, with a separate identification number, for its new-issue purchases. At the end of each fiscal year, the general partners will certify in writing to its independent certified public accountants that: (a) all hot issues purchased by the partnership were placed in this new-issue account; (b) the partners participating in the new-issue account are not restricted persons under the Interpretation; and (c) no management fees are based upon the performance of securities in the new issue account.
      2. Prior to the execution of the initial hot-issue transaction, the partnership's outside legal counsel will render an opinion that complies paragraph B of the section of the Interpretation titled "Investment Partnerships and Corporations."
      3. As part of its audit procedure for the partnership, the independent certified public accountant will confirm in writing to the partner ship that all allocations for the new-issues account were made in accordance with the provisions of the applicable partnership agreement that restricts participation in hot-issue purchases.
      4. The partnership will maintain in its files copies of the certifications, representations, and confirmations referred to in paragraphs (1) – (3) above for at least three years following the last purchase of a hot issue for the new-issue account.
      5. The partnership will accept investment funds from other partnerships if such other partnerships provide the same documentation and assurances described in paragraphs (1) – (4) that restricted persons will not participate in the purchase of hot issues.
      6. The certifications and documents required in paragraphs (1) – (3) shall be provided to the member holding such account at such time as these certifications and documents are filed with the partnership and its independent certified public accountant and the member shall make such documentation available to the NASD upon request.

      To qualify for the interim relief described in this Notice, a member executing a hot issue transaction for an investment partnership with restricted persons as general or limited partners must receive, prior to the initial transaction, the certification from the general partner described in paragraph 1 and the opinion of counsel letter described in paragraph 2. The certification from the independent certified public accountant described in paragraph 3 above shall be obtained at the partnership's next audit.

      Questions concerning this Notice should be directed to T. Grant Callery, Vice President and General Counsel, at (202) 728-8285; Craig L. Landauer, Associate General Counsel, at (202) 728-8291; or Lewis E. Antone at (202) 728-8245.

      NASD Fidelity Bond Program Enhanced

      The NASD Fidelity Bond Program has been enhanced to increase its value to NASD member firms and reflect the SEC-mandated increase in net capital requirements for 1994 (Notice to Members 92-72 for information on the new net capital requirements).

      The NASD Fidelity Bond Program now offers members coverage up to $5 million (for firms that have not had any paid losses in the past three years) and with net capital requirements of less than $4,166,000. Previously, firms with net capital requirements over $416,000 had to use the Financial Institution Bond Form 14. NASD members can now use the Security Dealers Blanket Bond (SDBB) to apply for coverage in all states except Texas.

      By using the SDBB, members receive additional benefits not available when using the standard Form 14. The SDBB provides the full limit of liability coverage for each and every loss, as opposed to the Form 14 coverage that ceases to exist once the firm's aggregate losses meet the policy limit (unless additional coverage is purchased by the firm for the balance of the year). It also provides firms with an automatic $25,000 audit expense coverage not available with the Form 14. Computer systems coverage, including voice-initiated transactions, is included in the SDBB. Additionally, firms have the opportunity to extend their coverage by purchasing an optional one-year discovery period to protect against losses later discovered that were sustained during the bond period.

      In October, applications and information on the NASD-sponsored Fidelity Bond Program will be mailed to all NASD member firms. If you have additional questions on the program or would like to compare your existing coverage with the NASD program, please contact Seabury and Smith at (800) 922-9242.

      Changes Enhance NASD/MCI Long Distance Program

      Two recent changes have been made to the NASD/MCI Long Distance Program that further enhance the value and savings available through the program to NASD member firms.

      Effective September 1, firms using MCI Data Services through the NASD/MCI Long Distance Program will receive monthly discounts on their MCI invoices of 4 to 20 percent off MCI's standard tariffed rates. Previously, participating members using this service only received a rebate from the NASD equal to 6 percent of their monthly data charges. Participating firms will now receive the appropriate MCI discount and the NASD rebate. MCI data services covered under the program include transmission speeds from 9600 bps up to TDS1.5.

      In June, MCI introduced Proof Positive that will provide NASD members with several additional benefits. A quarterly report will be sent to each participating firm comparing its actual savings to AT&T. The report also compares your current service with other MCI services. If another MCI service would have reduced your long distance costs, the difference will automatically be credited to your firm's account by MCI. MCI also will recommend specific alternatives to assist you in reducing your monthly telephone charges.

      Please call (800) 688-8220, for additional information on these program changes or to find out how to enroll in the NASD/MCI Long Distance Program.

      SEC Extends Derivative Products Comment Period

      The SEC is extending the comment period for Release No. 34-32256 (May 10, 1993 Federal Register) concerning derivative products. In its release, the SEC solicited comments on a broad range of questions regarding the impact of Net Capital Rule standards on broker/dealer participation in the derivative products market. The new deadline for comments is now December 17, 1993.

      Persons interested in submitting written comments should file three copies with Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. All comments should refer to File No. S7-17-93.

      Examination Revisions Announced

      Effective January 1, 1994, some NASD examinations will reflect recent SEC rule changes. Please note these changes only affect those examinations that cover these rules.

      • The Net Capital Rule (SEC Rule 15c3-1)—the changes to the minimum net capital requirements by class of broker/dealer, effective January 1 to June 30, 1994 (refer to Notice to Members 92-60 and Notice to Members 93-30).

      • Reports to Be Made by Certain Brokers and Dealers (SEC Rule 17a-5)—amendments to the rule give additional responsibilities to "designated examining authorities" (refer to Notice to Members 93-70).

      • Notification Provisions for Brokers and Dealers (SEC Rule 17a-11)—amendments to the rule eliminate certain filing requirements. However, the requirements to give notice remain basically unchanged (refer to Notice to Members 93-72).

      For further explanation, contact Carole Hartzog at (301) 590-6696.

      NASD Member Firm Insurance Program Eligibility Enhancements

      The NASD Member Firm Insurance Program provides member firms employing 2 to 50 persons with group insurance coverage. The program previously excluded contracted branch offices and contracted employees from eligibility. Such branch offices and employees are now eligible to apply to the program if they meet the definition of a small group. The NASD Member Firm Insurance Program, underwritten through The Travelers, offers qualified participants Major Medical, Dental, Term Life, and Accidental Death and Dismemberment insurance. Available in all states and the District of Columbia, the program is tailored to conform to each state's laws and regulations. For additional information on the program or assistance in determining your group's eligibility, please contact Seabury and Smith at (800) 321-1998; in the Washington, DC area call (202) 296-8030, extension 353 or 354.

      NASD Member Voting Results

      As a member service, the NASD publishes the result of member votes on issues presented to them for approval in the monthly Notices to Members. Most recently, members voted on the following issues:

      • Notice to Members 93-50—Proposed New Section to the Rules of Fair Practice Relating to the Respective Obligations and Supervisory Responsibilities of Introducing and Clearing Firms. Ballots For: 1,429; Against: 397; and Unsigned: 211.

      • Notice to Members 93-51—Proposed Amendment to the Corporate Financing Rule Relating to Fairness and Reasonableness of Anti-Dilution Provisions in Underwriters' Warrants, Options, and Convertible Securities. Ballots For: 1,600; Against: 280; and Unsigned: 154.

      • Notice to Members 93-52Proposed Amendment Exempting Money Market Mutual Funds From Disclosure Requirements. Ballots For: 1,645; Against: 250; and Unsigned: 140.

      Questions regarding these items should be directed to Stephen Hickman, President's Office, at (202)728-8381.

      CMO Advertising Prefiling Requirement

      On November 9, 1993, the Securities and Exchange Commission (SEC) approved a temporary extension for one year of the prefiling requirement relating to advertisements concerning collateralized mortgage obligations (CMOs). The prefiling requirement in Article III, Section 35(c)(2) of the NASD Rules of Fair Practice was adopted in 1992 and was set to expire on November 16, 1993. The temporary extension causes the prefiling requirement to continue in effect until November 16, 1994.

      The NASD has also proposed in a separate rule filing making the CMO advertising prefiling requirement permanent. The temporary extension announced here will continue the requirement in effect until the SEC has completed its consideration of the NASD's proposal to make the requirement permanent.

      NASD Member Voting Results

      As a member service, the NASD publishes the result of member votes on issues presented to them for approval in the monthly Notices to Members. Most recently, members voted on the following issue:

      • Notice to Members 93-61—NASD Solicits Member Vote on New Rule Governing the Pricing of Open Orders; Last Voting Date: October 29, 1993. Ballots For 1,682; Against 232; and Unsigned 11.

      Questions regarding these items should be directed to Stephen Hickman, President's Office, at (202) 728-8381.

      The Nasdaq Stock MarketSM Launches Two New Indexes and Modifies Two Others

      On November 1, The Nasdaq Stock MarketSM responded to requests for better performance indicators for Nasdaq-listed companies by launching two new indexes— Biotechnology and Computer—and changing the Utilities Index to the Telecommunications Index to reflect more accurately its composition. In addition, on October 26, the Nasdaq-100 Index®, a widely watched barometer of large-capitalization growth stocks trading on Nasdaq, was modified.

      The Biotechnology and Computer Indexes—both market-value weighted—will include stocks listed in the Nasdaq National Market® and The Nasdaq SmallCap MarketSM.

      When accessing these indexes on the Nasdaq Workstation®, the symbol for the Biotechnology Index is IXBIO, for the Computer Index it is IXCOM, and for the Telecommunications Index it is IXUT. To access through other services such as Quotron, etc., use the symbols IXB, IXR, and IXU, respectively.

      On November 1, The Nasdaq Stock Market also changed its existing Utilities Index to a Telecommunications Index. During the past several years, the Nasdaq Utilities Index has become increasingly dominated by telecommunications issues, which last year comprised more than 90 percent of this index. Because the telecommunications issues have driven this index to its new record highs, the index needs to reflect its changing composition. The utilities issues have been moved to the Industrial Index, and the Telecommunications Index has been reset at a base value of 200.

      The Nasdaq-100 Index was changed to better reflect the changing mix of Nasdaq's 100 largest non-financial companies. The new Nasdaq-100 Index will provide investment managers with a better means to build portfolios with many of Nasdaq's largest, non-financial growth companies. Options will soon be traded on the Nasdaq-100 Index by the Chicago Board Options Exchange, which has filed with the SEC to trade options and LEAPS (Long-term Equity Anticipation Securities) on the Nasdaq-100 Index.

      Correction to Notice to Members 93-76

      Notice to Members 93-76 in the November edition contains an error. The second line of the fifth paragraph under "Background and Description of the Proposal" on page 449 should read as follows:

      "The NASD is proposing to amend the section to apply the preuse requirement to all investment company advertisements or sales literature that incorporate rankings or comparisons either not [emphasis added] generally published or created directly or indirectly by the investment company, its underwriter, or an affiliate."

      The word "not" was omitted from the final version. Please note the correction in your November copy of Notices to Members.

    • 93-91 Nasdaq National Market® Additions, Changes, And Deletions as of November 26, 1993

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading

      As of November 26, 1993, the following 105 issues joined the Nasdaq National Market®, bringing the total number of issues to 3,412:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      DUCR

      Duracraft Corp.

      10/26/93

      1000

      ISCO

      Illinois Superconductor Corporation

      10/26/93

      1000

      KAMNZ

      Kaman Corporation (Dep. Shrs)

      10/26/93

      200

      MRIM

      MRI Management Associates, Inc.

      10/26/93

      1000

      RIMGW

      Rimage Corporation (7/21/95 Wts)

      10/26/93

      500

      JPEI

      JPE, Inc.

      10/27/93

      1000

      ORCI

      Opinion Research Corporation

      10/27/93

      1000

      SSPC

      Seda Speciality Packaging Corp.

      10/27/93

      1000

      SONOP

      Sonoco Products Company (Pfd Ser A Cum Co)

      10/27/93

      200

      CMOS

      Credence Systems Corporation

      10/28/93

      1000

      IFLM

      Interfilm, Inc.

      10/28/93

      1000

      MSLD

      Masland Corporation

      10/28/93

      1000

      PAGI

      Penn-America Group, Inc.

      10/28/93

      1000

      HLPH

      Holophane Corporation

      10/29/93

      500

      ITEG

      IntegraCare, Inc.

      10/29/93

      1000

      MERQ

      Mercury Interactive Corporation

      10/29/93

      500

      PTREF

      PartnerRe Holdings Ltd.

      10/29/93

      1000

      PETR

      PetroCorp Incorporated

      10/29/93

      1000

      CPSC

      Carson Pirie Scott & Co.

      11/1/93

      1000

      FFIN

      First Financial Bankshares, Inc.

      11/1/93

      200

      SDYNZ

      Staodyn, Inc. (11/1/96 Wts Ser II)

      11/1/93

      500

      DMMC

      DM Management Company

      11/2/93

      1000

      PTEN

      Patterson Energy, Inc.

      11/2/93

      500

      PTENW

      Patterson Energy, Inc. (Redeem Wts)

      11/2/93

      500

      TREX

      Transnational Re Corporation (Cl A)

      11/2/93

      500

      BJCT

      Bioject Medical Technologies Inc.

      11/3/93

      1000

      FSNM

      First State Bancorporation

      11/3/93

      1000

      FUNN

      Mountasia Entertainment International, Inc.

      11/3/93

      1000

      DERM

      Penederm Incorporated

      11/3/93

      1000

      AMRI

      Amrion, Inc.

      11/4/93

      1000

      FFCI

      Fairfield Communities, Inc.

      11/4/93

      1000

      VISX

      VISX Incorporated

      11/4/93

      1000

      ROCK

      Gibraltar Steel Corporation

      11/5/93

      500

      GASI

      Greenwich Air Services, Inc.

      11/5/93

      1000

      ITRI

      Itron, Inc.

      11/5/93

      1000

      MONFA

      Monaco Finance, Inc. (Cl A)

      11/5/93

      1000

      MONFW

      Monaco Finance, Inc. (Cl A) (12/10/95 Wts)

      11/5/93

      1000

      PTSI

      P.A.M. Transportation Services, Inc.

      11/8/93

      1000

      ASCA

      Ameristar Casinos, Inc.

      11/9/93

      1000

      BOST

      Boston Chicken, Inc.

      11/9/93

      1000

      PIPE

      Consolidated Stainless, Inc.

      11/9/93

      1000

      GLDN

      Golden Systems, Inc.

      11/9/93

      1000

      PURS

      Purus, Inc.

      11/9/93

      1000

      URBN

      Urban Outfitters, Inc.

      11/9/93

      1000

      ASTX

      Applied Science & Technology, Inc.

      11/10/93

      1000

      ASTXW

      Applied Science & Technology, Inc. (Redeem Wts)

      11/10/93

      1000

      PTSF

      Petstuff, Inc.

      11/10/93

      1000

      SKYB

      Skybox International, Inc.

      11/10/93

      1000

      UFPI

      Universal Forest Products, Inc.

      11/10/93

      500

      TATWF

      TAT Technologies Ltd. (Cl A)(3/31/94 Wts)

      11/11/93

      1000

      TATTF

      TAT Technologies Ltd. (Ord Shrs)

      11/11/93

      1000

      VVTVA

      ValueVision International, Inc. (Cl A)

      11/11/93

      1000

      ZTEC

      Zytec Corporation

      11/11/93

      1000

      LOJN

      LoJack Corporation

      11/12/93

      1000

      MACE

      Mace Security International, Inc.

      11/12/93

      1000

      OSBC

      Old Second Bancorp, Inc.

      11/12/93

      200

      SBNP

      State Bancshares, Inc.

      11/12/93

      500

      HAVAB

      Harvard Industries, Inc. (Cl B)

      11/15/93

      500

      IREG

      Information Resource Engineering, Inc.

      11/15/93

      500

      FULCF

      Fulcrum Technologies, Inc.

      11/16/93

      1000

      HAVAP

      Harvard Industries, Inc. (Pfd)

      11/16/93

      500

      LAND

      Landair Services, Inc.

      11/16/93

      500

      QFAB

      Quaker Fabric Corporation

      11/16/93

      1000

      RBDS

      Roberds, Inc.

      11/16/93

      1000

      SCHN

      Schnitzer Steel Industries, Inc. (Cl A)

      11/16/93

      1000

      TOWR

      Tower Air, Inc.

      11/16/93

      1000

      ALCL

      Allied Capital Lending Corporation

      11/17/93

      1000

      ALFC

      ALLIED Life Financial Corporation

      11/17/93

      500

      BOLL

      Bollinger Industries, Inc.

      11/17/93

      1000

      CXIPY

      Coflexip (ADR)

      11/17/93

      1000

      DNFCR

      D & N Financial Corporation (12/20/93 Rts)

      11/17/93

      1000

      FTPS

      FTP Software, Inc.

      11/17/93

      1000

      SFSK

      Safeskin Corporation

      11/17/93

      1000

      PBSFR

      Pacific Bank, N.A. (The) (12/2/93 Rts)

      11/17/93

      500

      UNPH

      Uniphase Corporation

      11/17/93

      1000

      ASFC

      Astoria Financial Corporation

      11/18/93

      1000

      ISLSW

      Intelligent Surgical Lasers, Inc. (11/17/2000 Wts Cl A)

      11/18/93

      200

      ISLSL

      Intelligent Surgical Lasers, Inc. (11/17/2000 Wts Cl B)

      11/18/93

      200

      ISLSD

      Intelligent Surgical Lasers, Inc.

      11/18/93

      500

      MIKN

      Mikohn Gaming Corporation

      11/18/93

      1000

      WBLT

      Welbilt Corporation

      11/18/93

      1000

      ARRS

      Arris Pharmaceutical Corporation

      11/19/93

      1000

      ABEV

      Atlantic Beverage Company, Inc.

      11/19/93

      1000

      CMAX

      CableMaxx, Inc.

      11/19/93

      1000

      JCOR

      Jacor Communications, Inc.

      11/19/93

      1000

      JCORW

      Jacor Communications, Inc. (1/14/2000 Wts)

      11/19/93

      500

      FORMF

      Jetform Corporation

      11/19/93

      1000

      RTEX

      RailTex Inc.

      11/19/93

      1000

      UVSGA

      United Video Satellite Group, Inc. (Cl A)

      11/19/93

      1000

      WMAR

      West Marine, Inc.

      11/19/93

      1000

      AMBI

      Applied Microbiology, Inc.

      11/22/93

      500

      TMTX

      Temtex Industries, Inc.

      11/22/93

      1000

      ATMI

      Advanced Technology Materials, Inc.

      11/23/93

      1000

      MATK

      Martek Biosciences Corporation

      11/23/93

      500

      OLYMP

      Olympic Financial Ltd. (8% Conv Pfd Stk)

      11/23/93

      1000

      PHTX

      Photonics Corporation

      11/23/93

      500

      QCSB

      Queens County Bancorp, Inc.

      11/23/93

      1000

      AAON

      AAON, Inc.

      11/24/93

      1000

      CDTC

      Cable Design Technologies Corporation

      11/24/93

      1000

      CCRO

      ClinTrials Inc.

      11/24/93

      1000

      LOFSY

      London & Overseas Freighters Limited (ADR)

      11/24/93

      200

      MONFZ

      Monaco Finance, Inc. (12/11/93 Wts B)

      11/24/93

      1000

      OTRX

      OTR Express, Inc.

      11/24/93

      1000

      UNSW

      Union Switch & Signal Inc.

      11/24/93

      1000

      AINN

      Applied Innovation Inc.

      11/26/93

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since October 26, 1993:

      New/Old Symbol

      New/Old Security

      Date of Change

      HOENW/HOENW

      Hoenig Group Inc. (10/31/94 Wts Cl A)/Hoenig Group Inc. (10/93 Wts Cl A)

      10/27/93

      SYMM/SILN

      Symmetricom, Inc./Symmetricom, Inc.

      11/01/93

      NGCOW/NGCWV

      National Gypsum Company (7/1/2000 Wts)/National Gypsum Company (7/1/2000 Wts)

      11/2/93

      ZALEW/ZALWV

      Zale Corporation (Wts 7/29/98 Ser A)/Zale Corporation (Wts Ser A 7/29/98 WI)

      11/2/93

      CBSS/CBSS

      Compass Bancshares, Inc./Central Bancshares South, Inc.

      11/8/93

      EWST/GFGC

      Energy West, Inc./Energy West, Inc.

      11/22/93

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      CHEK

      Checkpoint Systems, Inc.

      10/29/93

      SUNI

      Sun Coast Plastics, Inc.

      11/3/93

      SEMIZ

      All American Semiconductors, Inc. (Wts)

      11/8/93

      GOOD

      Goody Products, Inc.

      11/10/93

      TPCA

      Total Pharmaceutical Care, Inc.

      11/10/93

      CAMDW

      California Micro Devices Corporation (Wts)

      11/11/93

      PABC

      Pacific Bancorporation

      11/11/93

      CIVCR

      Civic Bancorp (Rts)

      11/15/93

      AHLDY

      Ahold N.V. (ADR)

      11/15/93

      BKLA

      BKLA Bancorp

      11/16/93

      SALM

      Salem Sportswear Corporation

      11/16/93

      BYTX

      Bytex Corporation

      11/17/93

      WWWM

      W. W. Williams Company

      11/17/93

      MCCS

      Medco Containment Services, Inc.

      11/19/93

      GATW

      Gateway Fed Corporation

      11/22/93

      DNKG

      Sofamor/Danek Group, Inc.

      11/22/93

      MSBKR

      Mutual Savings Bank, f.s.b. (Rts)

      11/23/93

      Questions regarding this Notice should be directed to Mark A. Esposito, Supervisor, Market Listing Qualifications, at (202) 728-8002. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director; NASD Market Surveillance, at (301) 590-6436.

    • 93-90 Trade Date-Settlement Date Schedule for 1994

      SUGGESTED ROUTING

      Internal Audit
      Legal & Compliance
      Municipal
      Operations
      Syndicate
      Systems
      Trading

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

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Martin Luther King, Jr., Day, Monday, January 17, 1994. On January 17, The Nasdaq Stock MarketSM and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

      Trade Date

      Settlement Date

      Reg. T Date*

      Jan. 6

      13

      17

      7

      14

      18

      10

      18

      19

      11

      19

      20

      12

      20

      21

      13

      21

      24

      14

      24

      25

      17

      24

      26

      18

      25

      27

      Note: January 17, 1994, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on January 17 will be combined with transactions made on the previous business day, January 14, for settlement on January 24. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on January 17.

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

      Presidents' Day: Trade Date-Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, February 21, 1994, in observance of Presidents' Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      Feb. 11

      18

      23

      14

      22

      24

      15

      23

      25

      16

      24

      28

      17

      25

      Mar. 1

      18

      28

      2

      21

      Markets Closed

      -

      22

      Mar. 1

      3

      Good Friday: Trade Date-Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Good Friday, April 1, 1994. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      Mar. 24

      Mar. 31

      Apr. 5

      25

      Apr. 4

      6

      28

      5

      7

      29

      6

      8

      30

      7

      11

      31

      8

      12

      Apr. 1

      Markets Closed

      -

      4

      11

      13

      Memorial Day: Trade Date-Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, May 30, 1994, in observance of Memorial Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      May 20

      May 27

      Jun. 1

      23

      31

      2

      24

      Jun. 1

      3

      25

      2

      6

      26

      3

      7

      27

      6

      8

      30

      Markets Closed

      -

      31

      7

      9

      Independence Day: Trade Date-Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, July 4, 1994, in observance of Independence Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      Jun. 24

      Jul. 1

      Jul. 6

      27

      5

      7

      28

      6

      8

      29

      7

      11

      30

      8

      12

      Jul. 1

      11

      13

      4

      Markets Closed

      -

      5

      12

      14

      Labor Day: Trade Date-Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, September 5, 1994, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      Aug. 26

      Sept. 2

      Sept. 7

      29

      6

      8

      30

      7

      9

      31

      8

      12

      Sept. 1

      9

      13

      2

      12

      14

      5

      Markets Closed

      -

      6

      13

      15

      Columbus Day: Trade Date-Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 10, 1994. On this day, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

      Trade Date

      Settlement Date

      Reg. T Date*

      Sept. 29

      Oct. 6

      Oct. 10

      30

      7

      11

      Oct. 3

      11

      12

      4

      12

      13

      5

      13

      14

      6

      14

      17

      7

      17

      18

      10

      17

      19

      11

      18

      20

      Note: October 10, 1994, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board. Transactions made on Monday, October 10, will be combined with transactions made on the previous business day, October 7, for settlement on October 17. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 10.

      Veterans' Day and Thanksgiving Day: Trade Date-Settlement Date Schedule

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Veterans' Day, Friday, November 11, 1994, and Thanksgiving Day, Thursday, November 24, 1994. On Friday, November 11, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed in observance of Veterans' Day. All securities markets will be closed on Thursday, November 24, in observance of Thanksgiving Day.

      Trade Date

      Settlement Date

      Reg. T Date*

      Nov. 2

      Nov. 9

      Nov. 11

      3

      10

      14

      4

      14

      15

      7

      15

      16

      8

      16

      17

      9

      17

      18

      10

      18

      21

      11

      18

      22

      14

      21

      23

      15

      22

      25

      16

      23

      28

      17

      25

      29

      18

      28

      30

      21

      29

      Dec. 1

      22

      30

      2

      23

      Dec. 1

      5

      24

      Markets Closed

      -

      25

      2

      6

      Note: November 11, 1994, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board. Transactions made on November 11 will be combined with transactions made on the previous business day, November 10, for settlement on November 18. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.

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

      The Nasdaq Stock MarketSM and the securities exchanges will be closed on Monday, December 26, 1994, in observance of Christmas Day, and Monday, January 2, 1995, in observance of New Year's Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date

      Settlement Date

      Reg. T Date*

      Dec. 16

      Dec. 23

      Dec. 28

      19

      27

      29

      20

      28

      30

      21

      29

      Jan. 3, 1995

      22

      30

      4

      23

      Jan. 3, 1995

      5

      26

      Markets Closed

      -

      27

      4

      6

      28

      5

      9

      29

      6

      10

      30

      9

      11

      Jan. 2, 1995

      Markets Closed

      -

      3

      10

      12

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

      Questions regarding the application of those settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at (203) 375-9609.

    • 93-89 NASD 1994 Holiday Schedule

      SUGGESTED ROUTING

      Internal Audit
      Legal & Compliance
      Operations
      Systems
      Trading

      The NASD will observe the following holiday schedule for 1994:

      February 21

      Presidents' Day

      April 1

      Good Friday

      May 30

      Memorial Day

      July 4

      Independence Day

      September 5

      Labor Day

      November 24

      Thanksgiving Day

      December 26

      Christmas Day (Observance)

      Note: The NASD and The Nasdaq Stock MarketSM will be open on December 31, 1993, and January 3, 1994.

      Questions regarding this holiday schedule may be directed to Linda Goodman, Human Resources, at (301) 590-6821.

    • 93-88 SEC Approves Amendment Clarifying The Application of the NASD's Corporate Financing Rule to Rule 415 Shelf Offerings and Certain Canadian Securities;

      Effective Date: February 1, 1994

      SUGGESTED ROUTING

      Senior Management
      Corporate Finance
      Institutional
      Legal & Compliance
      Syndicate

      Executive Summary

      On November 10, 1993, the Securities and Exchange Commission (SEC) approved an amendment to Subsection (b)(7)(C) to Article III, Section 44 of the Rules of Fair Practice clarifying that the exemptions from the filing requirements of the NASD's Corporate Financing Rule for securities registered on Forms S-3 or F-3 offered pursuant to Rule 415 under the Securities Act of 1933 (Securities Act) are limited to offerings that meet the eligibility criteria as set forth in these forms prior to October 21, 1992. In addition, the exemption for securities registered on Form F-10 under the Securities Act is amended to limit the exemption to Canadian issuers that meet the standards set forth in the SEC release approving that form and are offered pursuant to Canadian shelf-offering procedures. The text of the amendment, effective on February 1, 1994, follows the discussion below. In addition, attached is a copy of SEC registration statement Forms S-3 and F-3, prior to October 21, 1992, and Form F-10 as originally approved by the SEC.

      Background

      The Interpretation of the Board of Governors, Review of Corporate Financing (Corporate Financing Interpretation) was adopted in the early 1970s as an interpretation of the NASD basic ethical rule contained in Article III, Section 1 of the Rules of Fair Practice, which requires that "A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." The purpose of the Corporate Financing Interpretation was to determine whether the offering terms and arrangements of public offerings filed with the NASD for review were fair and reasonable in accordance with Article III, Section 1 of the Rules of Fair Practice. To that end, it required that the NASD issue an opinion as to the fairness and reasonableness of underwriting terms and arrangements.

      Although not defined in the Corporate Financing Interpretation, the term "public offering" is defined in Schedule E to the NASD By-Laws1 to include any primary or secondary distribution of securities made pursuant to a registration statement or offering circular, except for offerings pursuant to Section 4(2) of the Exchange Act. Pursuant to the terms of the Corporate Financing Interpretation as of 1981, exemptions from the filing requirements of the Corporate Financing Interpretation were provided for certain specified classes of offerings that were regulated by other rules of the NASD, were under a specific scheme of regulation by other entities such as the SEC or the Treasury Department, or were subject to market forces that would assure the fairness and reasonableness of underwriting terms and arrangements of such offerings.

      In 1982, the SEC adopted the Integrated Disclosure System, including new Form S-32. Form S-3, the SEC's short-form registration statement, permits the issuer to incorporate many of the required disclosure items by reference to the disclosure of the same items in filings under the Securities Exchange Act of 1934. On March 8, 1983, the NASD simultaneously issued Notice to Members 83-12 (March 8, 1983) (1983 Notice to Members) and filed with the SEC Rule Filing SR-NASD-83-33 (1983 rule filing) for immediate effectiveness to clarify the availability of an exemption from the filing requirements of the Corporate Financing Interpretation for shelf offerings pursuant to new Rule 415.

      The NASD stated in the 1983 Notice to Members and 1983 rule filing that exemptions to the Corporate Financing Interpretation filing requirements had previously been available where market forces or other constraints were present to assure the fairness and reasonableness of underwriting terms and arrangements, including specifically the amount of underwriting compensation. The 1983 Notice to Members and 1983 rule filing further stated that market pressures in Rule 415 transactions registered on Form S-3 often result in the amount of underwriting compensation being determined through a competitive bidding process that helps to achieve its reasonableness. Finally, the NASD stated it had concluded that even in transactions that eventually include a traditional underwriting agreement, competitive pressures come into play in the negotiations preceding the execution of the agreement that can be relied on to achieve the overall fairness of the agreements. An important clarification was provided in the 1983 Notice to Members and 1983 rule filing that offerings subject to the exemption were only exempt from the filing requirements of the Corporate Financing Interpretation and remained subject to the substantive requirements of the Interpretation.4

      Subsequently, in 1988, the NASD issued Notice to Members 88-101 (December 1988) in response to inquiries of members and their counsel for clarification regarding the Corporate Financing Department's review procedures for Rule 415 offerings. That Notice includes the following statement regarding the view of the Corporate Financing Committee as to the continuing rationale for the availability of the exemption for offerings registered on Form S-3 and offered pursuant to Rule 415:

      In connection with Rule 415 offerings, the Committee determined to exempt from the filing requirements securities registered on Form S-3 because an issue able to satisfy Form S-3's "registrant requirements" would be followed closely by investors and market professionals. The Committee also felt that the securities markets would efficiently determine a fair price for the securities being offered and that any underwriting compensation received by members ordinarily would be determined under very competitive circumstances (generally limited to normal brokerage transactions). The Committee did not believe that the same facts were present in Rule 415 offerings where the securities are registered on any form other than S-3.

      In 1991, the NASD filed rule filing SR-NASD-91-19 with the SEC, which included a proposed codification of the Corporate Financing Interpretation as the new Corporate Financing Rule.5 The Rule 415/S-3 exemption was included in the new Rule at Subsection (b)(7)(C) and specified that the exemption was also available for shelf offerings on Form F-3 consistent with the Corporate Financing Committee's earlier interpretation.

      Subsequently, the SEC adopted the Multi-Jurisdiction Disclosure and Modifications to the Current Registration and Reporting System for Canadian Issuers (MJDS) which adopted new forms for offerings in the U.S. by Canadian issuers6, and the NASD adopted an exemption for offerings filed on new Form F-10 by Canadian private and crown corporations and offered pursuant to Canadian shelf-offering rules.7

      On October 21, 1992, the SEC approved an amendment to expand the availability of Form S-3 and to make Rule 415 registrations available to additional issuers as part of an effort to reduce the cost of financing through the securities markets.8 The SEC's amendment to Form S-3 has reduced the reporting history requirement of Form S-3 from 36 to 12 months for most issuers, reduced the public float test from $150 million to $75 million, and eliminated the three-million-share volume requirement. Finally, no reporting history is required to rely on Form S-3 to register investment grade asset-backed securities. At the same time, the SEC amendments permitted the registration of a single shelf-registration statement covering debt, equity, and other classes of securities without a specific allocation of offering amounts among the classes of securities being registered.

      Description of the Amendment

      The NASD reviewed the SEC's amendments to Form S-3 in keeping with its prior history of considering amendments to the NASD's Corporate Financing Filing Requirements to coordinate with the SEC's amendments to its registration forms and rules. The NASD is obligated to ensure the fairness of underwriting terms and arrangements as a self-regulatory organization registered under Section 15A of the Securities Exchange Act of 1934. The NASD determined that investment grade non-convertible debt and investment grade non-convertible securities registered on amended Form S-3 should continue to be exempt from the Corporate Financing Rule Filing Requirements, regardless of the registration form relied on, under a separate exemption set forth in Section (b)(7)(B) of the Corporate Financing Rule.

      The NASD, however, concluded it did not have sufficient information for the issuers that became eligible to file on Form S-3 to reach a determination that the Rule 415/S-3 exemption should be extended to the newly qualified issuers. Therefore, the NASD determined not to change its Filing Requirements at this time to provide an exemption for offerings by companies that meet the new requirements of Form S-3. The NASD will, however, undertake a one-year review of offerings filed with the NASD on registration statement Form S-3 and are offered pursuant to Rule 415 by companies that would not meet the prior criteria for Form S-3 to determine whether the market forces related to such offerings result in the presence of fair and reasonable underwriting terms and arrangements.

      Accordingly, to clarify the Filing Requirements of the Corporate Financing Rule for issuers that now qualify to register on amended Form S-3, Section (b)(7)(C) of the Corporate Financing Rule is amended to provide that the exemption is only available for offerings that comply with Form S-3 pursuant to the requirements for that Form prior to October 21, 1992, which is the date of SEC approval of the amendments to Form S-3 expanding the availability of Form S-3 and making Rule 415 registrations available to additional issuers. The NASD believes the proposed rule change continues to ensure that compliance with the NASD's Corporate Financing Rule is effectively monitored.

      Section (b)(7)(C) of the Corporate Financing Rule is also amended so that the exemption provided for shelf offerings on Form F-3 has been modified to reference the requirements for that Form prior to October 21, 1992, and the exemption for Form F-10 has been modified to reference the SEC release approving the MJDS. Although the SEC did not adopt amendments to these forms at the time it amended Form S-3, the NASD believes it should clarify all of these exemptions in the event amendments are adopted by the SEC in the future.

      Policy for the Review of Shelf-Registration Statements

      In determining not to expand the exemption from the Corporate Financing Rule at this time, the NASD recognizes its responsibility to ensure that application of the Rule does not impose a substantial burden on issuers. In this connection, it is important to note that the Corporate Financing Department has procedures to facilitate the expeditious review of shelf offerings. The NASD believes that publication of these procedures, as set forth below, will assist issuers, members, and their counsel to avail themselves of procedures that will expedite review of an offering pursuant to Rule 415 that is registered on SEC Form S-3 and avoid additional reviews of arrangements entered into in connection with separate offerings off the shelf.

      The procedures approved by the Corporate Financing Committee are as follows:

      1. Where the participating NASD member(s) have not been determined, the issuer may file the offering with the NASD for potential NASD member participants.
      2. All necessary documents should be filed as set forth in Section (b)(5) of the Corporate Financing Rule.
      3. The cover letter to the filing should include all information in response to the items set forth under "Information Required to Be Filed" contained in Subsection (b)(6) of the Corporate Financing Rule requiring, among other things, estimates of the maximum underwriting compensation, maximum price per share, and maximum amounts of any other underwriting compensation, as well as a statement of any affiliations between the issuer and any NASD member, and any purchases of securities of the issuer made by any NASD member in the prior 12 months.
      4. The Corporate Financing Department staff will render an opinion of no objections to the underwriting terms and arrangements if undertakings are received for the compensation and disclosure of the compensation in the offering document and that the Corporate Financing Department would be notified of any changes of issuer-member affiliation or purchases of the issuer's securities by a member.
      5. In recognition of the market-timing issues associated with shelf offerings, the staff of the Corporate Financing Department are authorized to grant priority to the review of shelf offerings. To determine the timetable for a proposed shelf offering, NASD staff routinely contact counsel on the date the offering is filed.

      Interpretation

      In the SEC release9 publishing the amendment for comment, the NASD stated in footnote 5 to the release that the Form S-3 and Form F-3 exemptions from the Corporate Financing Rule filing requirements cannot be used for offerings if the Rule 415 box is checked on the cover page of the registration statement but the securities are distributed in a single traditional underwriting arrangement shortly after effectiveness. The NASD position set forth in footnote 5 reflects the NASD's original intent to limit the Corporate Financing Rule filing exemption to "delayed basis" shelf offerings. The NASD recognizes that the circumstances under which registrants may claim reliance on Rule 415 was changed by the SEC's adoption of Rule 430A in 198710 —well after the NASD's 1983 adoption of the S-3/Rule 415 exemption. Rule 430A provided a registrant the flexibility to offer its securities during a five-day post-effective period without filing an amendment to the registration statement. If the registrant was uncertain at the time of filing whether or not the securities would be offered promptly after effectiveness or on a delayed basis under Rule 415, the SEC permitted the registrant to follow an administrative procedure to retain the option to proceed under either Rule 430A or Rule 415 for all or a portion of the registered securities.11

      Registrants also may claim reliance on Rule 415 in the case where the registrant includes on a single registration statement securities to be offered shortly after effectiveness in a conventional underwritten offering and other securities (such as common stock underlying warrants and securities of selling shareholders) to be offered on a delayed basis in the future. In this case, the registrant would include undertakings in compliance with Rule 415 for the delayed offerings, but not for the conventional underwriting.

      As a result of the ability of registrants to rely on Rule 430A and Rule 415 simultaneously and to register a conventional and delayed offering on the same registration statement, it has been argued that the act of "checking the Rule 415 box" on the cover page of the registration statement is sufficient for a member to rely on the S-3/Rule 415 exemption to the Filing Requirements of the Corporate Financing Rule. The Filing Requirements of the Corporate Financing Rule requires that all public offerings of securities be filed with the NASD for review if a member participates in the offering, unless an exemption from filing is available. The NASD believes that a claimed exemption from the Filing Requirements of the Corporate Financing Rule cannot be "potentially" or "possibly" available, or available under some circumstances and not others, or—in the case of a shelf registration— only available for a portion of the securities registered. It is, therefore, inappropriate for a member to rely on any of the available exemptions from the Filing Requirements of the Corporate Financing Rule if, at the time between the date when filing with the Corporate Financing Department would be required and the effective date of the offering, the member does not reasonably believe that the offering, including each tranche of securities off of a shelf registration, qualifies for an exemption. The member is required to review the facts and circumstances of the offering and must reasonably believe that the proposed manner of distribution satisfies an exemption from the Filing Requirements of the Corporate Financing Rule to rely on that exemption.

      In particular, the NASD believes that "checking the Rule 415 box" on the cover page of a Form S-3 registration statement is not dispositive of the availability of the S-3/Rule 415 exemption under the Corporate Financing Rule as the Rule 415 election may relate solely to the future issuance of common stock underlying warrants or of common stock registered for selling shareholders and not to the registration on the same registration statement of securities of the issuer that are to be sold in a conventional underwriting shortly after effectiveness of the registration statement.

      Moreover, if a registrant relies on both Rule 430A and Rule 415 for an offering registered on Form S-3, the NASD believes that the offering is required to be filed for review under the Filing Requirements of the Corporate Financing Rule, as the simultaneous reliance on Rule 430A indicates that it is possible the securities may be sold in the form of a traditional underwriting syndicate within a few days following the effective date of the offering.12

      * * * * *

      To assist members in determining whether an exemption from the Filing Requirements is available under Subsections (b)(7)(C)(i) and (ii) to Article III, Section 44 of the NASD Rules of Fair Practice, the NASD is attaching to this Notice a copy of Forms S-3 and F-3 as those forms existed before October 21, 1992, and a copy of Form F-10 as approved by the SEC on June 21, 1991.

      The amendments take effect February 1, 1994. Questions regarding this Notice may be directed to the Corporate Financing Department of the NASD at (202) 728-8258.


      1 The Corporate Financing Interpretation provided that definitions in the By-Laws or the Rules of Fair Practice have the meaning defined therein for purposes of the Interpretation unless the context requires otherwise. The discussion herein is based on the definition as of 1981.

      2 The financial criteria for Form S-3 was modified from that in Form S-16, with the other requirements for reporting history and default on debt remaining the same.

      To use Form S-3, the issuer was required to have at least $150 million aggregate market value of voting stock held by non-affiliates or, alternatively, $100 million aggregate market value of voting stock held by non-affiliates and an annual trading volume of at least three million shares, except in the case of an offering of investment grade debt (i.e., debt rated in one of the four highest generic rating categories by a nationally recognized statistical rating organization).

      3 Securities Exchange Act Rel. No. 19648 (April 4, 1983); 48 F.R. 15358 (April 8, 1983).

      4 In 1984, in response to a request by the staff of the SEC for an interpretation of the filing requirements under the Corporate Financing Interpretation for foreign private issuers, the NASD determined to treat offerings on Form F-3 the same as offerings on Form S-3 by providing an exemption to the filing requirements if the offering is made pursuant to Rule 415 on the basis that the scheme of regulation on Form F-3 paralleled that for a company registering on Form S-3.

      5 The Corporate Financing Rule was adopted as Article III, Section 44 to the NASD Rules of Fair Practice on April 15, 1992, at which time the Corporate Financing Interpretation was rescinded. Securities Exchange Act Rel. No. 30587 (April 15, 1992); 57 FR 14597 (April 21, 1992).

      6 Securities Act Release No. 6902 (June 21, 1991).

      7 Form F-10 may be used by Canadian issuers with outstanding equity with an aggregate market value of at least (CN) $360 million and a public float of at least (CN) $75 million, where the issuer has a reporting history with Canadian authorities of at least 36 months.

      8 Securities Act Rel. No. 6964 (October 22, 1992), 57 FR 48970 (October 29, 1992).

      9 Securities Exchange Act Release No. 32316 (May 17, 1993); 58 F.R. 29672.

      10 Rule 430A permits the filing of a final prospectus that omits certain pricing and underwriting compensation information and interest payments and maturity dates so long as a prospectus with the final information is filed with the SEC within five days following the effective date of the offering.

      11 Securities Act Release No. 6964 (October 22, 1992), footnote 30 citing Securities Act Release No. 6714 (May 27, 1987). The SEC further expanded the ability of a registrant to rely on Rule 430A when it amended Form S-3 in 1992, by amending Form 430A to permit price changes and volume decreases that do not materially change the disclosure in the registration statement to be reflected in the final prospectus without the need to file a post-effective amendment. Previously, even immaterial decreases in the volume of securities offered and a pricing change outside of a bona fide range would have required the filing of a post-effective amendment. Securities Act Release No. 6964 (October 22, 1992).

      12 In its release adopting the amendments to Form S-3, the SEC was asked regarding a practice that had developed in response to concerns about immediate underwritten sales of a large (or the entire) amount of securities offered pursuant to a registration statement that disclosed that the securities would be offered from time to time in the market, and did not disclose the terms of the distribution immediately after effectiveness. The SEC reminded registrants that disclosure in the registration statement at the time of effectiveness should accurately reflect the registrant's current plans and arrangements for the distribution of securities and stated that compliance with the 48hour waiting period is not an appropriate basis for relying on Rule 415. Securities Act Release No. 6964 (October 22, 1992).


      Text of Amendment to Article III, Section 44 of the Rules of Fair Practice

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

      THE CORPORATE FINANCING RULE

      Underwriting Terms and Arrangements

      Sec. 44.

      (b) Filing Requirements

      * * * * *
      (7) Offerings Exempt From Filing

      * * * * *
      (C) offerings of securities:
      (i) registered with the Securities and Exchange Commission on registration statement Forms S-3 or F-3 pursuant to the standards for those Forms prior to October 21, 1992 and offered pursuant to Rule 415 adopted under the Securities Act of 1933, as amended; [,] or
      (ii) a foreign private issuer incorporated or organized under the laws of Canada or any Canadian province or territory, and is registered with the Securities and Exchange Commission on Form F-10 [(only with respect to Canadian issuers)] pursuant to the standards for that Form approved in Securities Act Release No. 6902 (June 21, 1991) and offered pursuant to [the home jurisdiction's] Canadian shelf prospectus offering procedures;

      FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

      I. Eligibility Requirements For Use of Form S-3.

      This instruction sets forth registrant requirements and transaction requirements for the use of Form S-3. Any registrant which meets the requirements of paragraph A. below ("Registrant Requirements") may use this form for the registration of securities under the Securities Act of 1933 which are offered in any transaction specified in paragraph B. below ("Transaction Requirements"), provided that the requirements applicable to the specified transaction are met. With respect to majority-owned subsidiaries, see paragraph C. below.
      A. Registrant Requirements. All registrants must meet the following conditions in order to use this Form S-3 for registration under the Securities Act of securities offered in the transactions specified in paragraph B. below:
      1. The registrant is organized under the laws of the United States or any State or Territory or the District of Columbia and has its principal business operations in the United States or its territories.
      2. The registrant has a class of securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 or a class of equity securities registered pursuant to Section 12(g) of the Exchange Act or is required to file reports pursuant to Section 15(d) of the Exchange Act.
      3. The registrant: (a) has been subject to the requirements of Section 12 or 15(d) of the Exchange Act and has filed all the material required to be filed pursuant to Section 13, 14 or 15(d) for a period of at least 36 calendar months immediately preceding the filing of the registration statement on this form; and (b) has filed in a timely manner all reports required to be filed during the 12 calendar months and any portion of a month immediately preceding the filing of the registration statement and, if the registrant has used (during the 12 calendar months and any portion of a month immediately preceding the filing of the registration statement) Rule 12b-25 (b) under the Exchange Act with respect to a report or a portion of a report, that report or portion thereof has actually been filed within the time period prescribed by the rule.
      4. Neither the registrant nor any of its consolidated or unconsolidated subsidiaries have, since the end of the last fiscal year for which certified financial statements of the registrant and its consolidated subsidiaries were included in a report filed pursuant to Section 13 (a) or 15 (d) of the Exchange Act: (a) failed to pay any dividend or sinking fund installment on preferred stock; or (b) defaulted: (i) on any installment or installments on indebtedness for borrowed money, or (ii) on any rental on one or more long term leases, which defaults in the aggregate are material to the financial position of the registrant and its consolidated and unconsolidated subsidiaries, taken as a whole.
      5. A foreign issuer, other than a foreign government, which satisfies all of the above provisions of these registrant eligibility requirements except the provisions in paragraph A.I. above, relating to organization and principal business shall be deemed to have met these registrant eligibility requirements provided that such foreign issuer files the same reports with the Commission under Section 13(a) or 15(d) of the Exchange Act as a domestic registrant pursuant to paragraph 3 above.
      6. If the registrant is a successor registrant, it shall be deemed to have met conditions 1, 2, 3, and 4above if: (a) its predecessor and it, taken together, do so, provided that the succession was primarily for the purpose of changing the state of incorporation of the predecessor or forming a holding company and that the assets and liabilities of the successor at the time of succession were substantially the same as those of the predecessor, or (b) if all predecessors met the conditions at the time of succession and the registrant has continued to do so since the succession.
      B. Transaction Requirements. Security offerings meeting any of the following conditions and made by registrants meeting the Registrant Requirements above may be registered on this form:
      1. Primary Offerings by Certain Registrants.

      Securities to be offered for cash by or on behalf of a registrant, or outstanding securities to be offered for cash for the account of any person other than the registrant, including securities acquired by standby underwriters in connection with the call or redemption by the registrant of warrants or a class of convertible securities; provided that the aggregate market value of the voting stock held by non-affiliates of the registrant is $150 million or more, or alternatively, the aggregate market value of the voting stock held by non-affiliates of the registrant is $100 million or more and the registrant has had an annual trading volume of such stock of three million shares or more.

      Instruction. The aggregate market value of the registrant's outstanding voting stock shall be computed by use of the price at which the stock was last sold, or the average of the bid and asked prices of such stock as of a date within 60 days prior to the date of filing. Annual trading volume shall be the volume of shares traded in any continuous 12 month period ended within 60 days prior to the date of filing. See the definition of "affiliate" in Securities Act Rule 405.
      2. Primary Offerings of Certain Debt and Non-Convertible Preferred Securities.

      Non-convertible debt and preferred securities to be offered for cash by or on behalf of a registrant, provided such securities are "investment grade securities," as defined below. A non-convertible debt or preferred security is an "investment grade security" if, at the time of effectiveness of the registration statement, at least one nationally recognized statistical rating organization (as that term is used in Rule 15c3-1 (c) (2) (vi) (F) under the Exchange Act) has rated the security in one of its generic rating categories which signifies investment grade; typically, the four highest rating categories (within which there may be sub-categories or gradations indicating relative standing) signify investment grade.
      3. Transactions Involving Secondary Offerings.

      Outstanding securities to be offered for the account of any person other than the issuer, including securities acquired by standby underwriters in connection with the call or redemption by the issuer of warrants or a class of convertible securities, if securities of the same class are listed and registered on a national securities exchange or are quoted on the automated quotation system of a national securities association. In addition, attention is directed to General Instruction C to Form S-8 for the registration of employee benefit plan securities for resale.
      4. Rights Offerings, Dividend or Interest Reinvestment Plans, and Conversions or Warrants.

      Securities to be offered: (a) upon the exercise of outstanding rights granted by the issuer of the securities to be offered, if such rights are granted on a pro rata basis to all existing security holders of the class of securities to which the rights attach; or (b) pursuant to a dividend or interest reinvestment plan; or (c) upon the conversion of outstanding convertible securities or upon the exercise of outstanding transferable warrants issued by the issuer of the securities to be offered, or by an affiliate of such issuer; provided the issuer has sent to all record holders of such rights, or to all participants in such plans, or to all record holders of such convertible securities or transferable warrants, respectively, material containing the information required by Rule 14a-3(b) under the Exchange Act and Items 401, 402 and 403 of Regulation S-K within the 12 calendar months immediately preceding the filing of the registration statement, except that the information required by Items 401, 402 and 403 of Regulation S-K need only be provided to holders of rights exercisable for common stock, holders of securities convertible into common stock, participants in plans which may invest in common stock, or in securities convertible into common stock or warrants exercisable for common stock, respectively.
      C. Majority-Owned Subsidiaries. If a registrant is a majority-owned subsidiary, security offerings may be registered on this form if:
      1. The registrant-subsidiary itself meets the Registrant Requirements and the applicable Transaction Requirement;
      2. The parent of the registrant-subsidiary meets the Registrant Requirements and the conditions of Transaction Requirement B.2. (Primary Offerings of Certain Debt and Non-Convertible Preferred Securities) are met; or
      3. The parent of the registrant-subsidiary meets the Registrant Requirements and the applicable Transaction Requirement and fully guarantees the securities being registered as to principal and interest.

      Note. In such an instance, the parent-guarantor is the issuer of a separate security consisting of the guarantee which must be concurrently registered but may be registered on the same registration statement as are the guaranteed securities.

      FORM F-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

      I. Eligibility Requirements for Use of Form F-3

      This instruction sets forth registrant requirements and transaction requirements for the use of Form F-3. Any foreign private issuer, as defined in Rule 405 which meets the requirements of I.A. below ("Registrant Requirements") may use this Form for the registration of securities under the Securities Act of 1933 (the "Securities Act") which are offered in any transaction specified in I.B. below ("Transaction Requirements"), provided that the requirements applicable to the specified transaction are met. With respect to majority-owned subsidiaries, see Instruction I.A.6 below.
      A. Registrant Requirements. All registrants must meet the following conditions in order to use this Form F-3 for registration under the Securities Act of securities offered in the transactions specified in I.B. below:
      1. The registrant has a class of securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") or a class of equity securities registered pursuant to Section 12(g) of the Exchange Act or is required to file reports pursuant to Section 15(d) of the Exchange Act and is eligible to file and has filed annual reports on Form 20-F under the Exchange Act.
      2. The registrant: (a) has been subject to the requirements of Section 12 or 15(d) of the Exchange Act and has filed all the material required to be filed pursuant to Sections 13, 14, or 15(d) for a period of at least 36 calendar months immediately preceding the filing of the registration statement on this Form; and (b) has filed in a timely manner all reports required to be filed during the 12 calendar months and any portion of a month immediately preceding the filing of the registration statement and, if the registrant has used (during the 12 calendar months and any portion of a month immediately preceding the filing of the registration statement) Rule 12b-25(b) under the Exchange Act with respect to a report or a portion of a report, that report or portion thereof has actually been filed within the time period prescribed by the Rule.
      3. Neither the registrant nor any of its consolidated or unconsolidated subsidiaries have, since the end of their last fiscal year for which certified financial statements of the registrant and its consolidated subsidiaries were included in a report filed pursuant to Section 13(a) or 15(d) of the Exchange Act: (a) failed to pay any dividend or sinking fund installment on preferred stock; or (b) defaulted (i) on any installment or installments on indebtedness for borrowed money, or (ii) on any rental on one or more long-term leases, which defaults in the aggregate are material to the financial position of the registrant and its consolidated and unconsolidated subsidiaries, taken as a whole.
      4. The aggregate market value worldwide of the voting stock held by non-affiliates of the registrant is the equivalent of $300 million or more, except that the provisions of this paragraph do not apply if the only securities being registered are to be offered in a transaction of the type described in B.2. of the Transaction Requirements.

      Instruction. The aggregate market value of the registrant's outstanding voting stock shall be computed by use of the price at which the stock was last sold, or the average of the bid and asked prices of such stock, in the principal market for such stock as of a date within 60 days prior to the date of filing. [See the definition of "affiliate" in Securities Act, Rule 405.]
      5. If the registrant is a successor registrant, it shall be deemed to have met conditions 1, 2, 3, and 4above if: (a) its predecessor and it, taken together, do so, provided that the succession was primarily for the purpose of changing the state or other jurisdiction of incorporation of the predecessor or forming a holding company and that the assets and liabilities of the successor at the time of succession were substantially the same as those of the predecessor; or (b) all predecessors met the conditions at the time of succession and the registrant has continued to do so since the succession.
      6. Majority-owned Subsidiaries. If a registrant is a majority-owned subsidiary, security offerings may be registered on this Form if:
      (i) the registrant-subsidiary itself meets the Registrant Requirements and the applicable Transaction Requirement;
      (ii) the parent of the registrant-subsidiary meets the Registrant Requirements and the condition of Transaction Requirement B.2. (Primary Offerings of Certain Debt Securities) are met; or
      (iii) the parent of the registrant-subsidiary meets the Registrant Requirements and the applicable Transaction Requirements and fully guarantees the securities being registered as to principal and interest.
      Note: In the situations described in (i), (ii), and (iii) above, the parent-guarantor is the issuer of a separate security consisting of the guarantee which must be concurrently registered but may be registered on the same registration statement as are the guaranteed securities. Both the parent-guarantor and the subsidiary shall each disclose the information required by this Form as if each were the only registrant except that if the subsidiary will not be eligible to file annual reports on Form 20-F after the effective date of the registration statement, then it shall disclose the information specified in Form S-3. Rule 3-10 of Regulation S-X specifies the financial statements required.
      B. Transaction Requirements. Security offerings meeting any of the following conditions and made by registrants meeting the Registrant Requirements above may be registered on this Form:
      1. Primary Offerings by Certain Registrants

      Securities to be offered for cash by or on behalf of a registrant; if the financial statements in the registrant's latest filing on Form 20-F comply with Item 18 thereof.
      2. Offerings of Certain Debt Securities

      Non-convertible debt securities to be offered for cash if such debt securities are "investment grade debt securities," as defined below. A non-convertible debt security is an "investment grade debt security" if, at the time of effectiveness of the registration statement, at least one nationally recognized statistical rating, organization (as that term is used in Rule 15c3-1 (c) (2) (vi) (F) under the Exchange Act has rated the security in one of its generic rating categories that signifies investment grade; typically, the four highest rating categories (within which there may be subcategories or graduations indicating relative standing) signify investment grade.
      3. Transactions Involving Secondary Offerings

      Outstanding securities to be offered for the account of any person other than the issuer, including securities acquired by standby underwriters in connection with the call or redemption by the issuer of warrants or a class of convertible securities. In addition, Form F-3 may be used by affiliates to register securities for resale pursuant to the conditions specified in General Instruction C to Form S-8 if the financial statements in the registrant's latest filing on Form 20-F comply with Item 18 thereof.
      4. Rights Offerings, Dividend or Interest Reinvestment Plans, and Conversions or Warrants

      Securities to be offered: (a) upon the exercise of outstanding rights granted by the issuer of the securities to be offered, if such rights are granted pro rata to all existing security holders of the class of securities to which the rights attach; or (b) pursuant to a dividend or interest reinvestment plan; or (c) upon the conversion of outstanding convertible securities or upon the exercise of outstanding transferable warrants issued by the issuer of the securities to be offered, or by an affiliate of such issuer. The registration of securities to be offered or sold in a standby underwriting in the United States or similar arrangement is not permitted pursuant to this paragraph. See paragraphs (1), (2), and (3) above.

      FORM F-10

      REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

      I. Eligibility Requirements For Use of Form F-10.
      A. Form F-10 may be used for the registration of securities under the Securities Act of 1933 (the "Securities Act"), including securities to be issued in an exchange offer or in connection with a statutory amalgamation, merger, arrangement or other reorganization requiring the vote of shareholders of the participating companies (a "business combination").
      B. This form may not be used for registration of derivative securities except:
      (1) warrants, options and rights, provided that such securities and the underlying securities to which they relate are issued by the registrant, its parent or an affiliate of either; and (2) convertible securities, provided that such securities are convertible only into securities of the registrant, its parent or an affiliate of either.

      Instruction. For purposes of this form, an "affiliate" of a person is anyone who beneficially owns, directly or indirectly, or exercises control or direction over, more than 10 percent of the outstanding equity shares of such person. The determination of a person's affiliates shall be made as of the end of such person's most recently completed fiscal year.
      C. Form F-10 is available to any registrant that:
      (1) Is incorporated or organized under the laws of Canada or any Canadian Province or Territory;
      (2) Is a foreign private issuer;
      (3) Has been subject to the continuous disclosure requirements of any securities commission or equivalent regulatory authority in Canada for a period of at least 36 calendar months immediately preceding the filing of this form, and is currently in compliance with such obligations, provided, however, that in case of a business combination, each participating company other than the successor registrant must meet such 36-month reporting obligation, except that any such participating company shall not be required to meet such reporting requirement if other participating companies whose assets and gross revenues, respectively, would contribute at least 80 percent of the total assets and gross revenues from continuing operations of the successor registrant, as measured based on pro forma combination of the participating companies' most recently completed fiscal years, each meet such requirement;
      (4) Has an aggregate market value of its outstanding equity shares of (CN) $360 million or more, provided, however, that in the case of a business combination, the aggregate market value of the outstanding shares of each participating company other than the successor registrant is (CN) $360 million or more, except that any such participating company shall not be requiredä to meet such market value requirement if other participating companies whose assets and gross revenues, respectively, would contribute at least 80 percent of the total assets and gross revenues from continuing operations of the successor registrant, as measured based on pro forma combination of the participating companies' most recently completed fiscal years, each meet such market value requirement; and
      (5) Has an aggregate market value of the public float of its outstanding equity shares of (CN) $75million or more, provided, however, that in the case of a business combination, the aggregate market value of the public float of the outstanding equity shares of each participating company other than the successor registrant is (CN) $75 million or more, except that any such participating company shall not be required to meet such public float requirement if other participating companies whose assets and gross revenues, respectively, would contribute at least 80 percent of the total assets and gross revenues from continuing operations of the successor registrant, as measured based on pro forma combination of the participating companies' most recently completed fiscal years, each meet such public float requirement; provided, further, that in the case of a business combination, such public float requirement shall be deemed satisfied in the case of a participating company whose equity shares were the subject of an exchange offer that was registered or would have been eligible for registration on Form F-8, Form F-9, Form F-10 or Form F-80, or a tender offer in connection with which Schedule 13E-4F or 14D-1F was filed or could have been filed, that terminated within the last 12 months, if the participating company would have satisfied such public float requirement immediately prior to commencement of such exchange or tender offer.

      Instructions.
      1. For purposes of this form, "foreign private issuer" shall be construed in accordance with Rule 405under the Securities Act.
      2. For purposes of this form, the "public float" of specified securities shall mean only such securities held by persons other than affiliates of the issuer.
      3. For purposes of this form, "equity shares" shall mean common shares, non-voting equity shares and subordinate or restricted voting equity shares, but shall not include preferred shares.
      4. For purposes of this form, the market value of outstanding equity shares (whether or not held by affiliates) shall be computed by use of the price at which such shares were last sold, or the average of the bid and asked prices of such shares, in the principal market for such shares as of a date within 60 days prior to the date of filing. If there is no market for any of such securities, the book value of such securities computed as of the latest practicable date prior to the filing of this form shall be used for purposes of calculating the market value, unless the issuer of such securities is in bankruptcy or receivership, or has an accumulated capital deficit, in which case one-third of the principal amount, par value or stated value of such securities shall be used.
      D. In the case of an exchange offer, the issuer of the securities to be exchanged (the "subject securities") for securities of the registrant shall be incorporated or organized under the laws of Canada or any Canadian Province or Territory and be a foreign private issuer.
      E. In the case of a business combination, each participating company shall be incorporated or organized under the laws of Canada or any Canadian Province or Territory and be a foreign private issuer.
      F. In the case of an exchange offer, the securities to be registered on this form shall be offered to U.S. holders upon terms and conditions not less favorable than those offered to any other holder of the same class of subject securities.
      G. In the case of a business combination, the securities to be registered on this form shall be offered to U.S. holders upon terms and conditions not less favorable than those offered to any other holder of the same class of such securities of the participating company.

      Instructions.
      1. For purposes of exchange offers, the term "U.S. holder" shall mean any person whose address appears on the records of the issuer of the subject securities, any voting trustee, any depositary, any share transfer agent or any person acting in a similar capacity on behalf of the issuer of the subject securities as being located in the United States.
      2. For purposes of business combinations, the term "U.S. holder" shall mean any person whose address appears on the records of a participating company, any voting trustee, any depositary, any share transfer agent or any person acting in a similar capacity on behalf of a participating company as being located in the United States.
      3. For purposes of this form, the class of subject securities shall not include any securities that maybe converted into or are exchangeable for the subject securities.
      H. With respect to registration of debt securities or preferred securities on this form, if the registrant is a majority-owned subsidiary, it shall be deemed to meet the requirements of I.C.(3), (4) and (5) above if the parent of the registrant-subsidiary meets the requirements of I.C. above, and fully and unconditionally guarantees the securities being registered as to principal and interest (if debt securities) or as to liquidation preference, redemption price and dividends (if preferred shares); provided, however, that the securities of the subsidiary are only convertible or exchangeable, if at all, for the securities of the parent.
      I. If the registrant is a successor registrant subsisting after a business combination, it shall be deemed to meet the 36-month reporting requirement of I.C.(3) above if: (1) the time the successor registrant has been subject to the continuous disclosure requirements of any securities commission or equivalent regulatory authority in Canada, when added separately to the time each predecessor had been subject to such requirements at the time of the business combination, in each case equals at least 36 calendar months, provided, however, that any predecessor need not be considered for purposes of the reporting history calculation if the reporting histories of predecessors whose assets and gross revenues, respectively, would contribute at least 80 percent of the total assets and gross revenues from continuing operations of the successor registrant, as measured based on pro forma combination of such participating companies' most recently completed fiscal years immediately prior to the business combination, when combined with the reporting history of the successor registrant in each case satisfy such 36-month reporting requirement; and (2) the successor registrant has been subject to such continuous disclosure requirements since the business combination, and is currently in compliance with its obligations thereunder.
      J. This form shall not be used for registration of securities if no takeover bid circular or issuer bid circular (in the case of an exchange offer) or information circular (in the case of a business combination) or rights offering circular (in the case of exempt rights offerings) or prospectus (in all other cases) is prepared pursuant to the requirements of any Canadian jurisdiction due to the availability of an exemption from such requirements.
      K. This form shall not be used if the registrant or, in the case of an exchange offer, the issuer of the subject securities is an investment company registered or required to be registered under the Investment Company Act of 1940.

    • 93-87 NASD Provides Guidance for Reinvestment of Maturing Certificates of Deposit in Mutual Funds

      SUGGESTED ROUTING

      Senior Management
      Advertising
      Legal & Compliance
      Mutual Fund
      Registration
      Training

      Executive Summary

      The NASD is publishing this Notice to remind members, particularly members affiliated with banks or participating in bank networking arrangements, of their obligations under the Rules of Fair Practice to disclose to customers the varying risks of investing the proceeds of deposits, such as a maturing Certificate of Deposit (CD), in a security, such as a mutual fund, collateralized mortgage obligation (CMO), or variable insurance product. Members and their sales persons should emphasize to customers that these securities products, while potentially providing attractive investment returns, are not the same as CDs, are not government insured, and have varying risks associated with them.

      Background

      In November 1991, the NASD published Notice to Members 91-74 reminding members of their obligations to customers when marketing bond mutual funds as replacements for maturing CDs. With interest rates then at their lowest levels in 20 years, members were engaging in intensive marketing efforts offering customers with maturing CDs the opportunity to purchase bond mutual funds because of the funds' higher yields. This trend has persisted as interest rates have continued to fall.

      With interest rates currently at or near 30-year lows, rolling over bank deposits or maturing CDs into new CDs or other depository instruments is unattractive to many investors. The NASD is reminding all members, and especially members with bank affiliations, members that participate in bank networking arrangements, and members that have marketed brokered CDs to their customers in the past, that they have a significant obligation in their oral as well as their written communications to provide customers, seeking non-depository alternatives to depository accounts, with full and fair disclosure of the material differences between the products, especially the greater degree of risk to capital that the customer may experience. Failure to provide adequate disclosure to customers, or engaging in certain marketing efforts with respect to replacements for depository instruments, may violate the NASD Rules of Fair Practice and subject members and their associated persons to disciplinary action.

      While the advice contained in this Notice is primarily directed at mutual fund sales because the NASD believes many investors seeking alternatives to CDs or other depository instruments look first to mutual funds, members are advised that the general advice of this Notice—disclosure of risks to any customer moving from a guaranteed or insured investment such as a CD to another uninsured invest-ment—is applicable to most other categories of investment alternatives.

      Disclosure

      The NASD believes that the appropriate disclosures for certain mutual fund investment alternatives should, at a minimum, include the following:

      • For money market funds, investors should be advised that, although fund managers strive to maintain a stable net-asset value, the funds are not federally insured and there is no guarantee that a stable net-asset value will be maintained.

      • For fixed-income or bond funds, investors should receive clear disclosures that, although such funds may pay higher rates than CDs, their net-asset values are sensitive to interest-rate movement and a rise in interest rates can result in a decline in the value of the customer's investment.

      • For equity funds, while there maybe less possibility that investors will confuse such funds with an insured product such as a CD, they should be clearly advised of the higher degree of risk to capital associated with equity mutual funds.

      Bank Affiliated Members

      Many first-time investors may use the services and products provided by a bank affiliated broker/dealer. This creates a higher level of responsibility on these members to ensure that investors understand the distinctions between the bank products and those offered by the broker/dealer, and that suitability and supervision standards are strictly followed. Members must develop procedures that require registered persons to reiterate to customers, in all oral and written communications, the material differences between their past dealings in insured depository instruments and investments in securities that carry risk to principal.

      Further, bank affiliated members and members participating in bank networking arrangements have to be particularly sensitive to the potential for customer confusion about mutual fund purchases made at bank branch locations. To guard against customer confusion or misinformation, bank affiliated members and members participating in bank networking arrangements should consider taking certain precautions, including, but not limited to the following:

      • Advertising and sales presentations should disclose that mutual fund shares purchased through banks are not deposits or obligations of, or guaranteed by, the bank and are not federally insured or otherwise guaranteed by the federal government. Members may wish to obtain signed, written acknowledgements from their customers that they have received and have understood these disclosures. Members should readvise their customers of these and other pertinent disclosures annually.

      • Bank customers may enter the location with certain preconceived assumptions and expectations of the types of products and services available within the bank. Members are under a significant burden to ensure that the customer understands the differences in the products and services offered by the bank and those offered by the broker/dealer, and that the customer is not confused or misled by any misunderstanding or previous assumption, albeit inaccurate.

      • Where banks permit their unregistered employees to discuss with customers the reinvestment of maturing CDs in mutual funds sold by the bank, members should advise their affiliates that unregistered employees should provide disclosures similar to those provided by members. Members should carefully review the activities of these unregistered employees to ensure that they do not require NASD registration. In addition, such members should advise their affiliates to use appropriate signs or labels near the investment area to distinguish the operation from the bank's traditional deposit-taking functions.

      Finally, all members, including bank affiliated members and members participating in bank networking arrangements, are reminded that they are subject to the full scope of NASD regulations and are thus obligated to comply with various customer protection provisions in the NASD Rules of Fair Practice and other NASD Rules. Among these are the following:

      • Article III, Section 1 of the Rules of Fair Practice, which requires members to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.

      • Article III, Section 2 of the Rules of Fair Practice, which requires members to have reasonable grounds for believing that their recommendations to a customer are suitable for that customer.

      • Article III, Section 15(d)(2) of the Rules of Fair Practice, which permits members to use negative-response letters in connection with certain bulk exchanges of money market mutual funds under certain conditions.

      • Article III, Section 18 of the Rules of Fair Practice, the NASD's general antifraud provision, which prohibits members from employing fraud, deception, or other manipulative practices in the sale of securities.

      • Article III, Section 21(c) of the Rules of Fair Practice, which requires members to obtain and to maintain certain information about their customers.

      • Article III, Section 26 of the Rules of Fair Practice, which governs the distribution of mutual fund shares with respect to sales charges, concessions, discounts, selling dividends, and disclosure, among other matters.

      • Article III, Section 27 of the Rules of Fair Practice, which imposes significant supervision obligations on member firms and also requires members to register branch locations with the NASD.

      • Article III, Section 29 of the Rules of Fair Practice, which governs the distribution of insurance company variable contract products with respect to sales charges, selling agreements, and redemption.

      • Article III, Section 35 of the Rules of Fair Practice, and the guidelines associated with the section, which sets forth advertising and sales literature filing requirements and general and specific rules governing member communications with the public.

      • Paragraph 5266 of the NASD Manual, which prohibits breakpoint sales of mutual funds.

      • Paragraph 5269 of the NASD Manual, which prohibits members from selling mutual fund shares at other than the public offering price.

      The educational and regulatory initiatives discussed in this Notice are designed to help members meet their obligations to investors under the NASD Rules of Fair Practice and to prevent investor misunderstanding that could lead not only to dissatisfaction with mutual funds and other securities sold, but also to potential violations of NASD rules and regulations. NASD regulatory staff will be examining all members, including those who are bank affiliates and who are providing networking arrangements for banks, for compliance with such regulations.

      If you have any questions concerning this Notice, please contact R. Clark Hooper, Vice President, Advertising/Investment Companies Regulation at (202) 728-8329 or your local NASD district office.

    • 93-86 SEC Approves Amendment to Section 65(f)(1) of the Uniform Practice Code Relating to Resolution of Fails Resulting From Account Transfers;

      Effective February 1, 1994

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations
      Systems

      Executive Summary

      On October 26, 1993, the Securities and Exchange Commission (SEC) approved an amendment to Section 65(f)(1) of the Uniform Practice Code (UPC) that clarifies the time frame within which members are required to initiate the resolution of fails resulting from account transfers. The text of the amendment, which takes effect February 1, 1994, follows the discussion below.

      Background and Description of the Amendment

      On October 26, 1993, the SEC approved an amendment to Section 65(f)(1) of the Uniform Practice Code (UPC) to clarify that the appropriate time frame for initiating the resolution of fails resulting from account transfers is 10 days after the date delivery is due. The measure applies to exceptions to certain types of securities for which a 30-days-after the date delivery is due is more appropriate.

      The language of subsection 65(f)(1) of the UPC requires members to "promptly" resolve fails resulting from account transfers, as compared with NYSE Rule 412(c), which requires resolution of such fails within 10 days. The NASD determined that members should initiate a close-out within 10 days from the date delivery was due. However, to accommodate the wide variety of securities as well as associated delivery and transfer issues, typical of many over-the-counter securities, the amendment includes an exception to permit more time for certain types of securities, typical of the non-exchange market, for which a 10-day close-out period is not practicable.

      For fail contracts resulting from customer account transfers, Section 65(f)(1) now requires the inclusion of such fails in the member's fail file, and requires the member to take steps to obtain physical possession or control of the failed securities, by initiating a buy-in procedure or otherwise, not more than 10 business days following the delivery date. The time frame within which a member is required to obtain taking possession or control of the failed securities is extended to 30 days for certain securities, including banker's acceptances, bond anticipation notes, certificates of deposit, commercial paper, FMAC certificates, FNMA certificates, foreign securities, GNMA certificates, limited partnership interests, municipal bonds, mutual fund shares (transferable), revenue anticipation notes, SBA certificates, and tax anticipation notes.

      The amendment takes effect February 1, 1994. Questions regarding this Notice may be directed to Dorothy L. Kennedy, Assistant Director, Market Operations, at (203) 375-9609, and Robert J. Smith, Attorney, Office of General Counsel, at (202) 728-8176.

      Text of Amendment to Section 65 of the Uniform Practice Code

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

      * * * * *

      Uniform Practice Code

      * * * * *

      Customer Account Transfers

      Sec. 65

      * * * * *

      (f)
      (1) Any fail contracts resulting from this account transfer procedure shall be included in a member's fail file and [shall be promptly resolved according to applicable close-out and liability procedures], not later than 10 business days following the date delivery was due, the member shall take steps to obtain physical possession or control of securities so failed to receive by initiating a buy-in procedure or otherwise; provided, that with respect to the following types of securities or instruments, not later than 30 business days following the date delivery was due, the member shall take steps to obtain physical possession or control of securities so failed to receive by initiating a buy-in procedure or otherwise:
      (A) banker's acceptances;
      (B) bond anticipation notes;
      (C) certificates of deposit;
      (D) commercial paper;
      (E) FMAC certificates;
      (F) FNMA certificates;
      (G) foreign securities;
      (H) GNMA certificates;
      (I) limited partnership interests;
      (J) municipal bonds;
      (K) mutual fund shares (transferable);
      (L) revenue anticipation notes;
      (M) SBA certificates; and
      (N) tax anticipation notes.* * * * *

    • 93-85 SEC Approves Amendments to CMO Advertising Guidelines:

      Effective Immediately

      SUGGESTED ROUTING

      Senior Management
      Advertising
      Legal & Compliance

      Executive Summary

      The Securities and Exchange Commission (SEC) recently approved amendments to the Guidelines Regarding Communications With the Public About Collateralized Mortgage Obligations (CMO Guidelines) at Article III, Section 35 of the Rules of Fair Practice. The amendments add a definition of the term collateralized mortgage obligation (CMO) to the CMO Guidelines and require members to offer to customers educational material on CMOs which conveys certain important information. The text of the amendments, which are effective immediately, follows this Notice.

      Background

      The SEC recently approved amendments to the CMO Guidelines, adding a definition of the term collateralized mortgage obligation (CMO) and requiring members to offer to customers educational material on CMOs that conveys certain important information. The amendments result from the NASD's continuing program to enhance the regulation of sales practices in marketing CMOs to retail customers.

      Definition of CMO

      The CMO Guidelines adopted in early 1993 did not define the term "collateralized mortgage obligation." The NASD believes that defining the term collateralized mortgage obligation aids in understanding and interpreting the Guidelines. Accordingly, the amendments define the term. The definition is substantially identical to the one that is used by the Public Securities Association (PSA) in its educational materials. Under the definition, a CMO is a "multiclass bond backed by a pool of pass-through securities or mortgage loans." The relationship between a CMO and a real estate mortgage investment conduit (REMIC) is also described. For purposes of the NASD's rules, the terms CMO and REMIC are used interchangeably.

      Educating Customers

      The NASD believes the complexity of CMOs mandates that members take steps to ensure their customers are fully educated about CMOs. Accordingly, the amendments require members to offer investors an educational document or other material about CMOs. The amendment specifies that the document: (1) explain CMOs, including the various types of tranches; (2) discuss mortgage loans and mortgage securities; (3) explain the features of CMOs, including credit quality, prepayment rates and average lives, interest rates (including effect on values and prepayment rates), tax considerations, minimum investments, transaction costs, and liquidity; (4) discuss the questions an investor should ask before investing; and (5) contain a glossary of terms that may be helpful to an investor considering an investment.

      The educational document may be similar to the PSA brochure, An Investor's Guide to Real Estate Mortgage Investment Conduits REMICs. In adopting the educational material provision, the NASD notes that the PSA brochure meets all of the requirements for an acceptable customer education document. The foregoing, however, does not constitute a recommendation or endorsement of the PSA brochure.

      Questions regarding this Notice may be directed to R. Clark Hooper, Vice President, Advertising/Investment Companies Regulation Department, (202) 728-8329, or Elliott R. Curzon, Senior Attorney, Office of General Counsel, (202) 728-8451.

      Text of Amendment to the Guidelines Regarding Communications With the Public About Collateralized Mortgage Obligations at Article III, Section 35 of the Rules of Fair Practice

      (Note: New text is underlined.)

      Guidelines Regarding Communications With the Public About Collateralized Mortgage Obligations

      1. General Considerations

      For purposes of these Guidelines and the NASD's Rules, the term "collateralized mortgage obligation" (CMO) refers to a multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. CMOs are also known as "real estate mortgage investment conduits" (REMICs). As a result of the 1986 Tax Reform Act, most CMOs are issued in REMIC form to create certain tax advantages for the issuer. The terms CMO and REMIC are now used interchangeably.

      In order to prevent a communication about CMOs from being false or misleading, there are certain factors to be considered, including, but not limited to, the following.

      Product Identification

      In order to assure that investors understand exactly what security is being discussed, all communications concerning CMOs should clearly describe the product as a "collateralized mortgage obligation." Member firms should not use proprietary names for CMOs as they do not adequately identify the product.

      To prevent confusion and the possibility of misleading the reader, communications should not contain comparisons between CMOs and any other investment vehicle, including Certificates of Deposit.

      Educational Material

      In order to ensure that customers are adequately informed about CMOs, members are required to offer to customers educational material which covers the following matters:
      • A discussion of CMO characteristics as investments and their attendant risks

      • An explanation of the structure of a CMO, including the various types of tranches

      • A discussion of mortgage loans and mortgage securities

      • Features of CMOs, including: credit quality, prepayment rates and average lives, interest rates (including effect on values and prepayment rates), tax considerations, minimum investments, transactions costs and liquidity

      • Questions an investor should ask before investing, and a glossary of terms that may be helpful to an investor considering an investment.
      * * * * *

    • 93-84 SEC Approves Amendments Prohibiting Certain Anti-Dilution Terms in the Warrant Agreements of Underwriters and Related Persons;

      Effective Date: December 15, 1993

      SUGGESTED ROUTING

      Senior Management
      Corporate Finance
      Institutional
      Legal & Compliance
      Syndicate

      Executive Summary

      On October 29, 1993, the Securities and Exchange Commission (SEC) approved amendments to the Corporate Financing Rule (Rule) under Article III, Section 44 of the Rules of Fair Practice to prohibit underwriters and related persons from accepting as underwriting compensation options, warrants, or convertible securities that (i) contain anti-dilution terms designed to provide the underwriter and related persons with disproportionate rights, privileges, and economic benefits that are not provided to the purchasers of the securities offered to the public, or (ii) contain terms that provide for the receipt or accrual of cash dividends before the exercise or conversion of the security.

      The text of the amendment, which takes effect December 15, 1993, follows this Notice.

      Background

      The NASD recognizes that contracts between the company and investors that cover the issuance of options, warrants, and convertible securities may contain certain anti-dilution terms designed to protect the security holders from events that dilute their economic interest in the company. The NASD reviewed the anti-dilution terms contained in the contracts of underwriters and related persons for warrants received as underwriting compensation and found that underwriters and related persons sometimes negotiate to receive protection from dilution in their warrant contracts through certain "disproportionate" rights. These rights provide them with a larger number of shares upon exercise or lower exercise price than rights available to shareholders of the offering when events occur that do not affect all shareholders, such as additional issuances by the company, including issuances under stock option plans, or the conversion of existing convertible securities. The NASD found different variations of how adjustments to the exercise price and number of shares occur in response to such issuances of securities. Such variations included formulas that "weight" the effect of changes in the company's capitalization and that "rachet" the adjustment without regard to the actual dilutive effect of the new issuance of securities.

      The NASD has determined that all variations of such disproportionate anti-dilution rights are unfair and unreasonable when not also provided to investors in the public offering. The receipt of such disproportionate benefits by underwriters and related persons, when such benefits are not received by other purchasers of the public securities, could result in the underwriter and related persons receiving securities as underwriting compensation in excess of 10 percent of the securities sold to the public in the offering, in violation of the Stock Numerical Limitation Rule contained in Subsection (c)(6)(B)(ix) of the Rule.

      Description of Amendments

      The NASD has adopted new Subsection (c)(6)(B)(vi)(7) of the Rule that defines as unfair and unreasonable the receipt by the underwriter and related persons of underwriting compensation consisting of any option, warrant, or convertible security that contains anti-dilution terms designed to provide the underwriter and related persons with disproportionate rights, privileges, and economic benefits that are not provided to the purchasers of the securities offered to the public. To address circumstances where the security received by the underwriter and related persons is different from the security to be offered to the public, new Subsection (c)(6)(B)(vi)(7) also provides that the rights, privileges, and economic benefits received by underwriters and related persons may be compared to the rights, privileges, and economic benefits of the public shareholders of the issuer whose shares have a bona fide independent market, in compliance with Subsection (c)(5)(A) of the Rule.

      New Subsection (c)(6)(B)(vi)(8) defines as unfair and unreasonable the receipt by the underwriter and related persons of underwriting compensation consisting of any option, warrant, or convertible security that contains anti-dilution terms that provide for the receipt or accrual of cash dividends before the exercise or conversion of the security. The NASD has determined that the receipt or accrual arrangement is unfair and unreasonable under the Rule because it provides the underwriter and related person with economic rights, privileges, and benefits that are more favorable than the benefits received by investors in the public offering.

      Questions concerning this Notice may be directed to Paul Mathews or Eugene Buchanan, Supervisors, Corporate Financing Department, at (202) 728-8258.

      Text of Amendments to the Corporate Financing Rule Under Article III, Section 44 of the Rules Of Fair Practice

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

      (c) Underwriting Compensation and Arrangements
      (6)
      (B)(vi)(6) has a piggyback registration right with a duration of more than seven (7) years from the effective date of the offering;[or]
      (7) has anti-dilution terms designed to provide the underwriter and related persons with disproportionate rights, privileges and economic benefits which are not provided to the purchasers of the securities offered to the public (or the public shareholders, if in compliance with subsection (c)(5)(A) above);
      (8) has anti-dilution terms designed to provide for the receipt or accrual of cash dividends prior to the exercise or conversion of the security; or

      Subsection (c)(6)(B)(vi)(7) of the Rule is renumbered Subsection (c)(6)(B)(vi)(9).

    • 93-83 SEC Approves New Trade Reporting Requirements for Pre-Opening Transactions And Convertible Debt Transactions

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations
      Systems
      Trading

      Executive Summary

      Beginning December 20, 1993, members will be required to submit to the NASD trade reports of transactions in convertible debt securities listed on Nasdaq within 90 seconds after execution. Also on December 20, 1993, members executing trades between 9 and 9:30 a.m., Eastern Time (ET) in Nasdaq and over-the-counter (OTC) securities not listed on Nasdaq will be required to report those transactions within 90 seconds after execution to the NASD through the Automated Confirmation Transaction (ACTSM) service, utilizing the after-hours or ".T" symbol. The Securities and Exchange Commission (SEC) has approved both of these rule changes, which appear in Schedule D to the By-Laws. The text of the rules follows the discussion below.

      Background and Description of Amendments

      The SEC has approved a new Part XIII to Schedule D to the By-Laws to require real-time trade reporting for convertible bonds listed on Nasdaq. Specifically, the requirements call for members to report all transactions in convertible debt securities for surveillance purposes within 90 seconds after execution, using the same reporting protocols as those for Nasdaq equity securities. The new rules also provide that only those transactions for 99 bonds or less will be disseminated real-time to the public starting in April 1994. The NASD is simultaneously eliminating the requirement for end-of-day volume reporting currently required for market makers in convertible debt securities.

      Market makers trading convertible bonds now report end-of-day volume and last-sale information into the ACT service, which will be designated as the vehicle for trade-by-trade transaction reporting for convertible debt. The time frames for reporting will be identical to those for equity securities, within 90 seconds after execution. The rules also specify which party to a transaction is required to report (in most transactions, the market maker registered in the bond in Nasdaq is the reporting party) and provide reporting policies, such as reporting transactions at the selling or purchasing price, irrespective of markups, markdowns, or commissions. These requirements parallel those currently in place for Nasdaq equity securities.

      For members that trade infrequently, the NASD will make the ACT service desk available for trade reporting purposes. The NASD operates the ACT service desk to facilitate members that average fewer than five trades a day and that do not have Nasdaq Workstation® equipment. Therefore, the ACT service desk will also be made available to members that average five or fewer bond trades a day.

      In implementing real-time reporting for Nasdaq convertible debt securities, the NASD carefully evaluated its effect on the membership. The NASD recognizes that increased transparency in the relatively illiquid convertible bond market could have significant costs in terms of liquidity and dealer participation in such a market. Accordingly, the NASD will disseminate on a real-time basis beginning in April 1994 only the retail or "odd lot" transactions, defined in the rules as transactions of 99 bonds or less. With this limited dissemination of information, the NASD believes that the potential negative impact on liquidity caused by real-time dissemination of all transaction prices and volumes will be mitigated, and the public will be better served by seeing intra-day transactional data. Accordingly, the NASD believes that the extension of trade reporting to convertible debt securities listed on Nasdaq and the dissemination of the retail-type trade reports will not result in an adverse impact on the liquidity of those securities because of the limited amount of market-sensitive information that will be made available to the public on a real-time basis.

      The SEC has also approved amendments to Schedule D of the NASD By-Laws and the Rules of Practice and Procedure for the Automated Confirmation Transaction service to require trade reporting for transactions in Nasdaq securities and OTC securities not listed on Nasdaq between the hours of 9 and 9:30 a.m., ET. Under the new rule, members must append ".T" to trade reports submitted between 9 and 9:30 a.m., ET, because these trades occur outside normal market hours.

      The new rules require members to input the details of reportable transactions from 9 to 9:30 a.m., ET, into ACT to facilitate trade reporting, comparison, and vendor dissemination. Pre-opening transactions in SelectNetSM during the 9 to 9:30 a.m., ET, session are already being processed and disseminated, and ACT will now be used to capture reports of trades executed outside of SelectNet during that time period. The changes mandate reporting of such trades through ACT within 90 seconds of execution. This requirement also reduces the use of Form T for reporting transactional data to the NASD and ensures that all trades in Nasdaq and OTC securities occurring between 9 and 9:30 a.m., ET, are fully integrated into the NASD's audit trail file.

      The reporting requirements are effective December 20, 1993.

      Questions regarding this Notice may be directed to Market Surveillance at (301) 590-6080 or to Beth E. Weimer, Associate General Counsel, at (202) 7286998.

      Text of New Rules

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

      SCHEDULE D

      PART V

      REQUIREMENTS APPLICABLE TO NASDAQ MARKET MAKERS

      Sec. 5 Reports

      [(a) Daily. A market maker shall report to the Automated Confirmation Transaction service each business day between 4:10 p.m. and 5:00 p.m. Eastern Time its daily volume, which shall be determined by the larger of total aggregated purchases or sales relating to convertible debt securities in which it is registered as a Nasdaq market maker. If a market maker has not executed transactions in a convertible debt security in which it is registered as a market maker on that business day, no report on that security need be submitted.

      Daily volume reports shall be entered via the Automated Confirmation Transaction service. In cases of equipment malfunction or failure, volume reports shall be telephoned to Nasdaq Operations-Members.

      A market maker shall also report to the Automated Confirmation Transaction service each business day all other data relating to convertible debt securities quoted in the Nasdaq system as the Association shall require.
      (b) Monthly. A market maker shall report monthly to the Automated Confirmation Transaction service such data on securities quoted in the Nasdaq system as the Association shall require.]
      [(c) Other.] A market maker shall make such [other] reports to the Association as may be prescribed from time to time by the Association.

      PART X

      REPORTING TRANSACTIONS IN NASDAQ NATIONAL MARKET SYSTEM DESIGNATED SECURITIES

      Sec. 2 Transaction Reporting

      (a) When and How Transactions are Reported

      * * * * *
      (4) Last sale reports of transactions in designated securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Additionally, last sale reports of transactions in designated securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution; trades executed and reported after 4:00 p.m. Eastern Time shall be designated as ".T" trades to denote their execution outside normal market hours. Transactions not reported within 90 seconds must include the time of execution on the trade report.
      (5) All members shall report weekly to the Market Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities executed outside the hours of [9:30] 9:00 a.m. and 5:15 p.m. Eastern Time.

      * * * * *

      PART XI

      REPORTING TRANSACTIONS IN NASDAQ SMALLCAPSM SECURITIES

      Sec. 2 Transaction Reporting

      (a) When and How Transactions are Reported

      * * * * *
      (4) Last sale reports of transactions in designated securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Additionally, last sale reports of transactions in designated securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution; trades executed and reported after 4:00 p.m. Eastern Time shall be designated as ".T" trades to denote their execution outside normal market hours. Transactions not reported within 90 seconds must include the time of execution on the trade report.
      (5) All members shall report weekly to the Market Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities executed outside the hours of [9:30] 9:00 a.m. and 5:15 p.m. Eastern Time.

      * * * * *

      PART XII

      REPORTING TRANSACTIONS IN OVER-THE-COUNTER EQUITY SECURITIES

      Sec. 2 Transaction Reporting

      (a) When and How Transactions are Reported

      * * * * *
      (3) Last sale reports of transactions in OTC Equity Securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Last sale reports of transactions in OTC Equity Securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall also be transmitted through ACT within 90 seconds after execution; trades executed and reported after 4:00 p.m. Eastern Time shall be designated as ".T" trades to denote their execution outside normal market hours.
      (4) All members shall report weekly to the Market Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in OTC Equity Securities executed outside the hours of [9:30] 9:00 a.m. and 5:15 p.m. Eastern Time.

      PART XIII

      REPORTING TRANSACTIONS IN NASDAQ CONVERTIBLE DEBT SECURITIES

      This Part has been adopted pursuant to Article VII of the Corporation's By-Laws and sets forth the applicable reporting requirements for transactions in convertible bonds that are listed on Nasdaq ("designated securities"). Members shall utilize the Automated Confirmation Transaction Service ("ACT") for transaction reporting.

      Sec. 1 Definitions

      (a) Terms used in this Part shall have the same meaning as those defined in the Association's By-Laws and Rules of Fair Practice, unless otherwise specified herein.
      (b) "Automated Confirmation Transaction Service" is the service that, among other things, accommodates reporting and dissemination of last sale reports in designated securities.
      (c) "Registered Reporting MarketMaker" means a member of the Association that is registered as a Nasdaq market maker in a particular designated security. A member is a Registered Reporting Market Maker in only those designated securities for which it is registered as a Nasdaq market maker. A member shall cease being a Registered Reporting Market Maker in a designated security when it has withdrawn or voluntarily terminated its quotations in that security or when its quotations have been suspended or terminated by action of the Corporation.
      (d) "Non-Registered Reporting Member" means a member of the Association that is not a Registered Reporting Market Maker.

      Sec. 2 Transaction Reporting

      (a) When and How Transactions are Reported
      (1) Registered Reporting Market Makers shall, within 90 seconds after execution, transmit through ACT last sale reports of transactions in designated securities executed during normal market hours. Transactions not reported within 90 seconds after execution shall be designated as late and such trade reports must include the time of execution.
      (2) Non-Registered Reporting Members shall, within 90 seconds after execution, transmit through ACT or the ACT service desk (if qualified pursuant to Part VIII of Schedule D to the By-Laws), or if ACT is unavailable due to system or transmission failure, by telephone to the Market Operations Department in New York City, last sale reports of transactions in designated securities executed during normal market hours. Transactions not reported within 90 seconds after execution shall be designated as late and such trade reports must include the time of execution.
      (3) Non-Registered Reporting Members shall report weekly to the Nasdaq Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities which are not required by paragraph (2) to be reported within 90 seconds after execution.
      (4) Last sale reports of transactions in designated securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted though ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Additionally, last sale reports of transactions in designated securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall be transmitted through the ACT system within 90 seconds after execution; trades reported after 4:00 p.m. Eastern Time shall be designated as ".T" trades to denote their execution outside normal market hours. Transactions not reported within 90 seconds must include the time of execution on the trade report.
      (5) All members shall report weekly to the Market Operations Department in New York City, on a form designated by the Board of Governors, last sale reports of transactions in designated securities executed outside the hours of 9:00 a.m. and 5:15 p.m. Eastern Time.
      (6) All trade tickets for transactions in eligible securities shall be time-stamped at the time of execution.
      (7) A pattern or practice of late reporting without exceptional circumstances may be considered conduct inconsistent with high standards of commercial honor and just and equitable principals of trade, in violation of Article III, Section 1 of the Rules of Fair Practice.
      (b) Which Party Reports Transaction
      (1) In transactions between two Registered Reporting Market Makers, only the member representing the sell side shall report.
      (2) In transactions between a Registered Reporting Market Maker and a Non-Registered Reporting Member, only the Registered Reporting Market Maker shall report.
      (3) In transactions between two Non-Registered Reporting Members, only the Member representing the sell side shall report.
      (4) In transactions between a member and a customer, the member shall report.
      (c) Information To Be Reported

      Each last sale report shall contain the following information:
      (1) Nasdaq symbol of the designated security;
      (2) Number of bonds;
      (3) Price of the transaction as required by paragraph (d) below;
      (4) A symbol indicating whether the transaction is a buy, sell, or cross;
      (5) The time of execution if the trade is reported more than 90 seconds after execution.
      (d) Procedures for Reporting Price and Volume*

      Members that are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in designated securities in the following manner:
      (1) For agency transactions, report the number of bonds and the price excluding the commission charged.
      (2) For dual agency transactions, report the number of bonds only once, and report the price excluding the commission charged.
      (3) For principal transactions, except as provided below, report each purchase and sale transaction separately and report the number of bonds and the price. For principal transactions that are executed at a price which includes a mark-up, mark-down or service charge, the price reported shall exclude the mark-up, markdown or service charge. Such reported price shall be reasonably related to the prevailing market, taking into consideration all relevant circumstances including, but not limited to, market conditions with respect to the bond, the number of bonds involved in the transaction, the published bids and offers with size at the time of the execution (including the reporting firm's own quotation), the cost of execution and the expenses involved in clearing the transaction. Exception: A "riskless" principal transaction in which a member that is not a market maker in the security after having received from a customer an order to buy, purchases the bond as principal from another member or customer to satisfy the order to buy or, after having received from a customer an order to sell, sells the bond as principal to another member or customer to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the mark-up or mark-down.
      (e) Transactions Not Required To Be Reported The following types of transactions shall not be reported:
      (1) transactions which are part of a primary distribution by an issuer;
      (2) transactions made in reliance on Section 4(2) of the Securities Act of 1933;
      (3) transactions where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the bond, e.g., to enable the seller to make a gift;
      (4) purchases or sales of bonds effected upon the exercise of an option pursuant to the terms thereof or the exercise of any other right to acquire bonds at a pre established consideration unrelated to the current market.
      (f) Dissemination of Transaction Reports

      The Association will collect and process trade reports on all transactions in convertible bonds listed on Nasdaq for surveillance purposes. On a real-time basis, the Association will disseminate to members and the public through the Nasdaq system and through securities information processors transactions in convertible debt listed on Nasdaq equalling 99 bonds or less.

      • • • Interpretation of the Board of Governors

      The Association seeks to emphasize the obligations of members to report transactions in designated securities within 90 seconds after execution. All transactions in designated securities not reported within 90 seconds after execution shall be reported as late, and the Association routinely monitors members' compliance with the 90 second requirement. If the Association finds a pattern or practice of unexcused late reporting, that is, repeated reports of executions in designated securities after 90 seconds without reasonable justification or exceptional circumstances, the member may be found to be in violation of Article III, Section 1 of the Association's Rules of Fair Practice. Exceptional circumstances will be determined on a case by case basis and may include conditions such as extreme volatility in a designated security, or in the market as a whole. Timely reporting of all transactions in designated securities is necessary and appropriate for the fair and orderly operation of the Association's marketplace, and the Association will view noncompliance as a rule violation.

      * For examples of reporting procedures, refer to Part XII of this Schedule, "Reporting Transactions in Nasdaq National Market System Securities."

    • 93-82 Mail Vote—NASD Solicits Member Vote on Proposed Amendment Exempting Money Market Mutual Funds From Disclosure Requirements;

      Last Voting Date: January 31, 1994

      SUGGESTED ROUTING

      Corporate Finance
      Legal & Compliance
      Mutual Fund

      Executive Summary

      The NASD invites members to vote on a revised proposed amendment to Article III, Section 26(d)(4) of the Rules of Fair Practice to exempt money market mutual funds with asset-based sales charges equal to or less than .25 of 1% of net assets (or 25 basis points) from the required disclosure under that subsection that "long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted by this section." The last voting date is January 31, 1994. The text of the proposed amendment follows this Notice.

      Background

      On July 7, 1993, new rules governing investment company sales charges took effect under Article III, Section 26(d) of the Rules of Fair Practice. The NASD has received several applications for exemption from Subsection 26(d)(4), which requires that the prospectus for an investment company with an asset-based sales charge must disclose that "longterm shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this section." The applications noted that the rule language is specific and requires the disclosure, even if the statement may not be true for a particular mutual fund.

      The applicants pointed out that in the case of a money market mutual fund, there is a high probability that the statement will be inaccurate because such funds generally have very low asset-based sales charges and an investor would have to be a shareholder for an extremely long time before the disclosure would be true. According to one applicant, a shareholder of its fund would have to remain in the fund for more than 55 years before exceeding the maximum front-end charge. The applicants suggest that since money market mutual funds are traditionally short-term investments or cash management vehicles, it is unlikely that investors will stay in such funds for lengthy periods. As a result, they believe that the disclosure may be misleading, or at least confusing, to investors in money market mutual funds.

      The NASD published the proposed rule change for member vote in (September 1993). After publication of the proposal for vote, the Securities and Exchange Commission (SEC) notified the NASD that it objected to the rule change as proposed because for certain money market funds with high asset-based sales charges (50 basis points or more) the disclosure statement would be accurate. For example, a fund with an asset-based sales charge of 50 basis points and a 3 percent return on investment would reach the economic equivalent of the maximum front-end sales charge permitted by Subsection 26(d) in approximately 14 years. Accordingly, the NASD is proposing to amend the proposed rule change to limit the exemption to money market mutual funds with asset-based sales charges of 25 basis points or less. Because this amendment to the proposed rule change represents a material change to the original proposal, the NASD is asking that members vote on the amended proposed rule change.

      Request for Vote

      The Board of Governors agrees with the arguments of the applicants and the comments of the SEC. Accordingly, it has determined to recommend amending Subsection 26(d)(4) to exempt money market mutual funds with asset-based sales charges of 25 basis points or less from the disclosure requirement. The Board does not believe that requiring funds to include disclosure statements in such circumstances serves any identifiable purpose nor does it advance any recognizable regulatory interest.

      The Board considers the proposed amendment necessary and appropriate and recommends that members vote their approval. The text of the proposed new rule that requires member vote is below. 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 January 31, 1994. The amendment would not take effect until it is filed with and approved by the SEC.

      Questions regarding this Notice may be directed to R. Clark Hooper, Vice President, Investment Companies Regulation Department, (202) 728-8329, or Elliott R. Curzon, Senior Attorney, Office of General Counsel, (202) 728-8451.

      Text of Proposed Amendment to Article III, Section 26 of the Rules Of Fair Practice

      (Note: New language is underlined.)

      Investment Companies

      Sec. 26

      * * * * *

      (d)
      (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. This subsection shall not apply to money market mutual funds which have asset-based sales charges equal to or less than .25 of 1% of average net assets per annum.

    • 93-81 NASD Reminds Members of the Requirement for Fairness Of Agency Commissions And Applicability of the 5% Policy

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Trading
      Training

      Executive Summary

      Members are reminded that commission charges to customers in agency transactions are fully subject to all provisions of Article III, Section 4 of the NASD Rules of Fair Practice. As such, the NASD 5% Policy applies as equally to commissions on agency trades as it does to markups or markdowns on principal transactions. Members are urged to review the level of their agency commissions to ensure that they are fair and reasonable and fully comply with all aspects of Section 4.

      Background

      The fairness of members' charges to customers both in regard to markups or markdowns on principal transactions and commissions in agency transactions has been the subject of close examination by the NASD across the country. As is evident by the number of disciplinary actions taken in recent years by the NASD involving egregious markup practices that have resulted in the imposition of serious sanctions on members and their associated persons, the NASD has been an aggressive enforcer in ensuring fair dealing with customers. Concerns are now being raised with the level of commissions being charged to customers that in some instances are not fair and reasonable in light of the requirements of Article III, Section 4 of the NASD's Rules of Fair Practice. In addition, members have raised questions about the applicability of various aspects of Section 4 to agency commissions. This Notice is being issued to assist members in adopting policies and procedures designed to achieve compliance with Section 4, and in resolving questions of fairness in agency commission transactions.

      Application of Article III, Section 4 and 5% Policy to Agency Commissions

      Article III, Section 4 of the Rules of Fair Practice states in part that, if a member acts as agent for a customer in any transaction, the customer shall not be charged more than a fair commission or service charge, taking into consideration all relevant circumstances.

      To provide direction in this area, the NASD Board of Governors adopted its 5% Policy as an Interpretation of the Board under Section 4. It indicates that it may be conduct inconsistent with just and equitable principles of trade for a member to charge a commission that is not reasonable. The policy further states that it applies to all transactions in which the member acts as agent and charges its customer a commission. Therefore, the NASD 5% Policy and Article III, Section 4 of the Rules clearly apply to commissions charged in agency transactions and are not limited to markups in principal transactions.1

      Regardless of product or type of transaction, members should ensure that customers are receiving fair prices and not being charged unfair or unreasonable commissions. The issue of fairness relative to agency commission charges as well as markups is determined by considering all relevant factors to the transactions. Article III, Section 4 requires any NASD member that acts as an agent for its customer to charge only a "fair commission or service charge, taking into consideration all relevant circumstances including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service he may have rendered by reason of his experience in and knowledge of such security and the market therefore."2 Disclosure does not justify a commission or markup that is unfair or excessive in light of all other relevant circumstances.

      In addition, other relevant factors include the price of the security and the amount of money involved in the transaction. In this regard, members should pay particular attention to commissions charged on agency transactions involving low-priced securities, including consideration of minimum commission charges.

      The NASD 5% Policy, which has been revalidated on various occasions since it was originally adopted in 1943, provides guidance to members in determining the fairness of markups, markdowns, and commissions. Consistent regulatory policy requires that agency transactions come under the same guidelines as principal transactions. Indeed, that approach was affirmed in 1943 in a letter from the NASD Board of Governors to the membership that discussed the NASD 5% Policy.

      Where consummated on an agency basis, the commission charged the customer must not be unfair and should not exceed the amount which, were the member to act as a principal, would be in accord with the standards of practices discussed above.3

      It expressly states that the 5% Policy is a guide, not a rule, and is applicable to commissions as well as markups and markdowns.4 Thus, if a member undertakes an agency transaction, a commission should generally not exceed 5 percent of the total transaction amount unless the member can show or document factors under the policy that justify a higher amount. The NASD has, since 1943, deemed it inconsistent with Article III, Sections 1 and 4 and just and equitable principles of trade for a member to charge a customer a commission or a markup/markdown that is not reasonable or fair in light of the 5% Policy.5

      The 5% Policy does not define specifically what constitutes a fair or reasonable commission, since "what might be considered fair in one transaction could be unfair in another transaction because of different circumstances."6 Instead, the 5% Policy requires that a determination of the fairness of a commission is based on "a consideration of all the relevant factors," of which the percentage of commission on the transaction is only one.7 Indeed, as with a markup/markdown, the 5% Policy says that commissions at 5 percent, or even less, may be deter-mined to be unfair or unreasonable when the other relevant factors have been carefully considered.

      Market Conditions

      When the market conditions for a security reflect active and competitive trading, the security typically will be readily available for the member to buy or sell on behalf of its customer. Thus, active, competitive market conditions would not usually justify a higher commission. However, in the case of an inactive security, the member's effort and cost of buying or selling the security for the customer may have a bearing on the amount of commission. Any special or unusual effort or cost should be documented if a higher commission is to be justified. The member bears the burden of adequately documenting any such claim.

      Expense of Execution

      The cost of actual execution of the customer's transaction may be taken into account. Normal overhead expenses, including commissions or other compensation to be paid to registered representatives, should not be taken into consideration in determining whether commissions to be charged customers are reasonable.8

      As the SEC has stated:

      The fact that a member is entitled to a profit is merely one of the circumstances to be considered in determining whether a price is fair, and excessive expenses cannot justify an excessive markup.9

      Value of Services Rendered

      In most instances, a member's service to its customer in executing a buy or sell transaction as agent for that customer is not extraordinary and therefore not sufficient to justify a commission greater than 5 percent. For example, a member's efforts to promote the stock and stimulate its sales cannot be viewed as a service for which customers can be charged by raising the com-missions.10

      Many of these factors were considered in a recent NASD disciplinary proceeding that involved a member, the sole market maker in the particular security at issue, who regularly charged its customers commissions ranging from 7 percent to 9 percent when acting as its customers' agent in the purchase or sale of securities.

      In its decision, the National Business Conduct Committee found that the member failed to demonstrate any "extraordinary" expense, service, or market condition that would justify a commission in excess of 5 percent.11

      Members are also reminded of their obligation under Section 27 of the NASD Rules of Fair Practice to have in place adequate written supervisory procedures to monitor employee conduct in customer transactions, including the fairness of commissions.

      * * * * *

      The NASD hopes that this Notice, which embodies longstanding NASD policies and principles, will aid members in their compliance efforts, and thereby enhance customer protection and help preserve the integrity of the marketplace.

      Questions concerning this Notice may be directed to your local NASD District Office, or to William R. Schief (Vice President) or Daniel M. Sibears (Director), NASD Regulation, 1735 K Street, NW, Washington, DC 20006-1500.


      1 NASD Manual, paragraph 2154.

      2 Ibid.

      3 In re: National Association of Securities Dealers, Inc., 17 S.E.C. 459 at Appendix A (1944).

      4 In a recent case, Kevin B. Waide, Securities Exchange Act Release No. 30561, footnote 12 (April 7, 1992), the SEC agreed that the NASD's 5% Policy applied to commissions in agency transactions. See Notice to Members 92-16 (April 1, 1992) for details concerning the application of the 5% Policy to markups and markdowns.

      5 NASD Manual, paragraph 2154.

      6 Ibid.

      7 Ibid.

      8 See Osborne, Stern and Co., Inc., Sec. Exch. Act Rel. No. 31211 (1992), at footnote 13, and Boren & Co., 40 S.E.C. 217 (1960).

      9 Boren & Co., 40 S.E.C. 217 (1960). See also Kenneth B. Stucker, 42 S.E.C. 910 (1966) (Excessive expenses in effecting sales—such as studies of the companies involved, attendance at the companies' stockholder meetings, political activity to further the companies' interests, and compliance with recordkeeping requirements— didn't justify excessive charges to customers.).

      10 See Kenneth B. Stucker, 42 S.E.C. 910 (1966).

      11 See Van Clemens & Company, Inc., CO4920012 (April 22, 1993).

    • 93-80 Nasdaq National Market(r) Additions, Changes, And Deletions as of October 25, 1993

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading

      As of October 25, 1993, the following 77 issues joined the Nasdaq National Market®, bringing the total number of issues to 3,325:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      TBAY

      Gotham Apparel Corp.

      9/27/93

      1000

      BPIX

      Broadcasting Partners, Inc. (Cl A)

      9/28/93

      1000

      COSB

      CSB Financial Corporation

      9/28/93

      500

      SUDS

      Sudbury, Inc.

      9/28/93

      1000

      HAUL

      Allied Holdings, Inc.

      9/29/93

      500

      CMEL

      Checkmate Electronics, Inc.

      9/29/93

      1000

      FFPB

      First Palm Beach Bancorp, Inc.

      9/29/93

      1000

      KESI

      Kentucky Electric Steel, Inc.

      9/29/93

      1000

      LUCK

      Lady Luck Gaming Corporation

      9/29/93

      1000

      LOEW

      Loewenstein Furniture Group, Inc.

      9/29/93

      1000

      MPRO

      MicroProbe Corporation

      9/29/93

      1000

      MPROW

      MicroProbe Corporation (9/28/98 Wts)

      9/29/93

      1000

      UTEK

      Ultratech Stepper, Inc.

      9/29/93

      1000

      FHCI

      Future Healthcare, Inc.

      9/30/93

      1000

      LDAKA

      LIDAK Pharmaceuticals (Cl A)

      9/30/93

      1000

      LDAKM

      LIDAK Pharmaceuticals (Cl B 5/8/95 Wts)

      9/30/93

      500

      LDAKZ

      LIDAK Pharmaceuticals (Cl C 5/26/95 Wts)

      9/30/93

      500

      LFCT

      Leader Financial Corporation

      9/30/93

      1000

      NRVH

      National R.V. Holdings, Inc.

      9/30/93

      1000

      NAWC

      North American Watch Corporation

      9/30/93

      1000

      SFXBA

      SFX Broadcasting, Inc. (Cl A)

      9/30/93

      500

      SBCN

      Suburban Bancorporation, Inc.

      9/30/93

      500

      ARAM

      Aramed, Inc.

      10/1/93

      1000

      GNSAW

      Gensia, Inc. (12/31/96 Wts)

      10/1/93

      200

      MAXM

      The Maxim Group, Inc.

      10/1/93

      500

      MAXMW

      The Maxim Group, Inc. (9/30/98 Wts)

      10/1/93

      500

      ACCX

      Atchison Casting Corporation

      10/4/93

      1000

      GART

      Gartner Group, Inc. (Cl A)

      10/5/93

      1000

      TAPE

      Magnetech Corporation

      10/5/93

      1000

      NPAF

      National Picture & Frame Company

      10/5/93

      1000

      CLBK

      Commercial Bankshares, Inc.

      10/6/93

      500

      IVIP

      IVI Publishing, Inc.

      10/6/93

      500

      SPZN

      Speizman Industries, Inc.

      10/6/93

      500

      UBSH

      Union Bankshares Corporation

      10/6/93

      1000

      ZONEL

      Discovery Zone, Inc. (Liquid Yield Option Notes)

      10/7/93

      N/A

      FSFC

      First Southeast Financial Corporation

      10/8/93

      1000

      MCTI

      Micro Component Technology, Inc.

      10/8/93

      1000

      RHNB

      RHNB Corporation

      10/11/93

      1000

      ALDNF

      Aladdin Knowledge Systems Ltd.

      10/12/93

      500

      BEERF

      Big Rock Brewery Ltd.

      10/12/93

      500

      CIVCR

      Civic BanCorp (11/2/93 Rts)

      10/12/93

      500

      EFIL

      Envirofil, Inc.

      10/12/93

      1000

      KARE

      Koala Corporation

      10/12/93

      1000

      MBIA

      Merchants Bancorp, Inc.

      10/12/93

      500

      NVIC

      N-Viro International Corporation

      10/12/93

      1000

      STCH

      Shared Technologies Inc.

      10/12/93

      1000

      BMCCP

      Bando McGlocklin Capital Corporation (Pfd)

      10/13/93

      500

      BZHKF

      Belize Holdings Inc.

      10/13/93

      1000

      FBAYF

      Frisco Bay Industries Ltd.

      10/13/93

      1000

      IFGI

      Insignia Financial Group, Inc. (Cl A)

      10/13/93

      1000

      OMGI

      OM Group, Inc.

      10/13/93

      1000

      LNET

      LodgeNet Entertainment Corporation

      10/14/93

      1000

      TENXF

      Tee-Comm Electronics Inc.

      10/14/93

      500

      DECK

      Deckers Outdoor Corporation

      10/15/93

      500

      EPUR

      Enviropur Waste Refining & Technology, Inc.

      10/15/93

      1000

      EPURW

      Enviropur Waste Refining & Technology, Inc. (12/31/93 Cl B Wts)

      10/15/93

      1000

      ULTE

      Ultimate Electronics, Inc.

      10/15/93

      1000

      WIKS

      Wickes Lumber Company

      10/15/93

      500

      AXAS

      Abraxas Petroleum Corporation

      10/19/93

      500

      CLBC

      Club Car, Inc.

      10/19/93

      500

      CROS

      Crossmann Communities, Inc.

      10/19/93

      1000

      INSV

      InSite Vision Incorporated

      10/19/93

      1000

      IWRK

      Iwerks Entertainment, Inc.

      10/19/93

      1000

      NRIM

      Northrim Bank

      10/19/93

      500

      POYO

      Pollo Tropical, Inc.

      10/19/93

      1000

      DAVL

      Davel Communications Group, Inc.

      10/20/93

      1000

      ENSY

      EnSys Environmental Products, Inc.

      10/20/93

      500

      PARSD

      Pharmos Corporation

      10/20/93

      1000

      WRTEP

      WRT Energy Corporation (Pfd)

      10/20/93

      500

      EVGMP

      Evergreen Media Corporation (Pfd)

      10/21/93

      500

      WRTE

      WRT Energy Corporation

      10/21/93

      500

      CBSAP

      Coastal Banc Savings Association (Pfd)

      10/22/93

      500

      ENVGW

      Envirogen, Inc. (10/12/98 Wts)

      10/22/93

      500

      SBLT

      The Sunbelt Companies, Inc.

      10/22/93

      1000

      TGIC

      Triad Guaranty Inc.

      10/22/93

      1000

      RENO

      Reno Air, Inc.

      10/25/93

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since September 27, 1993:

      New/Old Symbol

      New/Old Security

      Date of Change

      DOSEW/DOSEW

      Choice Drug Systems, Inc. (9/30/94 Wts)/Choice Drug Systems, Inc. (9/30/93 Wts)

      10/4/93

      COHO/COHO

      Coho Energy, Inc./Coho Resources, Inc.

      10/4/93

      SMTSZ/SMTSZ

      Somanetics Corporation (12/29/93 Wts)/Somanetics Corporation (9/28/93 Wts)

      10/4/93

      DIAU/DIAUV

      Diasonics Ultrasound, Inc./Diasonics Ultrasound, Inc. (WI)

      10/5/93

      GRNT/GRNT

      Grant Geophysical Inc./Grant Tensor Geophysical Corp.

      10/5/93

      GRNTP/GRNTP

      Grant Geophysical Inc. (Pfd)/Grant Tensor Geophysical Corp. (Pfd)

      10/5/93

      KREGP/BLSAP

      Koll Real Estate Group Inc. (Pfd)/Bolsa Chica Co. (Ser A Pfd)

      10/8/93

      KREG/BLSA

      Koll Real Estate Group Inc. (Cl A)/The Bolsa Chica Co.

      10/8/93

      IMPX/IMPX

      IMP, Inc./International Microelectronics

      10/12/93

      ICTL/OHCO

      International CableTel, Inc./OCOM CP

      10/14/93

      FRDM/FRDMA

      Friedman's Inc. (Cl A)/Friedman's Inc. (Cl A)

      10/15/93

      DIDI/DIDIF

      Destron/IDI, Inc./Destron/IDI, Inc.

      10/18/93

      ZALE/ZALEV

      Zale Corporation/Zale Corporation (WI)

      10/21/93

      GOLD/FGBC

      Goldenbanks of Colorado, Inc./First Golden Bancorp

      10/22/93

      PCCW/PCLB

      Price/Costco Inc./The Price Company

      10/22/93

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      ATKM

      ATKM Metals Center, Inc.

      9/27/93

      CBWV

      Commerce Banc Corporation

      9/28/93

      ASIXE

      Assix International

      10/1/93

      VCRE

      Vari-Care Inc.

      10/1/93

      PROT

      Protective Life Corporation

      10/4/93

      CNSB

      Centennial Savings Bank, FSB

      10/5/93

      OHBC

      Ohio Bancorp

      10/13/93

      BFCS

      Boston Five Bancorp, Inc.

      10/14/93

      FRDMA

      Friedman's Inc. (Cl A)

      10/14/93

      FCMI

      Future Communications Inc.

      10/14/93

      SIMU

      Simula, Inc.

      10/14/93

      SODA

      A & W Brands Inc.

      10/15/93

      NDTA

      National Data Corporation

      10/15/93

      AUTR

      Autotrol Corporation

      10/19/93

      MORR

      Morrison Restaurants Inc.

      10/21/93

      COST

      Costco Wholesale Corporation

      10/22/93

      ENGH

      Engraph Inc.

      10/22/93

      Questions regarding this Notice should be directed to Mark A. Esposito, Supervisor, Market Listing Qualifications, at (202) 728-8002. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 93-79 Christmas Day: Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading

      The Nasdaq Stock MarketSM and the securities exchanges will be closed on Friday, December 24, 1993, in observance of Christmas Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date*

      Dec. 16

      Dec. 23

      Dec. 28

      17

      27

      29

      20

      28

      30

      21

      29

      31

      22

      30

      Jan 3, 1994

      23

      31

      4

      24

      Markets Closed

      —

      27

      Jan. 3, 1994

      5

      Note: Securities markets will be open on Friday, December 31, 1993, and Monday, January 3, 1994. There will be no observance of New Year's Day.

      Brokers, dealers, and municipal securities dealers should use these settlement dates to clear and settle 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 (203) 375-9609.

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

    • 93-78 SEC Approves Extension Of MSRB Continuing Disclosure Information Pilot System

      SUGGESTED ROUTING

      Senior Management
      Institutional
      Municipal
      Trading

      Executive Summary

      The Securities and Exchange Commission (SEC) approved an extension, through April 6, 1995, of the Municipal Securities Rule-making Board's (MSRB) Continuing Disclosure Information Pilot System for accepting and disseminating disclosure notices relating to outstanding issues of municipal securities.

      Background

      The Continuing Disclosure Information Pilot System (System) is part of the MSRB's Municipal Securities Information Library System (Library System). With its Library System, the MSRB seeks to increase the integrity and efficiency of the municipal securities market by ensuring that the price charged for an issue in the secondary market reflects all available official information about that issue. Operating on a pilot basis since January of this year, the System accepts time-sensitive continuing disclosure information that affects municipal securities in the secondary market for dissemination to interested parties.

      To evaluate and address technical, policy, and cost issues, the MSRB chose to implement the System in phases. During the first six months, the System only accepted information from trustees. The MSRB accelerated the second phase and began accepting disclosure notices from issuers as of May 17, 1993.

      Currently, the System accepts only short submissions (one to three pages in length) that trustees and issuers submit by mail, facsimile transmission, or electronic transmission. The System then makes these documents available in two ways. A subscription service transmits each document to subscribers as soon as possible after the document is accepted. Information submitted by mail or facsimile goes out by facsimile transmission; information submitted electronically by computer modem is disseminated electronically. Interested persons may also review and copy these documents at the MSRB's Public Access Facility in Alexandria, Virginia.

      Extension of Pilot

      In August, the MSRB requested an 18-month extension of the program to allow more time for issuers and trustees to recognize the overall benefit to the market in voluntarily providing continuing disclosure information via the System. The SEC granted the extension through April 6, 1995.

      During the extended pilot period, the MSRB will explore the feasibility of accepting and disseminating longer documents through the System. Although the SEC approved the extension on an accelerated basis to permit the System to continue to operate without interruption, interested parties are encouraged to submit comments. NASD members that wish to comment on the System should refer to File No. SR-MSRB-93-9 and send six copies of the comment letter to:

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

      The SEC will make all comments available for public inspection and copying at its Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549. Copies also will be available for inspection and copying at the MSRB's principal offices.

    • 93-77 SEC Adopts Rule 15c6-1; Establishes Three-Business-Day Settlement for Securities Transactions

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations

      Executive Summary

      The Securities and Exchange Commission (SEC) recently adopted Rule 15c6-1 under the Securities Exchange Act of 1934 to establish three business days, instead of five, as the standard settlement time-frame for most securities transactions. The new rule is effective June 1, 1995.

      Background

      Earlier this year, the SEC solicited comments on its proposal to adopt Rule 15c6-1 as one means of reducing the risks associated with unsettled securities transactions.

      The proposed rulemaking followed several studies by government and industry groups after the October 1987 market break. These groups closely scrutinized the clearance and settlement system as they sought to identify causes for the market decline and develop initiatives to protect market participants from the impact of such declines in the future.

      The Group of Thirty conducted one of these studies. The Group is an independent, non-partisan, nonprofit organization composed of international financial leaders that focuses on international economic and financial issues. In March 1989, the Group of Thirty issued a report with a number of proposals to improve clearance and settlement practices and standards. Among these proposals was the recommendation that settlement take place on the third day after trade date (T+3).

      Following release of this report, two subcommittees, the U.S. Steering Committee and a U.S. Working Committee of the Group of Thirty, were formed to evaluate these recommendations. The subcommittees concluded that shortening the settlement cycle would be beneficial.

      Next, the SEC convened a round table to discuss the subcommittees' recommendations. Round table participants generally agreed that these recommendations should be adopted but expressed concern about the impact on broker/dealers conducting a predominantly retail business.

      Subsequently, an industry task force, headed by John W. Bachmann, the Managing Principal of Edward D. Jones & Co. of St. Louis, Missouri, undertook an independent evaluation of these issues. In May 1992, the Bachmann Task Force presented its findings supporting T+3 settlement to the SEC.

      In its proposal, the SEC set forth three reasons for supporting adoption of Rule 15c6-1. "First, at any given point in time, fewer unsettled trades would be subject to credit and market risk, and there would be less time between trade execution and settlement for the value of those trades to deteriorate. Second, the rule would reduce the liquidity risk among the derivative and cash markets and reduce financing costs by allowing investors that participate in both markets to obtain the proceeds of securities transactions sooner. Finally, the SEC noted that a shorter settlement timeframe could encourage greater efficiency in clearing agency and broker/dealer operations."

      According to its records, the SEC received more than 1,900 comment letters. After reviewing the comments, the SEC revised proposed Rule 15c6-1 and determined to adopt it effective June 1, 1995.

      Description of Rule 15c6-1

      Rule 15c6-1 provides that, unless otherwise expressly agreed to by the parties at the time of the transaction, a broker or dealer cannot enter into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than the third business day after the date of the contract. The Rule does not apply to a contract for an exempted security, government security, municipal security, commercial paper, bankers' acceptances, or commercial bills.

      The rule allows a broker or dealer to agree that settlement will occur in more or less than three business days, provided the agreement is explicit and reached at the time of the transaction. However, this does not require broker/dealers to specify all contract terms before a trade is executed.

      The rule provides three exemptions to its three-day-settlement provision:

      • Transactions in limited partnership interests that are unlisted or not quoted in The Nasdaq Stock MarketSM.

      • The sale for cash of securities by an issuer to an underwriter pursuant to a firm commitment offering registered under the Securities Act of 1933, or the sale to an initial purchaser by a broker/dealer participating in such offering.

      • Securities transactions that the SEC may from time to time exempt by order if the SEC determines that such exemption is consistent with the public interest and the protection of investors.

      Finally, it should be noted that the rule does not preclude individual investors from obtaining physical securities certificates.

      In adopting the rule, the SEC expressed its confidence that broker/dealers can make the necessary systems and operational changes to comply with three-day settlement by June 1, 1995, the rule's effective date.

      A copy of the SEC's release adopting Rule 15c6-1, which was published in the October 13, 1993, Federal Register, is attached.

      Questions concerning this Notice may be directed to Samuel Luque, Associate Director, Compliance, at (202) 728-8472, or Brad Darfler, Compliance, at (202) 728-8946.

      their securities on issuer records in a three-day settlement environment. Fifty-six of the commentators that oppose the Rule expressed concern about the costs of complying with the three-day settlement. A complete list of commentators is attached as Appendix 1. Staff of the Commission has prepared a summary of the comments, a copy of which has been placed in the official file.

      As discussed below, the Commission agrees with many of the commentators' suggestions, and the Commission has modified Rule 15c6-1 accordingly. For example, the Commission is modifying the Rule to exempt at this time transactions in limited partnership interests that are not listed on a national securities exchange or traded in the over-the-counter market ("unlisted limited partnership interests") and certain new issues involving firm-commitment underwritings. Although the Commission is not expanding the scope of the Rule to encompass municipal securities, the Commission is calling upon the Municipal Securities Rulemaking Board ("MSRB") to take all steps necessary to shorten the routine settlement cycle for municipal securities transactions by the effective date of Rule 15c6-1. In addition, the Commission has determined not to exempt other securities issued by mutual funds and private label mortgage-backed securities, or listed limited partnership interests. Finally, the Commission is modifying the Rule to authorize the Commission, by order, to exempt additional securities from the scope of Rule 15c6-1. For the reasons discussed in the Proposing Release and below, the Commission is adopting Rule 15c6-1, as revised, effective June 1, 1995.

      I. Background

      In recognition of the importance of broker-dealer settlement practices to the clearance and settlement process,3 the Securities Acts Amendments of 1975 ("1975 Amendments")4 authorized federal regulation of the time and method by which broker-dealers settle securities transactions. In adopting the 1975 Amendments, Congress directed the Commission to act in the national interest to achieve safety and efficiency in clearance and settlement. Section 17A of the 1934 Act directs the Commission "to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities (other than exempted securities)."5 That directive was revised by the Market Reform Act of 1990 6 to reflect the interdependence of options, futures, and equity markets that trade products involving securities or stock indexes.

      Currently, the settlement cycle in the U.S. varies among markets.7 Settlement of securities transactions on the fifth business day after the trade date ("T+5") is largely a function of market custom and industry practice. There is no federal rule that mandates a specific settlement cycle for securities transactions. Indeed, at one time, other settlement periods were considered "regular-way."8 Prior to 1953, settlement at the American Stock Exchange ("Amex") occurred on the second day after the trade date ("T+2"), and gradually moved to the third day after the trade date ("T+3") in 1953, T+4 in 1962, and to the present T+5 in 1968.9 The New York Stock Exchange ("NYSE") originally settled trades on T+1 in the 1920s, but settlement has gradually moved to T+5.10 Currently, self-regulatory organization ("SRO") rules define "regular way" settlement as settlement on T+5.11 At this time, however, and for the reasons set out below, the Commission believes T+3 settlement should be mandated.
      II. Basis and Purpose of the Rule
      A. Regulatory Basis

      The market break of 1987 highlighted the need for improvements in the nation's clearance and settlement system.12 The performance of the clearance and settlement system was viewed by many as a threat to the stability of the market during this time. During and after the week of October 19, 1987, over 50 introducing brokers failed, many as a result of the inability of customers to meet margin calls and pay settlement obligations.13 The failure to meet margin calls and/or transaction settlement obligations exposed some clearing firms to financial loss, thus threatening the entire financial system.14

      Shortly after the 1987 market break, then Treasury Secretary Nicholas F. Brady referred to the clearance and settlement system as the weakest link in the nation's financial system and noted that improving clearance and settlement would "help ensure that a securities market failure does not become a credit market failure."15 Gerald Corrigan, President of the Federal Reserve Bank of New York ("FRBNY"), noted: "[T]he greatest threat to the stability of the financial system as a whole [during the 1987 market break] was the danger of a major default in one of these clearing and settlement systems." 16

      The connection between a crisis in the clearance and settlement system and the financial industry was highlighted by the bankruptcy in 1990 of Drexel Burnham Lambert Group, the holding company parent of Drexel Burnham Lambert, Inc. ("Drexel"), a large broker-dealer. As described more fully in the Commission's testimony before the Senate Banking Committee,17 near gridlock developed in the mortgaged-backed securities market and in the corporate debt and equity markets where Drexel was an active participant. Drexel had significant positions in mortgage-backed securities that required physical delivery of certificates to settle and also in corporate equity and debt that could be liquidated by book-entry transfer. Lenders and counterparties, however, were reluctant to release both physical certificates and book-entry securities to Drexel. Those counterparties were concerned that the delivery of securities to Drexel against the promise of payment at the end of the day might result in the deliverer's inability to retrieve the securities if the deliverer did not receive payment because of an intervening event, such as the filing of a petition for bankruptcy by or against Drexel, or the assertion of a lien or set-off by one or more financial institutions handling those funds or securities.18

      The events that surrounded the subsequent liquidation of Drexel's positions in mortgage-backed and corporate securities highlighted two concerns-first, the risk that counterparty credit concerns could lead to gridlock in securities markets, even where regulators assured markets that a major participant is solvent; second, that these risks are not limited to markets where transactions are subject to netting by clearing corporations. These events forced the conclusion that the clearance and settlement system deserved immediate attention.19

      As noted by Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System ("Federal Reserve Board" or "Board"), "The importance of strong clearing and settlement systems cannot be overemphasized. This area was identified by the Brady Commission and others after the market break last year as a potential point of vulnerability in the U.S. financial system. The overloading of the* * * clearing systems last October induced breakdowns that dramatically increased uncertainty among investors and likely contributed to additional downward pressures on prices."20

      In the Proposing Release, the Commission set forth three reasons with adoption of Rule 15c6-1 would be necessary or appropriate. First, at any given point in time, fewer unsettled trades would be subject to credit and market risk, and there would be less time between trade execution and settlement for the value of those trades to deteriorate. Second, the proposed Rule would reduce the liquidity risk among the derivative and cash markets and reduce financing costs by allowing investors that participate in both markets to obtain the proceeds of securities transactions sooner. Finally, the Commission noted that a shorter settlement timeframe could encourage greater efficiency in clearing agency and broker-dealer operations.

      Commentators that support T+3 settlement believe that the new Rule would facilitate these goals. Commentators stated specifically that the Rule would significantly reduce settlement risk. The Federal Reserve Board stated that settlement systems for securities and other financial instruments are a potential source of systemic disturbance to financial markets and to the economy.21 In the Board's view, the key features of an ideal settlement system are the settlement of trades immediately after execution and payment in same-day funds, and compressing the settlement timeframe for corporate securities to three days from five days is an important and achievable step toward this ideal. Similarly, the FRBNY noted that shortening the settlement Cycle decreases the opportunity for adverse developments to occur between the execution and settlement of each trade, thus lowering the credit and market risks that can arise when settling individual transactions. A move to T+3 reduces the total volume and value of outstanding obligations in the settlement pipeline at any point in time; the FRBNY believes this will better insulate the financial sector from the potential systemic consequences of serious market disruptions.22

      Commentators stated also that the Rule will facilitate risk reduction by achieving closer conformity between the corporate securities markets and the markets for other securities that currently settle in fewer than five days (i.e., government securities and derivative securities), and will encourage market participants to achieve greater efficiencies in clearing agency and broker-dealer operations. For example, the Government Securities Clearing Corporation ("GSCC") stated that settlement risk can arise from dissimilarities in settlement cycles among markets as well as the length of a specific market's settlement cycles, which can lead to artificial delays in moving securities and make it more difficult to establish risk reduction mechanisms such as common netting and cross margining arrangements.23 The American Bankers Association echoed these views, noting that by reducing the lag between the settlement of derivatives and government securities and the settlement of corporate securities, investors that participate in both markets will be able to reduce their financing costs and obtain the proceeds of their securities transactions on a more timely basis.24

      The Commission believes that the benefits of three-day settlement will inure to all market participants. As noted in the Proposing Release, the value of securities positions can change suddenly causing a market participant to default on unsettled positions. Because the markets are interwoven through common members, default at one clearing corporation or by a major market participant or end-user25 could trigger additional failures, resulting in risk to the national clearance and settlement system ("system").26 This risk is even more acute given the growth of the over-the-counter derivative product markets where dealers shift risk exposure among major market participants in international centers and end-users.27 Finally, in a T+3 settlement environment, because the settlement date will be accelerated by two business days, a broker-dealer who executes a trade based on a customer's verbal agreement will be able to take action as much as two business days sooner than in a T+5 environment to mitigate losses in the event of the customer's cancellation.
      B. Cost of Systems and Operational Changes

      The Commission believes that the potential benefits from shortening the settlement cycle by two business days outweigh the costs associated with such a change. The benefits of a shorter settlement cycle include reduced credit, market, and systemic risk. Perhaps no single conclusion from the Bachmann Task Force ("Task Force") Report28 is more significant than the equation "Time = Risk." A shorter settlement cycle not only reduces the number of outstanding trades, but significantly changes how market participants calculate credit and market risk.

      Activity in the national clearance and settlement system measures in the tens of billions of dollars, with continuous-net-settlement ("CNS") processing at the National Securities Clearing Corporation ("NSCC") averaging over $22.5 billion in corporate equity and debt transactions a day. This activity creates considerable risk to clearing corporations, including credit risk, market risk on open contractual commitments, and systemic risk because clearing corporations interpose themselves between purchasers and sellers of securities. The Task Force found that the risk reduction to one clearing corporation, NSCC, from reducing the standard settlement cycle to T+3 in the event of the failure of an average large member could range from $6.5 million (or 58%) to $208 million (or 55%) in a worst case scenario.29 Equally significant, if the temporary insolvency of eleven average large firms were to occur on a typical trading day, T+3 would reduce the risk to NSCC by $72 million (or 59%) to $2.3 billion (or 55%) in a worst-case situation.30

      Notwithstanding these benefits, some commentators, generally small retail broker-dealers, thought that the costs involved in shortening the settlement cycle would outweigh the benefits. Although they were unable to quantify their estimated expenses with precision, these commentators noted problems with receipt of confirmation, payment by check, and possible financing costs resulting from the rule." Commentators supporting the Rule, including exchanges, the ABA, the Securities Industry Association ("SIA"), and a significant number of broker-dealers representing a large majority of the retail customer base indicated that the risk reduction benefits of Rule 15c6-1 were important to the national clearance and settlement system, and they therefore supported the Rule.

      The Commission is sensitive to the costs necessary for transition to a shorter settlement timeframe but on balance believes that the benefits to the financial system outweigh those costs. Moreover, the Commission believes Rule 15c6-1 creates an incentive for broker-dealers, particularly retail firms, to encourage timely customer payment and improve management of cash flows. With more than 19 months before the effective date of Rule 15c6-1, the Commission expects broker-dealers will have adequate notice to educate customers about the need for prompt payment and will have adequate time and incentive to implement changes to reduce the need for financing.

      As discussed in more detail in the Final Regulatory Flexibility Analysis ("FRFA"), a potentially large expense for retail firms likely will be interest expenses, while a few firms projected a cost increase from hiring additional personnel.32 Many of the cost estimates are based on assumptions of static circumstances. Firms generally projected costs, or claimed the move to T+3 settlement would be impossible for them, by assuming continued reliance upon the U.S. mail for delivery of confirmations and checks and no change in the behavior of customers who do not provide payment until receipt of confirmations; all without considering use of new practices and technologies.

      The Commission believes that alternatives exist to speed processing funds payments. For example, broker-dealers could encourage clients to deposit funds or securities with the broker-dealer upon placing an order, or to send funds and securities that day. Existing technology allows firms to advise customers immediately after trade execution what the net cost is. Sixteen commentators indicated that many customers will not pay by check until they see the written confirmation which means that funds won't arrive at the firm until after a "round-trip" mailing.33

      Alternatively, firms could establish facilities with local banks that would permit customers to authorize payments to firms using electronic funds transfer systems. One type of electronic funds transfer system is the Automated Clearing House ("ACH") system operated under the guidelines established by the National Automated Clearing House Association ("NACHA"),34 which is now used by several retail service industries for periodic and occasional funds payments. A study done in 1990 by the U.S. Working Committee of the Group of Thirty indicated that the costs of ACH may be offset by a reduction of internal costs arising from the processing of checks and elimination of financing costs currently incurred for checks received after T+5 and could be absorbed by the initiating firm.35 Several commentators noted that firms and customers may be uncomfortable using these systems for security, administrative, and other reasons.

      Several broker-dealers have expressed reluctance to use ACH because of liability that may result from a customer exercising his sixty-day right of rescission in the current ACH system. In response to this concern, NACHA recently passed a rule that will, effective April 1994, require a receiving depository financial institution to obtain a signed affidavit from a consumer when the consumer claims that a transaction to his or her account is unauthorized or that an authorization had been revoked. NACHA is confident that this rule amendment will make the ACH network more attractive for retail security transactions.

      Seven retail broker-dealers, including the three retail broker-dealers that believe the Rule is not necessary, suggested that the Commission adopt a daily mark-to-market instead of shortening the settlement cycle to three days. These commentators believe that a daily mark-to-market is the best way to reduce "real" systemic risk, i.e., market risk, as opposed to time risk. The commentators suggested that the Commission propose a pass-through mark-to-market similar to the one NSCC imposes on open trades in its CNS system.36

      The Commission believes the mark-to-market mechanism raises more concerns than it does solutions, inasmuch as it reduces, but does not eliminate, the potential risk of unsettled trades. Indeed, the Bachmann Task Force concluded that shortening the settlement cycle significantly reduced market risk to clearing agencies when a major participant defaults compared to a system that only required pass-through of daily marks-to-the-market. Moreover, it would appear to require firms to have the capacity to collect funds from customers to meet some or all mark-to-market obligations, particularly in volatile markets where the firm might not have enough working capital to meet the mark-to-market payment obligation. In addition, because the firm would not have any collateral to post, financing could be difficult to obtain except on an unsecured basis. In this regard, shortening the settlement cycle should be more manageable for firms because the firm can post the customer's securities as collateral for financing pending settlement with the customer.

      As stated above, the Commission believes that greater risk reduction can be achieved through reducing the settlement timeframe. While a risk reduction measure such as a mark-to-market may be more readily acceptable to the retail segment of the industry, the Commission believes that retail broker-dealers and their customers can achieve T+3 settlement given the extended transition period for implementation.
      C. Building Blocks

      Several commentators expressed concern that certain "building blocks" must be in place before the Commission mandated T+3 settlement. The building blocks most frequently cited were an interactive institutional delivery system at securities depositories (to allow institutional broker-dealers, money managers, and custodians to confirm trades, correct errors, and instruct release of funds and securities on an intraday basis), making as many securities as possible eligible for processing in those depositories, and improving retail customer payment systems to broker-dealers. Commentators also identified several regulatory initiatives they believe are predicates to T+3 settlement, including changes in the Commission's confirmation rule (Rule 10b-10), broker-dealer financial responsibility rules (Rules 15c3-1 and 15c3-3), and the Federal Reserve Board broker-dealer credit rules (Regulation T). These concerns are described briefly below and in greater detail in appendix 3.

      The Commission believes that none of these building blocks justify delaying the Commission's adoption of Rule 15c6-1. Efforts to implement several of the building blocks commentators identified are underway, and the Commission reasonably anticipates implementation will be completed before June 1, 1995, the effective date of Rule 15c6-1. Indeed, if the Commission were to defer action on this Rule, those efforts might well languish. Moreover, certain changes, particularly those that involve regulation, are best considered after a date for shortening the settlement cycle has been established, as the Commission is doing today. Of course, the Commission will monitor efforts to address these and other concerns.
      1. SRO and Industry Initiatives

      To facilitate three-day settlement, The Depository Trust Company ("DTC") is developing an interactive Institutional Delivery ("ID") system37 that would permit real-time confirmation/ affirmation of institutional trades. In March 1993, DTC distributed to its participants and other ID system users a design paper containing detailed descriptions of the various features of the interactive ID system as well as a tentative Implementation schedule for each. DTC proposes to introduce certain features in late 1993, with the interactive receipt of trade input and affirmations, and the interactive distribution of confirmations and Eligible/Ineligible Trade Reports, scheduled for the first half of 1994.

      Institutional trades comprise a large part of the U.S. securities market. As of the third quarter of 1992, institutions held 29% of the total outstanding corporate equity securities in the U.S., totaling over $1.4 trillion.38 During 1992, institutions accounted for two-thirds, and perhaps more, of daily share volume on the NYSE.39

      DTC's ID system is the workhorse for processing institutional trades in the national ID system, which links broker-dealers. Investment managers, and custodian banks through a network of electronic communications systems to speed confirmations, settlement instructions, and corrections among the agents for institutional investors. Currently, 81% of institutional transactions are affirmed by T+1, and 94% are affirmed by T+2. An interactive ID system will allow the processes of trade data input, confirmation output, affirmation, and issuance of settlement instructions to be completed in a matter of minutes. Consequently, with an interactive ID system in place, the number of institutional trades that are affirmed by T+2 could approach 100%. DTC has filed with the Commission a proposed rule change under section 19(b)(1) of the 1934 Act outlining its proposed enhancements to the ID system.40 Commission staff will review the proposal in light of the requirement under section 17A of the 1934 Act that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions and the safeguarding of funds and securities.

      Some commentators believe that T+3 settlement would be difficult to achieve without making all securities depository eligible. Currently, only a small fraction of securities listed on an exchange, the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or the over-the-counter ("OTC") Bulletin Board are not eligible for deposit at a registered clearing agency. Accordingly, the Commission does not believe this is a serious impediment to T+3 settlement, although the percentage of ineligible securities must remain minuscule. The Legal and Regulatory Subgroup of the U.S. Working Committee of the Group of Thirty ("Legal and Regulatory Subgroup") is drafting a uniform rule intended to incorporate a depository eligibility requirement into a listing standard for each registered national securities exchange and into the eligibility requirements of NASDAQ. The Commission expects the exchanges and the National Association of Securities Dealers ("NASD") to submit proposed rule changes to the Commission under section 18(b)(1) of the 1934 Act in the near future. Although the rules, if approved, would not reach settlement of transactions in securities that are not listed on a national exchange or NASDAQ, the Commission believes preliminarily that this effort could be an important step towards improving the efficiency of the national clearance and settlement system, and indeed towards facilitating T+3 settlement

      The Commission did not solicit comment on the desirability of settling securities transactions in same-day funds. However, six commentators stated that additional risk reduction could be gained by converting to a same-day funds payment system. DTC and NSCC recently distributed a memorandum outlining their plans and timetable for converting to same-day funds settlement and detailing how DTC and NSCC believe many aspects of the same-day funds settlement system will function. DTC and NSCC expect to implement the proposal by late 1994 or early 1995. The Commission supports the efforts of the SROs and will continue to work with the SROs towards early implementation of the initiatives.
      2. Regulatory Initiatives

      Some commentators suggested that implementation of a T+3 settlement period will require amendments to the Commission's confirmation rule, Rule 10b-10 adopted under the 1934 Act41 That rule, however, does not require the confirmation to be received prior to settlement, and therefore the current practice of sending the confirmation the day after trade date will satisfy Rule 10b-10 in a T+3 settlement cycle. Implementation of T+3, however, may alter the confirmation's utility as a customer invoice because confirmation delivery and transfer of customer funds and securities may not be possible within the three-day settlement period. The Commission therefore encourages broker-dealers to consider changes to their procedures for delivery of confirmations, as necessary, to accommodate three-day settlement. Such changes might include dispatch on trade date from offices within one-day delivery range of the customer or transmission of confirmations by facsimile or other electronic means.

      Commentators also asked the Commission to review Rules 15c3-1 and 15c3-3 to determine whether amendments will be required to conform those rules to a shorter settlement timeframe. Rule 15c3-142 establishes the net capital requirements for brokers and dealers. To determine net capital, Rule 15c3-1 requires a broker or a dealer to deduct from net worth, as computed in accordance with generally accepted accounting principles, assets not readily convertible into cash, including most unsecured receivables. A broker or a dealer also must deduct certain specific percentages from the securities and commodity positions that it carries in its proprietary account. The rule also requires that a failed to deliver contract that has been outstanding for a certain specified period of time be treated as a proprietary position of the broker-dealer and subject to a percentage deduction. This time period is dependent upon the time from the settlement date.43

      Rule 15c3-344 requires brokers and dealers to maintain possession or control of all customer fully paid and excess margin securities. As with Rule 15c3-1, some of the requirements imposed on brokers and dealers by Rule 15c3-3 are dependent upon the time from settlement. One commentator referred specifically to Rule 15c3-3(m).45 Rule 15c3-3(m) requires that a broker or dealer that has executed a sell order for a customer, and has not obtained possession of such securities from the customer within ten business days after the settlement date, must immediately close the transaction with the customer by purchasing securities of like kind and quantity. The Commission notes that Rule 15c8-1 merely changes the number of days following the trade date that settlement will occur. Therefore, being keyed to settlement date, Rules 15C3-1 and 15c3-3, including Rule 15c3-3(m), are consistent with Rule 15c6-1.

      Commentators urged the Commission, in conjunction with other regulators, to review Regulation T ("Reg T")46 to determine how, if at all, Reg T should be modified. Currently, Reg T does not require that any action be taken unless a customer fails to pay for securities within seven business days of the trade date. The commentators were concerned that Reg T as currently drafted could leave customers and broker-dealers with the impression that payment from the customer is not due in a three-day settlement environment until the expiration of the seven-day period specified by Reg T. The Commission understands that the Federal Reserve Board staff has undertaken a general review of Reg T, and the Commission has already asked the Federal Reserve Board staff informally to consider whether conforming amendments to Reg T would be necessary in a three-day settlement environment.

      In the Proposing Release, the Commission solicited comment on whether the Commission should require disclosure of whether the securities being offered in an initial public offering ("IPO") are depository eligible, and if not, why not. Five commentators supported the adoption of a disclosure requirement for IPOs as described above. Three commentators stated that a disclosure requirement was not necessary. None of the commentators, however, articulated the basis for their support. Nevertheless, the Commission believes that disclosure regarding whether or not an IPO will be eligible for deposit at a securities depository may be appropriate. Accordingly, the Commission is directing the staff to pursue requiring disclosure in those instances when neither the issuer nor the underwriter intends to make the securities depository eligible.
      D. Implementation Date

      The Commission believes that the benefits of a shorter settlement cycle exceed the costs associated with implementing that change, including the cost to firms to finance purchases by retail customers that traditionally rely on the U.S. mail service to deliver checks. The potential reduction in systemic risk coupled with the opportunity to provide smoother transmission of value from markets using a five-day settlement convention to markets using earlier settlement timeframes (such as the next-day settling government securities and derivative product markets) are essential to maintaining investor confidence and the premier competitive position of U.S. securities markets. As one commentator stated, "The speed with which market conditions can change today and the risk inherent in the five day settlement timeframe, warrant consideration of an earlier implementation date. We believe that the move to a three business day timeframe for settlements could and should occur earlier than 1996." 47 Although the transition to T+3 will entail costs and changes, the Commission believes the U.S. securities industry is more than equal to the challenge given current technology and financing sources.

      The Commission is adopting Rule 15c6-1 with an effective date of June 1, 1995. The Commission believes that changes in industry practice and custom such as an earlier settlement timeframe must involve marketplaces, marketplace regulators, and participants in those markets acting cooperatively. In connection with this, the Commission recognizes that some broker-dealers need to make operational and procedural changes to comply with a three-day settlement period and that certain building blocks must be in place prior to compressing the settlement cycle. In view of the Commission's desire to minimize the potential cost of complying with the Rule and the need for more work at the SRO and regulatory levels, the Commission is adopting an extended transition period to allow affected parties to implement necessary changes gradually.

      Forty of the commentators that support adoption of proposed Rule 15c6-1 suggested that the proposal he implemented on January 1, 1996, or earlier. The Cashiers' Association of Wall Street, Inc. ("Cashiers' Association"), the Public Securities Association ("PSA"), and Data Management Division of Wall Street ("Data Management Division") agreed that the proposal should be implemented in 1996 but believed implementing the proposal in January 1996 would place an excessive strain on broker-dealers' production systems.48 These commentators suggested implementing the proposed Rule late in the first quarter or second quarter of 1996 to allow broker-dealers more time to complete year-end processing.

      Eight commentators suggested specifically that the proposed Rule be deferred until the necessary building blocks are in place or for an indefinite period, three retail broker-dealers stated that the Rule was not necessary, and one broker-dealer specifically opposed implementation earlier than January 1, 1996.

      The Commission is adopting Rule 15c6-1 with an effective date of June 1. 1995, rather than January 1, 1996, for two principal reasons. First, the Commission believes it is better not to change the settlement cycle timeframe at the same time market participants, custodians, and investors might be distracted by other matters, such as year-end tax and trading concerns. Second, June 1, 1995, is reasonably close so as to draw the Immediate attention of those who must take steps to initiate compliance, and is reasonably far-off to permit completion of those preparatory steps. An effective date of January 1, 1996 or June 1, 1996, would continue to expose securities markets to risks that can and should be reduced. Accordingly, the Commission believes a 19 month delay in the effective date of Rule 15c6-1 is appropriate. Nevertheless, the Commission will monitor industry efforts toward implementation and will take all appropriate steps in that regard.

      As stated above, the Commission encourages broker-dealers who wish to limit financing costs or the use of overnight mail to explore the available alternatives to payment by check through the U.S. mail. In addition, the Commission believes that customer education regarding those alternatives is paramount to successful implementation of T+3 settlement. For example, broker-dealers can require clients to deposit funds or securities upon placing an order, educate customers on the necessity of providing funds earlier, and emphasize the usefulness of In-house brokerage accounts. Alternatively, broker-dealers could encourage customers to use an electronic payment system, such as the ACH system, to pay for transactions.

      The Commission recognizes that it must play its part in facilitating a smooth transition to shorter securities settlements. Adoption of Rule 15c6-1 may entail expense and may be unpopular among those who would prefer to see no change in current practice or would prefer to see next-day and even same-day settlement prevail. Reducing systemic risk is important to the safety and vitality of securities markets, and the Commission's efforts and resources remain committed to those goals. The Commission invites a continuing dialogue and partnership with all interested parties.
      III. Scope of Rule 15c6-1
      A. Application of Rule 15c6-1 to Municipal Securities, Limited Partnership Interests, New Issues, Mutual Funds, and Mortgage-Backed Securities

      The Commission received approximately 66 comment letters addressing the scope of Rule 15c6-1. Generally, those commentators were supportive of the Commission's efforts to include a broad range of products within a shortened settlement cycle. The Commission has considered these comments, and for the reasons discussed below, the Commission believes that Rule 15c6-1 appropriately applies to securities issued by mutual funds, private-label mortgage-backed securities, and limited partnership interests that are listed on an exchange. The Rule does not apply to municipal securities, and the Commission has determined that, in addition, unlisted limited partnership interests and new issues should be exempt from the Rule for the reasons discussed below. Finally, the Rule has been revised to provide that the Commission may, by order, exempt additional securities from the scope of the Rule.
      1. New Issues

      Several commentators voiced concerns that new issues of securities49 could not be settled by T+3 due to the need to deliver a prospectus prior to settlement.50 Specifically, commentators have indicated that because the prospectus cannot be printed prior to the trade date (the date on which the securities are priced), the prospectus printing and delivery process cannot be completed within a T+3 timeframe. The problems described by commentators would seem to be specific to firm commitment offerings where the underwriter must make payment with its own funds to the issuer on a specified date, whether or not its customers have purchased and paid for the securities.51

      To address this problem, the Commission is modifying the Rule to provide a limited exemption from T+3 for the sale of securities for cash pursuant to firm commitment offerings.52 The exemption is limited to sales to an underwriter by the issuer and initial sales by members of the underwriting syndicate and selling group. Any secondary resale of such securities must be settled within T+3.

      The Commission recognizes that the comment process may not have identified all situations or types of trades where settlement on T+3 would be problematic. Accordingly, the Rule has been revised to authorize the Commission to exempt, by order, additional types of trades from the scope of Rule 15c6-1.53 This revision and the exemption for firm commitment offerings should assure that the Rule will not interfere unduly with the settlement of securities whose characteristics make it difficult to operate within the framework of Rule 15c6-1.
      2. Municipal Securities

      In proposing Rule 15c6-1, the Commission invited commentators to address the merits of including municipal securities within the scope of the Rule. Due to differences between the corporate and municipal securities markets and the unique role the MSRB has in overseeing the municipal securities market, and based in part on comments received, the Commission has determined not to include municipal securities within the scope of Rule 15c6-l. The Commission makes this determination, however, with the expectation that the MSRB will take the lead in implementing three-day settlement of municipal securities by June 1, 1995, the implementation date of the new Rule.

      Over fifty commentators favored including municipal securities within the scope of the Rule. Those commentators believe that maintaining separate settlement cycles for corporate and municipal securities is unnecessary and would impose significant cost and operational difficulties on industry participants.

      Several other commentators favor excluding municipal securities from the scope of Rule 15c6-1, citing the many special features of the municipal securities markets. Those features include a lower confirmation/ affirmation percentage of transactions in municipal securities than corporate securities, lack of CUSIP numbers in many municipal securities,54 non-depository eligibility of many municipal issues, and the greater reliance on confirmations by purchasing investors.

      The Commission believes that the benefits of reduced systemic, market, and credit risk justify reducing the settlement timeframe for municipal securities from five to three business days consistent with Rule 1SC6-1. The Commission recognizes, however, that the differences between the corporate and municipal securities markets may justify a different approach to implementing T+3 settlement for municipal securities than corporate securities. For example, while publicly-traded corporate debt issuances number in the thousands, there are over one million municipal securities "maturities," each of which is a separate security for purposes of trade clearance and settlement and not all of which are depository eligible. In addition, approximately 80,000 entities issue municipal securities, which are not subject to the provisions of the Securities Act of 1933 ("1933 Act") and are exempted from many provisions of the 1934 Act.

      Despite these differences, significant progress has been made towards more efficient, automated clearance and settlement of municipal securities.55 First, the Commission understands that the system changes at clearing agencies necessary for T+3 settlement of municipal securities should be functional by July 1, 1994. Second, as a result of recent changes to MSRB rules, most, if not all municipal securities dealers and institutional investors have access (directly or through correspondents) to clearing agencies for automated clearance, confirmation, and settlement of their municipal securities trades. Third, only a fraction of newly-issued municipal securities are not routinely made eligible for deposit at securities depositories, and efforts are underway to address the remaining newly-issued securities. This progress has been the result of cooperative efforts by the Commission, the MSRB, clearing agencies, and their members.

      Although commentators have raised concerns about the differences between municipal and other debt securities, the Commission believes that these differences can be overcome. For example, it may be appropriate to consider exempting certain types of municipal securities trades for a certain amount of time. Similarly, it might be appropriate to explore alternatives to the confirmation as the means of identifying securities that have been sold and as a risk disclosure document. It might also be appropriate to consider exemptions for trades in connection with firm commitment underwritings and for trades in securities for which CUSIP numbers are not required.

      The Commission also understands commentator concern about potential costs to municipal securities dealers, such as financing retail customer purchase transactions pending receipt of payment from customers. With sufficient notice, the Commission believes that the municipal securities industry can identify and address these costs in ways similar to other broker-dealers.

      In summary, the Commission is confident that municipal securities dealers and market participants, under the guidance of the MSRB, can accomplish the goal of shortening the settlement timeframe by two business days and that regular-way settlement for municipal securities can be subject to the same timetable as other securities. Accordingly, the Commission is requesting a report from the MSRB within six months outlining a time schedule in which the MSRB intends to implement T+3 in the municipal securities market.
      3. Limited Partnership Interests

      The Commission invited comment as to whether limited partnership interests should be included in the scope of Rule 15c6-1. Eleven commentators supported inclusion of limited partnership interests, citing the difficulty caused by different settlement dates for different types of securities. Eight commentators opposed the inclusion of limited partnership interests.

      Many commentators distinguished between limited partnership interests that are listed on an exchange or on NASDAQ ("listed limited partnerships") and those that are not listed ("unlisted limited partnerships"). Six commentators stated that listed limited partnerships should be included in the scope of the Rule, while no commentator specifically stated that listed limited partnerships should be excluded from the scope of the Rule. Six commentators stated that unlisted limited partnerships should be excluded from the scope of the Rule, while no commentator specifically stated that unlisted limited partnerships should be included in the scope of the Rule.

      Accordingly, the Commission is modifying the Rule to distinguish between trades involving listed versus unlisted limited partnership interests, including listed limited partnership interests and excluding unlisted limited partnership interests. First, the majority of commentators appear to support the inclusion of listed limited partnerships. Second, as exchange or NASDAQ traded securities, these interests currently settle in a five-day timeframe and exclusion of listed limited partnerships from Rule 15c6-1 would unnecessarily contribute to the bifurcation of the settlement cycle in these markets. Under Rule 15c6-1, therefore, listed limited partnerships will be required to settle by T+3.

      Many commentators expressed concern, however, about the ability to settle unlisted limited partnerships by T+3, indicating that extended time periods are required to settle trades in these instruments. In order to settle, transfer documentation must be obtained in order to determine whether the transfer of ownership is permitted on the books and records of the issuer.56 In addition, several commentators noted that there is not an active secondary market in unlisted limited partnership interests. Therefore, the Commission has determined to exempt unlisted limited partnership interests from the Rule.
      4. Securities Issued by Mutual Funds

      As proposed, Rule 15c6-1 would include securities issued by investment companies.57 The Commission noted that mutual funds often permit customers to purchase shares by telephone and requested comment on whether a T+3 settlement timeframe would make it necessary for mutual funds and broker-dealers to implement operational changes to confirm the sale to the investor, to receive the proceeds, and to settle the transaction.58 Twenty-five commentators believed the proposed three-day settlement should be applied to securities issued by mutual funds. These commentators stated that the exclusion or delayed implementation of a shortened settlement cycle for mutual funds would complicate rather than simplify the transition to T+3. Seven commentators believed the Rule should provide an exemption for securities issued by mutual funds.

      The Commission has determined that Rule 15c6-1 should apply to broker-dealer contracts for the purchase and sale of securities issued by investment companies, including mutual funds shares, A broker-dealer selling securities issued by a closed-end fund or unit investment trust could avail itself of the exemption for new issues in a firm commitment underwriting under Rule 15c6-1(b). Thus, the new issue exemption would cover underwritings of closed-end funds and unit investment trusts but not open-end funds.

      The Commission believes it is appropriate to include mutual fund transactions because mutual fund shares represent a significant and growing percentage of a broker-dealer's transactions, Even though some mutual fund shares may represent diversified portfolios, contracts for the purchase and sale of these securities pose many of the same systemic, market, and credit risk concerns as other securities subject to Rule 15c6-1, and in the event of a broker-dealer insolvency, these contracts will also need to be resolved. In addition, many, if not most, mutual fund purchases and redemptions are now processed through the centralized "FUND SERV" system operated by NSCC.59 Although NSCC does not formally guarantee performance on contracts cleared in the "FUND SERV" service, its central role, coupled with potential changes to payment settlement timeframes, suggests that reducing the "FUND SERV" settlement timeframe to three business days would significantly reduce risk to the national clearance and settlement system,

      Several commentators expressed concern that shortening the timeframe for redemptions by two business days would create liquidity concerns in the event of unexpectedly high volumes of redemptions. The commentators noted that although mutual funds generally meet redemption requests from cash on hand, a particularly large volume of redemption requests would require mutual funds to sell securities from their portfolios, The commentators maintain that application of the T+3 settlement requirement under these circumstances could be problematic, particularly for mutual funds with portfolios heavily invested in securities not subject to T+3 settlement.

      The Commission shares commentator concern about the potential for redemptions to create a liquidity crisis, but believes several factors mitigate these concerns, First, the Commission expects that mutual fund managers will account for the risk of a liquidity crisis in planning their portfolio investments, Second, the Commission is delaying the effective date of Rule 15c6-1 by more than nineteen months, which should permit fund managers sufficient time to identify potential exposures and take appropriate remedial steps. Third, the primary components of mutual fund portfolio assets should, by June 1, 1995, settle within three business days of the date of the trade (including U.S. government, corporate equity and debt, and municipal securities). Indeed, as discussed above, the Commission expects the MSRB will act to implement T+3 settlement for municipal securities by June 1, 1995, consistent with Rule 15c6-1. Finally, the Commission will retain authority to exempt, by order, specific trades or classes of trades from the requirement of Rule 15c6-1.

      Several commentators raised concerns about whether application of Rule 15c6-1 would be consistent with obligations and requirements under section 22(e)60 of the Investment Company Act of 1940 ("1940 Act") and section 11(d)(1) of the 1934 Act.61 Section 22(e) generally provides that investment companies may not suspend the right of redemption, or postpone payment or satisfaction upon redemption of any redeemable security for more than seven days after tender of the security being redeemed, except under certain circumstances.

      The Commission believes that the primary purpose of the seven day period prescribed in section 22(e) is to set forth an outside limit on the amount of time that an investment company may take to satisfy a redeeming shareholder's request for payment. Further, the Commission believes that the underlying rationale of section 22(e) is to ensure that "redeemable" securities are, in fact, redeemable, and that that rationale does not conflict with the purposes of Rule 15c6-1.62 Moreover, industry practice regarding the settlement timeframe for securities transactions, including transactions in mutual funds, has fluctuated since the enactment of the 1940 Act. Accordingly, while the commentators may contend that the seven-day period provided by section 22(e) is analogous to the current industry convention of effecting settlement on the fifth business day following trade date, the fact that those periods are the same today is merely fortuitous.

      Section 11(d)(1) generally prohibits a person that acts as both a broker and a dealer from extending credit to a customer to allow that customer to purchase securities issued by a mutual fund. The Commission preliminarily believes these requirements should not be an obstacle to reducing the settlement timeframe for trades in mutual fund shares. At the time these requirements were enacted, the settlement timeframe was T+2. Commentators have discussed with the Commission staff the potential application of these provisions and the staff expect to address these concerns before June 1, 1995. 5. Mortgage-Backed Securities

      As proposed in February 1993, private-label mortgage backed securities ("MBS")63 would fall within the ambit of Rule 15c6-1. The Rule would not, however, apply to those MBSs issued by government agencies and government sponsored enterprises ("GSE").64 In the Proposing Release, the Commission invited commentators to consider whether adopting a T+3 settlement timeframe would cause difficulties for issuers and investors in the MBS market and to consider generally whether additional safeguards relating to clearance and settlement of MBSs would be appropriate.

      The commentators generally were supportive of applying the proposed Rule to MBSs. Some of the commentators stated that the Rule should apply to MBSs issued by government agencies and GSEs as well as to private-label collateralized mortgage obligations ("CMO"). The PSA stated that although it would prefer that all MBSs settle on the same basis, the bifurcation between private-label MBSs on the one hand, and government agency and GSE MBSs on the other, did not present an insurmountable barrier. The PSA stated that the larger firms probably would adopt a T+3 settlement standard for all MBSs, whether or not subject to the Rule.

      Commentators identified several areas of concern with respect to MBSs. The first relates to the availability of factors,65 and whether that could create a barrier for private-label MBSs to move to T+3. Transactions that are effected before the current month's factor is available must go through a cancel and correct procedure to ensure that the correct amount of principal and interest is attributed to the investor for that month. Shortening the settlement cycle could make it less likely that the current month's factor will be available for a given transaction, which would be reflected by more cancel and correct transactions.

      The Commission notes, along with The PSA, that for private-label MBSs settling through DTC, DTC's CMO Trade Adjustment System66 keeps track of trades settling with the previous month's factor and automatically adjusts those trades after the current factor is available. Over three-quarters of outstanding private-label CMOs are on deposit at DTC, and the CMO Trade Adjustment System is used regularly among participants.67

      The Commission believes that trades in private-label CMOs should be included within the scope of Rule 15c6-1. First, although CMO trades could require some adjustments to reflect changing principal payments in underlying collateral, existing trade adjustment and reconciliation systems and practices appear adequate. Second, the potential for gridlock in the event of a major participant default68 warrants the exchange of as much value as soon as possible in these markets, even if that means that some post-trade adjustment is necessary. This is even more important given the increasing complexity of CMO products, the absence of transparent markets for establishing fair value, and concern about the liquidity of CMO markets in the event of a major market event.

      Commentators also expressed concern about how contracts for purchase or sale of mortgage pass-throughs in the to-be-announced ("TBA") market would be treated under Rule 15c6-1. Trading in this market occurs without providing specific mortgage pool information. Among other things, TBA trading allows an underwriter of a private-label mortgage pass-through security to acquire the financing necessary to assemble the pool of mortgages that will comprise a given mortgage pass-through security.69 In response to those concerns, the Commission will interpret Rule 15c6-1 to require that settlement of mortgage pass-through securities occur within three days after a specific pool is contract. Under current TBA market conventions, as specified in PSA Guidelines,70 firms must designate specific pools allocated to a TBA transaction at least 48 hours before settlement.71 Firms following this convention will be deemed to comply with Rule 15c6-1.

      In summary, all private-label MBSs shall be subject to the T+3 settlement requirement. TBA trades will not be subject to the Rule; instead, once a pool is designated, settlement must occur within three days. New issuances of CMOs that are the subject of a firm commitment underwriting will be subject to the settlement timeframe applicable to other initial issuances as provided in Rule 15c6-1(b).
      B. Ability of Broker-Dealers to Override T+3 Settlement

      As proposed, Rule 15c6-1 provides that, unless otherwise expressly agreed by the parties at the time of the transaction, a broker or dealer is prohibited from entering into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers' acceptance, or commercial bill) that provides for payment of funds and delivery of securities later than T+3. As described above, the proposed Rule allows a broker or dealer to agree that settlement will take place in more than three business days, when the agreement is express and reached at the time of the transaction.

      Several letters from individual commentators and approximately 1,550 substantially similar letters expressed concern that the ability to override the three day settlement requirement could create a market inefficiency that could be exploited by some broker-dealers. Those commentators suggested that the ability of broker-dealers to override the three day settlement requirement for specific transactions will permit broker-dealers to establish two classes of investors, providing advantages to investors holding with the broker-dealer in indirect or beneficial ownership form over those investors choosing to own shares of stock in direct ownership form.

      Several commentators suggested eliminating from the Rule the ability to override the three day settlement requirement. The large majority of the letters, however, did not suggest eliminating the override provision, but rather encouraged the Commission to ensure that broker-dealers do not use the override provision to discourage direct forms of securities ownership,

      The override provision was intended to apply only to unusual transactions, such as seller's option trades, that typically settle as many as sixty days after execution as specified by the parties to the trade at execution. It was not intended to permit broker-dealers to specify before execution of specific trades that a group of trades will settle in a timeframe other than T+3. In general, broker-dealers will not be able to contract out of the three day settlement timeframe.

      The Commission supports industry efforts to develop products which will enhance the ability of retail investors to choose among suitable forms of ownership. The Commission, moreover, intends for the choice of securities ownership to be driven by market forces, and not for the override provision of Rule 15c6-1 to be used by market participants to prefer one form of ownership over another. The Commission will continue to monitor the use of the override provision of Rule 15c6-1, and, if such abuses are detected, will consider additional rulemaking.
      IV. Competition Findings

      Section 23(a)(2) of the 1934 Act72 requires the Commission, in adopting rules under the 1934 Act, to consider the anti-competitive effects of such rules, if any, and to balance any impact against the regulatory benefits gained in terms of farthering the purposes of the 1934 Act. Several commentators, primarily small retail broker-dealers, raised concerns that Rule 15c6-1 would increase their costs, thereby making it more difficult to compete with larger broker-dealers. The Commission notes that Rule 15c6-1 does not distinguish between categories of broker-dealers, and believes that the costs created would be imposed evenly upon larger and smaller broker-dealer firms. The costs may be higher for certain firms, regardless of their size, that have not invested in necessary infrastructure and technology.73 These costs would be necessary in assuring that the purpose of the Rule, risk reduction, is met. The Commission has considered Rule 15c6-1 in light of the standard cited in section 23(a)(2) and believes that adoption of the Rule will not impose any burden on competition not necessary or appropriate in furtherance of the 1934 Act.
      V. Conclusion

      The Commission believes that Rule 15c6-1 will reduce credit and liquidity risks, reduce the settlement gap between the corporate securities market and the government securities and derivatives markets, and increase efficiency in broker-dealer and clearing agency operations. Some broker-dealers currently have the operational capability to comply with three-day settlement. However, where a broker-dealer's procedures currently are not designed to accommodate three-day settlement, the facilities to expedite the settlement process do exist (e.g., bank wire systems or overnight postal courier services). The Commission believes that broker-dealers and their customers can make the necessary systems and operational changes to comply with three-day settlement given the extended transition period for implementation of the Rule. The Commission recognizes, however, that the extent and nature of modifications depends on the specific needs of each firm. Nevertheless, the Commission recommends that, as necessary, industry participants that need to make significant systems or operational changes evaluate their progress periodically as the implementation date for T+3 approaches and make adjustments as appropriate to ensure a smooth transition to T+3 settlement.
      VI. Summary of Final Regulatory Flexibility Analysis

      The Commission has prepared a Final Regulatory Flexibility Analysis ("FRFA") regarding Rule 15c6-1, in accordance with5 U.S.C. 604. The FRFA notes the potential costs of operational and procedural changes that may be necessary to comply with the Rule. In addition, the FRFA notes the importance of the risk reduction that will result from a shorter settlement cycle. The Commission believes that the benefits of Rule 15C6-1 outweigh the costs that will be incurred by industry participants in complying with the Rule.

      A copy of the FRFA may be obtained by contacting Christine Sibille, Attorney, Branch of Debt and International Clearing Agency Regulation, Office of Securities Processing Regulation, Division of Market Regulation, Commission, 450 Fifth Street, NW., Mail Stop 5-1, Washington, DC 20549.

      List of Subjects

      17 CFR Part 200

      Administrative practice and procedure, Authority delegations (Government agencies), Organizations and functions (Government organizations).

      17 CFR Part 240

      Brokers and dealers, Registration and regulation, Securities.

      Text of the Amendments

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

      PART 200-ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS

      1. The authority citation for part 200, subpart A continues to read in part as follows:

      Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 78ll(d), 79t, 77sss, 80a-37, 80b-11, unless otherwise noted.

      * * * * *
      2. Section 200.30-3 is amended by adding paragraph (a)(55) to read as follows:

      § 200.30-3 Delegation of authority to Director of Division of Market Regulation.

      * * * * *
      (a) * * *
      (55) Pursuant to § 240.15c6-1 of this chapter, taking into account then existing market practices, to exempt contracts for the purchase or sale of any securities from the requirements of § 240.15c6-1(a) of this chapter.

      * * * * *

      PART 240-GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

      1. The authority citation for part 240 continues to read in part as follows:

      Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 78ll(d), 79q, 79t, B0a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and 80b-11, unless otherwise noted.

      * * * * *

      2. Section 240.15c6-1 is added to read as follows:

      § 240.15c6-1 Settlement cycle.
      (a) Except as provided in paragraph (b) of this section, a broker or dealer shall not effect or enter into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers' acceptances, or commercial bills) that provides for payment of funds and delivery of securities later than the third business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction.
      (b) Paragraph (a) of this section shall not apply to contracts:
      (1) For the purchase or sale of limited partnership interests that are not listed on an exchange or for which quotations are not disseminated through an automated quotation system of a registered securities association;
      (2) For the sale for cash of securities by an issuer to an underwriter pursuant to a firm commitment offering registered under the Securities Act of 1933, or the sale to an initial purchaser by a broker-dealer participating in such offering; or
      (3) For the purchase or sale of securities that the Commission may from time to time, taking into account then existing market practices, exempt by order from the requirements of paragraph (a) of this section, either unconditionally or on specified terms and conditions, if the Commission determines that such exemption is consistent with the public interest and the protection of investors.

      Dated: October 6, 1993.

      By the Commission.

      Margaret H. McFarland,

      Deputy Secretary.


      3 The term "clearance" includes the comparison of data regarding the terms of settlement of securities transactions and the allocation of securities settlement responsibilities. After trade comparison, most trades clear through a continuous net settlement system ("CNS") operated by a clearing corporation registered with the Commission under Section 17A of the 1934 Act. Under CNS, the clearing corporation nets each clearing member's purchases and sales to arrive at a daily net receive or deliver obligation for each security and a daily net settlement payment obligation. The term "settlement" includes the delivery of securities in exchange for funds, pursuant to the terms of the original transaction, and the custody of securities. See section 3(a)(23)(A) of the 1934 Act, 15 U.S.C. 78c(a)(23)(A).

      4 Public Law 94-29 section 16, 89 Stat. 146.

      5 See 15 U.S.C. § 78o, 78q-1, and 78w.

      6 Public Law 101-432.104 Stat. 963.

      7 Settlement in the futures, options, and government securities markets occurs on the day after trade date ("T+1") using same-day funds. Settlement of most trades in corporate and municipal securities, on the other hand, takes place on the fifth business day after the trade date ("T+5") with money payments among financial intermediaries made in next-day funds (i.e., payment by means of certified checks passing between the clearing corporation and its members). Thus, financial intermediaries have good funds on "T+6."

      8 See e.g., Remarks of Commissioner Mary L. Schapiro before the Securities Industry Association ("SIA") Regional Conference (March 20, 1991), stating that "[p]rior to 1968, equity transactions in the U.S. were settled on the fourth day after the trade date ("T+4"), without causing undue harm to retail customers."

      9 Letter from Mary Ann Callahan, Vice President/ Director of International Development, National Securities Clearing Corporation ("NSCC"), to Toshitsugu Shimizu, Assistant Manager, Tokyo Stock Exchange (June 30, 1987).

      10 Frank w. Curran, Address to Executives and Officers of Korea Securities Industry (March 28, 1974).

      11 See e.g., National Association of Securities Dealers, Inc. Uniform Practice Code 1 3512, section 12 and New York Stock Exchange Rule 64.

      12 Commentators opposed to Rule 15C6-1 predominantly expressed concern about the cost implications of the rule, which are addressed in section II.B of this release. Fewer than ten commentators indicated that the rule was unnecessary or that Commission goals could be achieved by other means. See discussion, infra, at pp. 19-21.

      13 Division of Market Regulation, The October 1987 Market Break ("Market Break Report") 10-20 (February 1988).

      14 Id. at 10-16. Clearing firms stand between the clearing corporation, on the one side, and market professionals, introducing firms, and public investors on the other. Many customers, institutional and otherwise, open their accounts with an introducing broker. Introducing brokers use executing brokers (which are usually members of a clearing agency) to execute and clear customer trades. If the customer fails to meet margin calls made by the executing firm or fails to pay on T+5 the settlement amount for securities it has purchased, the introducing or executing broker must pay that debt. If the amount exceeds the introducing broker's ability to pay and it fails, the clearing member executing firm will be responsible for the customer's debt. If the clearing member fails to meet its obligation to the clearing agency, the clearing agency will suspend and cease to act for that member. Clearing agencies ceased to act for three clearing members during the week of October 19, 1987. The Depository Trust Company ("DTC") and NSCC ceased to act for Metropolitan Securities ("Metropolitan"), American Investors Group, and H.B. Shaine and Co. ("Shaine"). The Options Clearing Corporation ("OCC") ceased to act for Shaine, and MBS Clearing Corporation ceased to act for Metropolitan. Id.

      15 The Market Reform Act of 1989: Joint Hearings on S. 648 before the Subcomm. on Securities and the Senate Comm. on Banking, Housing and Urban Affairs, 101st Cong., 1st Sess. 225 (Oct. 26, 1969) (statement of Nicholas F. Brady, Secretary of the Treasury).

      16 Luncheon Address: Perspectives on Payment System Risk Reduction by £. Gerald Corrigan, President, FRBNY, reprinted in The U.S. Payment System: Efficiency, Risk and the Role of the Federal Reserve 129-30 (1990).

      17 The Issues Surrounding the Collapse of Drexel Burnham Lambert, Hearings before the United States Congress, Senate Committee on Banking, Housing, and Urban Affairs, 101st Cong., 2d Sess. 5 (1990) (testimony of Richard C. Breeden, Chairman, Commission) ("Drexel testimony").

      18 Ordinarily, lenders who accept securities hi DTC's pledge program release those securities to the debtor's control without requiring full payment of outstanding loans, provided payment (including refunding through new pledge loans) occurs before the end of the day. This permits the debtor (typically, a broker-dealer) to deliver the pledged securities against payment to another participant or to NSCC during both of DTC's delivery processing cycles. Because settlement of transactions typically starts with delivery of securities, with the deliverer assuming the risk that payment will be made at or before the end of the day, release of pledged collateral can help maximize the number of trades that settle while shifting some credit risk to the deliverer's bank.

      When Drexel experienced financial difficulties, however, its lenders and counterparties took steps to reduce their credit risk exposure to Drexel. In particular, because of concern about what might happen during the day or the quality of collateral that might be posted at the end of the day, lenders insisted upon repayment before release of securities, which meant Drexel could not settle open transactions even as it was winding down its portfolio. See Drexel testimony at 47.

      19 Initiatives in clearance and settlement reform undertaken since 1967 are outlined in Appendix 2.

      20 See Remarks by Alan Greenspan before the Annual Convention of the SIA (November 30, 1988).

      21 Letter from William W. Wiles, Secretary to the Board, to Jonathan G. Katz, Secretary, Commission (September 1, 1993). See also Bank for International Settlements, Delivery Versus Payment in Securities Settlement Systems (September 1992).

      22 Letter from William J. McDonough, President, FRBNY, to Jonathan G. Katz, Secretary, Commission (August 27, 1993).

      23 Letter from Jeffrey F. Ingber, General Counsel and Secretary, GSCC, to Jonathan G. Kali, Secretary, Commission (June 30, 1993).

      24 Letter from Sarah A. Miller, Senior Government Relations Counsel, American Bankers Association, to Jonathan G. Katz (June 30.1993].

      25 See Securities Exchange Act Release No. 3225(1 (May 14, 1993), 56 FR 27486 (concept release regarding changes to Commission's net capital treatment of derivative products); and the Group of Thirty, Derivatives: Practices and Principles (July 1993).

      26 Clearing corporations function as, among other things, post-trade processing facilities and guarantors of post-trade settlements. Upon reporting matched trade information to its members, the clearing corporation becomes the counterparty to every trade and guarantees payment and delivery. See Securities Exchange Act Release No. 20221 (September 23, 1983), 48 FR 45167 ("Full Registration Order"). To protect against the credit risk presented by unsettled positions, clearing corporations obtain contributions from their members to a pool of funds designed to provide a ready source of liquidity in case of a member default See Securities Exchange Act Release Nos. 16900 (June 17, 1980), 49 FR 4192 (announcing the Division of Market Regulation's standards for the registration of clearing agencies); 20221 supra; and 30879 (July 1, 1992), 97 FR 30279 (order approving modifications to the CNS portions of NSCC, Midwest Clearing Corporation, and Securities Clearing Corporation of Philadelphia clearing fund formulas). Any sizable loss in liquidating the open commitments of a defaulting member, however, would be assessed pro rata against all clearing members. See e.g., NSCC Rule 4. See also, Market Break Report, Chapter 10.

      27 Task Force on Securities Settlement Report to the Governor of The Bank of England (June 1993).

      28 Bachmann Task Force, Report of the Bachmann Task Force on Clearance and Settlement in the U.S. Securities Markets ("Task Force Report") (May 1982).

      29 Task Force Report at 35.

      30 Id. at 38.

      31 Based on the information received from commentators upon staff requests for further data, the firms' estimated costs ranged from SO to $5 million. Three firms stated that they expected to incur little or no cost Other firms cited annual cost figures as follows: $12,000, $20,000, $99,000, $75-100,000, $87,000, $99,300, $1 million, $3.8 million, and $9 million.

      Two clearing firms provided specific cost data. One clearing firm stated that it would have initial start-up costs of approximately one million dollars to make changes to its cash management and trade processing systems and procedures. Letter from George Minnig, Managing Director, Penning Division of Donaldson, Lufkin and Jenrette Securities Corporation ("Pershing"), to Jonathan G. Katz, Secretary, Commission (June 21, 1993). The other responding clearing firm stated that its informal analysis indicated that it would have annual costs, mainly based on financing late payments, of approximately five million dollars. Letter from Jeffrey R. Larson, Senior Legal Counsel, Fidelity Investments Institutional Services Company, Inc. ("Fidelity"), to Jonathan G. Katz, Secretary, Commission (June 24, 1993).

      32 The Commission notes that the cost data received in general were very rough estimates, not based on detailed studies, and the Commission expects that actual costs will vary among firms depending on many factors including the nature and location of the firm's clientele and the level of technology employed by the firm.

      33 In addition, three commentators indicated that the customer needed to review the confirmation to eliminate unauthorized transactions. Commentators raise valid concerns about unauthorized transactions and the utility of the written confirmation in detecting unauthorized transactions. Nevertheless, unauthorized transactions generally represent a small percentage of all trades executed each day. and the key to avoiding those transactions is prompt communication of key trade terms to the customer, which could be accomplished orally as well as in writing. Even more to the point, firms should take corrective action whenever they discover unauthorized transactions in customer accounts without regard to when the customer receives a confirmation.

      34 ACH is a domestic electronic payment system operated under the direction of NACHA and is utilized by over 22.000 hanks, thrifts, and other depository financial institutions on behalf of corporations and individuals.

      35 U.S. Working Committee, Implementing the Group of Thirty Recommendations in the United States (November 1890).

      36 See e.g., letter from Robert C Disset, Director. Operations Division, A.G. Edwards & Sons, Inc. ("A.G. Edwards"), to Jonathan G. Katz, Secretary, Commission (June 1, 1993).

      37 In the ID system, broken notify the depository of trades made by an investment manager on behalf of an institutional client. The investment manager and the client's custodian banks are notified of too trade and asked to affirm that the information is correct. Trades affirmed by T+3 settle automatically by book-entry at the depository on T+5.

      The majority of settlements between broker-dealers and their institutional customers are processed through the National Institutional Delivery System ("national ID system" or "NIDS") which includes links with three securities depositories (Midwest Securities Trust Company, Philadelphia Depository Trust Company, and DTC) and their member broker-dealers. See, e.g. Securities Exchange Act Release No. 25120 (November 13, 1887), 52 FR 44506.

      38 NYSE, Fact Book for the Year 1992 (April 1993) at 28.

      39 For the first six months of 1983. an average of 284 million shares wen traded daily on the NYSE.

      40 See File No. SR-DTC-93-07.

      41 17 CFR 240.10b-10.

      42 17 CFR 240.15c3-1.

      43 See Rule 15c3-1(c)(2)(ix).

      44 17 CFR 240.15c3-3.

      45 17 CFR 240.15c3-3(m).

      46 Reg T, 12 CFR part 220, at. seq., imposes, among other things. Initial margin requirements and payment rules on securities transactions. See 15 U.S.C. § 78a et seq., part 220.

      47 Letter from Albert Peterson, Executive Vice President, State Street Bank and Trust Company, to Jonathan G. Katz, Secretary, Commission (June 2, 1993).

      48 See letters from Paul Farace, President, Cashiers Association, to Jonathan G. Katz, Secretary, Commission (June 14, 1993); and letter from Salvatore N. Cucco, President, Data Management Division, to Jonathan G. Katz, Secretary, Commission (June 16, 1993).

      49 A new Issue of securities includes both IPOs and offerings of additional debt or equity issues by reporting companies.

      50 See section 5 of the Securities Act of 1933 ("1933 Act") (15 U.S.C § 77e).

      51 In a firm commitment offering, the underwriter purchases the securities from the issuer, generally for a fixed price, and then re-sells the securities to the public, thereby assuming the risk of market fluctuations in the price of securities.

      52 The exemption will apply only to offerings when cash is the sole form of consideration given in exchange for the securities. This requirement is intended to limit the exemption to the conventional firm commitment public offerings which are associated with the problems raised by the commentators rather than including transactions such as issuer exchange offers or business combinations.

      53 Concurrent with the adoption of the Rule, The Commission is delegating to the Director of the Division of Market Regulation authority to exempt such additional types of trades.

      54 CUSIP is an acronym for the Committee on Uniform Securities Identification Procedures. Although most outstanding municipal securities have CUSIP numbers, there probably are several thousand maturities that do not

      55 For example, the Commission recently approved a rule proposed by the MSRB requiring the use of automated clearance and settlement systems on most Delivery Versus Payment and Receipt Versus Payment customer transactions. Securities Exchange Act Release No. 32460 (July 22, 1993), 56 FR 39260. In addition, the MSRB has filed with the Commission a proposed rule change that will require use of automated clearance and settlement systems on most interdealer transactions. Securities Exchange Act Release No. 32282 (May 4, 1993), 56 FR 27757. That proposed rule change was filed in concert with NSCC's recently implemented comparison system which accelerates the comparison cycle for municipal securities. Securities Exchange Act Release No. 32747 (August 13, 1993), 58 FR 44530. The Commission also approved an MSRB proposal requiring most interdealer transactions in municipal securities that are eligible for book-entry settlement in a registered securities depository to be settled by book-entry through the facilities of that depository or in an interface with another registered securities depository.

      56 Required paperwork varies among different issuers, and the processing requirements may take weeks. According to the comment letter from the Chicago Partnership Board, some issuers require that blank paperwork be ordered after a trade is agreed to, and these same issuers often take weeks to deliver the paperwork once ordered. Letter from James Frith, Jr., President, Chicago Partnership Board, to Jonathan G. Katz, Secretary, Commission (June 4, 1993).

      57 The Investment Company Act of 1940 ("1940 Act"). 15 U.S.C. 80a-1, describes several forms of investment companies. Among these are "open-end" and "closed-end" management companies and unit investment trusts. Sections 4, 5, 1940 Act; 15 U.S.C 809-4, 80a-5. Open-end companies, commonly known as mutual funds, offer redeemable securities. Unit investment trusts also issue redeemable securities, although their sponsors generally create a secondary market for their shares. Closed-end companies resemble corporations in that at any time they have a fixed number of shares outstanding that are traded on an exchange or in the over-the-counter market at prices which reflect supply and demand.

      58 See Proposing Release, at note 33.

      59 The Mutual Fund Settlement, Entry, and Registration Service ("Fund/Serv") was implemented in 1986 to enable NSCC members to submit mutual fund purchase and redemption orders to NSCC, and to enable NSCC In turn to transmit the orders to its members acting on behalf of eligible mutual funds.

      60 15 U.S.C. 80a-22(e).

      61 15 U.S.C. 78k(d)(1).

      62 The legislative history of section 22(e), although sparse, indicates the significant importance placed on an open-end investment company shareholder's right to redeem shares, "and receive at once, or within a very short time, the approximate cash asset value of such shares as of the time of the tender." See Hearings Before a Subcomm. of the Comm. on Banking and Currency on S. 3580,76th Cong., 3d Sess. (1940), at 985. The Commission believes that the wording of section 22(e)-"No registered investment company * * * shall* * * postpone the date of payment or satisfaction upon redemption of any redeemable security* * * for more than seven days after the tender of such security"-clearly suggests that the section is intended to be a "limit" rather than a "grant"

      63 MBSs include mortgage pass through securities, collateralized mortgage obligations ("CMO"), and Real Estate Mortgage Investment Conduits ("REMIC"). Private-label MBSs include privately issued MBSs collateralized by agency or government sponsored enterprise mortgages or mortgage pass through securities.

      64 Government agencies include, for example, the Government National Mortgage Association ("Ginnie Mae"). GSEs include, without limitation, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").

      65 A (actor is the proportion of outstanding principal to the original principal balance, expressed as a decimal. In the case of CMOs and REMICs, factors are made available once a month, and in the case of private-label MBSs, this occurs at the end of the month.

      66 See Securities Exchange Act Release No. 30277 (January 22, 1992), 57 FR 3657 (order approving DTC's CMO Trade Adjustment System).

      67 Telephone conversation with James Riley, Planning Department, DTC, and Patricia Trainor, Associate Counsel, DTC (August 23, 1993).

      68 See e.g., testimony concerning the bankruptcy of Drexel.

      69 Mortgage pass-through securities have been traded for many years and frequently are the collateral from which CMOs and REMICs are created. For a description of this market, see e.g., Securities Exchange Act Release No. 26671 (March 28, 1989), 54 FR 13266 (granting the Participants Trust Company temporary registration as a clearing agency).

      70 PSA, Uniform Practices for the Clearance and Settlement of Mortgage-Backed Securities and Other Related Securities 8.B.1 (1992).

      71 Forward trades are done typically on a TBA basis because certain specifics, such as the pool numbers, ere not available at the time of the trade and are typically provided 46 hours before settlement to allow for the smooth settlement of the pass-through security. Letter from Dominick F. Antonelli, Chairman, PSA Municipal Securities Division Operations and Compliance Committee, and Stephen W. Hopkins, Chairman, PSA Mortgage Securities Division Operations Committee, to Jonathan G. Kalz, Secretary, Commission (July 8, 1993).

      72 15 U.S.C. 78w(a)(2).

      73 These broker-dealers, however, are not subject to a unique cost. Instead, they are incurring a cost previously paid by their competitors.


      Note: Appendices 1 through 3 to the preamble will not appear in the Code of Federal Regulations.

      Appendix 1-List of Commentators

      The following commentators submitted comments relating to- proposed Rule 15c6-1.

      Government Agency

      Board of Governors of the Federal Reserve System ("Federal Reserve Board" or "Board")

      Self-Regulatory Organizations

      Boston Stock Exchange ("BSE")
      Chicago Mercantile Exchange ("CME")
      The Depository Trust Company ("DTC")
      Government Securities Clearing Corporation ("GSCC")
      International Securities Clearing Corporation ("ISCC")
      Midwest Clearing Corporation/Midwest Securities Trust Company ("CHX")
      Municipal Securities Rulemaking Board ("MSRB")
      National Securities Clearing Corporation ("NSCC")
      New York Stock Exchange ("NYSE")
      The Options Clearing Corporation ("OCC")

      Trade Associations

      American Bankers Association ("American Bankers")
      American Bar Association Section of Business Law, Subcommittee on Market Regulation and Subcommittee on Registration Statements, 1933 Act of the Committee on Federal Regulation of Securities (" American Bar Association")
      American Council of Life Insurance ("American Council")
      American Society of Corporate Secretaries, Inc. ("Corporate Secretaries")
      Association of Reserve City Bankers ("Reserve City Bankers")
      The Cashiers' Association of Wai)
      Street, Inc. ("Cashiers' Association")
      Corporate Transfer Agents Association. Inc. ("CTAA")
      Data Management Division of Wali Street (Securities Industry Association)
      ("Data Management Division")
      Investment Company Institute ("ICI")
      National Association of Securities Dealers, Inc. ("NASD")
      National Automated Clearing House Association ("NACHA")
      New York Clearing House ("NYCH")
      Public Securities Association ("PSA")
      Regional Municipal Operations Association ("RMOA")
      Securities Industry Association ("SLA")
      Securities Operations Division of the S1A ("SOD")
      Security Traders Association ("Traders Association")
      The Securities Transfer Association, Inc. ("STA")
      Syndicate Operations Association Incorporated ("SOA")
      Broker-Dealers

      A.G. Edwards & Sons, Inc. ("A.G. Edwards")
      Alex. Brown & Sons Incorporated ("Alex Brown")
      Arthurs Lestrange & Company Incorporated ("Arthurs Lestrange")
      Asiel & Co. ("Asiel")
      Robert W. Baird & Co. Incorporated ("Baird")
      Baker & Co., Incorporated ("Baker")
      Bear Stearns & Co., Inc. ("Bear Stearns")
      Bodell Overcash Anderson & Co., Inc. ("Bodell Overcash")
      Jack V. Butterfield Investment Company ("Butterfield")
      J.W. Charles Securities, Inc. (4 letters)
      ("J.W. Charles")
      Chatfleld Dean & Co., Inc. ("Chatfield")
      Cheevers, Hand & Angeline, Inc. ("Cheevers")
      The Chicago Corporation ("Chicago Corporation")
      Collopy & Company Inc. ("Collopy")
      Consolidated Financial Investments, Inc. ("Consolidated")
      CUSO Equities, Inc. ("CUSO")
      Cygnet Resources, Inc. ("Cygnet")
      D.A. Davidson & Co. ("Davidson")
      Davenport & Co. of Virginia, Inc. ("Davenport")
      Dean Witter Reynolds, Inc. ("Dean Witter")
      J.V. Delaney & Associates ("Delaney")
      Dempsey & Company ("Dempsey")
      H.C. Denison Co. ("Denison")
      Dorsey & Company, Incorporated ("Dorsey")
      East/West Securities Co. ("East/West")
      Ferris, Baker Watts, Incorporated ("Ferris Baker")
      Fidelity Investments Institutional Services Company, Inc. ("Fidelity")
      Financial Network Investment Corporation ("Financial Network")
      John Finn & Company, Inc. ("John Finn")
      The First Boston Corporation ("First Boston")
      First Dallas Securities Incorporated ("First Dallas")
      First Manhattan Co. ("First Manhattan")
      First Northeast Securities, Inc. ("First Northeast")
      Gilbert Marshall & Company ("Gilbert")
      Goldman, Sachs & Co. ("Goldman Sachs")
      Grove Securities, Inc. ("Grove")
      Gruntal & Co. Incorporated ("Gruntal")
      G-W Brokerage Group, Inc. ("G-W")
      Hamilton & Company Incorporated ("Hamilton")
      The Heitner Corporation ("Heitner")
      Hopper Securities-Vermont ("Hopper")
      Wayne Hummer & Co. ("Hummer")
      Interstate/Johnson Lane Corporation ("Interstate/Johnson Lane")
      Raymond James 4 Associates, Inc. (2 letters)
      ("Raymond James")
      Kenneth Jerome & Company ("Jerome")
      JJC Specialist Corp. ("JJC")
      Edward D. Jones & Co. ("E.D. Jones")
      Juran & Moody, Inc. ("Juran & Moody")
      Kidder, Peabody & Co., Incorporated (2 letters)
      ("Kidder")
      Kirk Securities Corporation ("Kirk")
      La Branche & Co. ("LaBranche")
      Legg Mason Wood Walker, Incorporated ("Legg Mason")
      Lewco Securities Corp. ("Lewco")
      Locust Street Securities, Inc. ("Locust")
      McCourtney-Breckenridge & Company ("McCourtney")
      M.E. Metzler Organization, Incorporated ("M.E. Metzler")
      Merchant Capital Corporation ("Merchant Capital")
      Mericka & Co., Inc. ("Mericka")
      Meridian Associates, Inc. ("Meridian")
      Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
      Miller & Schroeder Financial, Inc. ("Miller")
      Montgomery Securities ("Montgomery")
      Morton Seidel & Co., Inc. ("Morton Seidel")
      Mutual Service Corporation ("Mutual")
      Nicodemus & Sherwood, Inc. ("Nicodemus")
      Northern Trust Securities, Inc. ("Northern Trust")
      Paine Webber Incorporated ("Paine Webber")
      Paulson Investment Company Inc. ("Paulson")
      Pershing Division of Donaldson, Lufkin and Jenrette Securities Corporation ("Pershing")
      Peterson Financial Corp. ("Peterson")
      Pflueger & Baerwald Inc. ("Pflueger")
      Piper Jaffray Companies Inc. ("Piper Jaffray")
      Pirrone & Co., Inc. ("Pirrone")
      Robert A. Podesta & Co. ("Podesta")
      The Principal/Eppler, Guerin & Turner, Inc. ("Principal Financial")
      Protective Group Securities Corporation ("Protective")
      Prudential Securities Incorporated ("Prudential")
      Quick & Reilly, Inc ("Quick & Reilly")
      Quincy Cass Associates Incorporated ("Quincy")
      Richards. Merrill & Peterson. Inc. ("Richards Merrill")
      Robinson & Lukens, Inc. ("Robinson Lukens")
      Rodgers Capital Corporation ("Rodgers")
      Roland Francis & Co., Inc. ("Roland Francis")
      Sands Brothers & Co., Ltd. ("Sands Bros.")
      Saperston Financial Inc. ("Saperston")
      Charles Schwab & Co., toe. ("Schwab")
      S.C. Parker & Co., Inc. (3 letters)
      ("S.C Parker")
      Janney Montgomery Scott Inc. ("Montgomery Scott")
      Scott & Stringfellow Investment Corp. ("Scott Stringfellow")
      Selected Securities Company ("Selected")
      Sierra Trading ("Sierra Trading")
      Smith, Moore & Co. ("Smith Moore")
      Southwest Securities Incorporated ("Southwest")
      Summitt Investment Corporation ("Summitt")
      Robert Thomas Securities, Inc. ("Robert Thomas")
      Robertson, Stephens & Company ("Robertson Stephens")
      The Warner Group Inc. ("Warner")
      U.S. Clearing Corp. ("U.S. Clearing")
      Wheat, First Securities, Inc. ("Wheat First")
      William J. Conway&Co., Inc. ("Conway")
      Wulff, Hansen & Co. ("Wulff Hansen")
      Wyoming Financial Securities. Inc. ("Wyoming")
      B.C. Ziegler and Company ("B.C. Ziegler")
      Ziegler Thrift Trading, Inc ("Ziegler Thrift")
      Investment Advisors

      Jobel Financial, Inc. ("Joben Massachusetts Financial Services Company ("Massachusetts Financial")
      Neuberger & Berman ("Neuherger")
      Oppenheimer Management Corporation ("Oppenheimer Management")
      Seger-Elvekrog, Inc. ("Seger-Elvekrog")
      Society National Bank ("Society")
      St. Denis J. Villere & Company ("St. Denis")
      Stephenson and Company ("Stephenson")
      Bank Custodians

      Bank of America National Trust and Savings Association ("Bank of America")
      The Chase Manhattan Bank, N.A. ("Chase")
      Citibank, N.A. ("Citibank")
      Morgan Guaranty Trust Company of New York ("Morgan Guaranty")
      United States Trust Company of New York ("U.S. Trust")
      Wachovia Trust Services, Inc. ("Wachovia")

      Insurance Company-Affiliated Broker-Dealers

      Green Hill Financial Service Corp, ("Green Hill")
      MML Investors Services, Inc. ("MML")
      Sun Investment Services Company ("Sun")

      Limited Partnerships Broker-Dealer

      Chicago Partnership Board, Inc. ("Chicago Partnership Board")

      Mutual Fund Broker-Dealers

      Chubb Securities Corporation ("Chubb")
      Penn Square Management Corporation ("Penn Square")
      H.D. Vest Investment Securities, Inc. ("H.D. Vest")

      Municipal Bond Broker-Dealers

      Clayton Brown & Associates, Inc. ("Clayton Brown")
      Halpert and Company, Inc. ("Halpert")
      Hanifen, Imhoff Inc. ("Hanifen")
      The Lsedy Corporation ("Leedy")

      Transfer Agents

      Burnham Pacific Properties, Inc. ("Burnham")
      Chemical Banking Corporation ("Chemical")
      Fidelity Accounting & Custody Services Company ("FACS")
      Morgan Stanley & Co. Incorporated ("Morgan")
      Oppenheimer Shareholder Services Division of Oppenheimer Management Corporation (2 letters)
      ("Oppenheimer Shareholder")
      State Street Bank and Trust Company ("State Street")
      Southern Company Services, Inc. ("Southern")
      Texaco Inc. ("Texaco")
      Valero Energy Corporation ("Valero")
      Wisconsin Energy Corporation ("Wisconsin")
      Individuals

      Scott G. Abbey
      John W. Bachmann
      Dr. & Mrs. L.O. Banks
      Rodney E. Bate
      Chris Bennett
      Nelda Bergsten
      Russell M. Bimfaer
      Helen A. Bird
      Allan R. Black
      Weston A. Boyd
      Carl R. Brasee
      D.N. Bulk
      Mark C Bublak
      Thomas A. Byrne
      D.H. Carlson
      John Cirrito
      Daniel B. Coleman
      Richard Conway
      Douglas Czarnecki
      Martin H. Drayer
      Karen Frye
      Gordon G. Carney
      Elaine Graham
      Rae T. Gaida
      Professor Steven Hill
      Donald R. Hollis
      Frank Hutcheon
      Mark Jackson
      Rex and Susan Jacobsen
      Kenneth S. Janke
      Marilyn D. Jennings
      James A. Jephcote
      William P. Kilroy
      David M. Klausmeyer
      Donald R. Kryzan
      Robert T. Levine
      Lowell H. Listrom
      Pearl Lurio
      Ina Mandel
      Joseph J.F. March
      George J. Minnig
      Stephen A. Molasky
      H.J. Porter
      Mani K. Pulimood
      Richard R. Romane
      Donald Rhyne
      Michael A. Rogawski
      Ramona B. Schafehen
      Charles F. Schlein. Jr.
      D. Schroeder
      Kenneth Shazel
      Hank Simon
      Richard B. Smith
      George Sneed
      Murray L. Solomon
      Walter Stelma
      Frank C Vogel
      Robert C. Waldo, Jr.
      Warren D. Weber
      Martin J. Webler
      Barbara Wilkinson
      Theo L. Wealinsh
      Daniel P. Worth

      Insurance Company

      Aetna

      Other

      Armstrong World Industries, Inc
      William Batdorf & Company, Certified Public Accountant
      BellSouth Corporation ("BellSouth")
      Bryan Cave The College Retirement Equities Fund("CREF")
      DQE
      E.F. Miller & Company ("E.F. Miller")
      Federal Reserve Bank of New York ("FRBNY")
      The Group of Thirty ("Group of Thirty")
      Minnesota Utility Investors ("MUI")
      Sixty Niner Investment Club ("Sixty Niner")
      Texas Industries, Inc. ("Texas Industries")
      Thomson Financial Services ("Thomson")

      In addition, the Commission received substantially similar letters from three separate groups, as set out below.

      Individual Investors

      1,550 Identical letters supporting direct registration

      Regional Investment Brokers, Inc. ("RIBS") Letters ("RIBS Letters")

      [101 letters opposing T+3 settlement]

      Century Capital Corp. of South Carolina ("Century")
      Corporate Securities Group, Inc. (16 letters) ("Corporate Securities")
      Culverwell & Co. Inc. (5 letters) ("Culverwell")
      Girard Securities, Inc. ("Girard")
      Greenway Capital Corporation ("Greenway")
      Investors Associates, Incorporated ("Investors Associates")
      La Jolla Capital Corporation ("Lajolla")
      M.H. Meyerson & Co., Inc. ("Meyerson")
      Royce Investment Group, Inc. ("Royce")
      RIBS Royce Employees (69 letters) Sentra Securities Corporation ("Sentra")
      Spellman & Company, Inc. ("Spellman")
      Wilson-Davis & Company Incorporated ("Wilson Davis")

      Transfer Agent Letters

      17 letters supporting T+3 settlement

      The Bank of New York ("BONY")
      Barnett Banks, Inc. ("Barnett")
      CBI Industries Inc. ("CBI")
      CEL-SCI Corporation ("CEL-SCI")
      Central and South West Corporation ("Central")
      E.I. du Pont de Nemours and Company ("DuPont")
      Nevada Power Company ("Nevada Power")
      First Chicago Trust Company of New York ("First Chicago")
      Florida Progress Corporation ("Florida Progress")
      GenCorp Mellon Financial Services Corporation No. 17 ("Mellon")
      Northern States Power Company ("Northern States")
      Northwest Natural Gas Company ("Northwest")
      Ottertail Power Company ("Ottertail")
      Society National Bank ("Society National")
      WPL Holdings. Inc. Union Daia Service Center, Inc. ("Union Data")

      Appendix 2-Recent Initiatives in Clearance and Settlement Reform

      Although the U.S. clearance and settlement system is among the safest in the world, recent events have demonstrated that vulnerabilities exist. Record volume and volatility during October 1987 proved detrimental to broker-dealers who were unable to resolve processing errors before settlement with their customers on T+5. Moreover, the steep decline in stock prices during that period, as well as the decline on October 16, 1989, left some broker-dealers vulnerable to loss from the positions of customers who were unable or unwilling to meet either margin calls or transaction settlement obligations. This in turn called into question the ability of those broker-dealers to meet their obligations to the clearing corporations.1

      After the October 1987 market break, several groups sought to identify causes of the market decline and changes that could be made to shield market participants from the impact of sudden steep declines in the market.2 All these studies identified clearance and settlement as an area which needed further attention.3

      At the same time, in March 1988, the Group of Thirty4 organized a symposium in London to discuss the state of clearance and settlement in the world's principal securities markets. The symposium participants concluded that there was a need for international agreement on a uniform set of practices and standards for the clearance and settlement of securities transactions in order to improve the process. In light of this conclusion, the Group of Thirty organized a Steering Committee to work with a professional and broad-based Working Committee in order to produce a set of operational proposals for practices arid standards in the area of clearance and settlement.

      In March 1989, the Group of Thirty issued a report by the Steering Committee setting forth nine recommendations ("Group of Thirty recommendations"),5 including implementation of settlement on T+3, to modernize and improve clearance and settlement systems at a local level and to make them compatible with each other internationally.6 Following the release of the Group of Thirty Report, several countries initiated separate efforts to study how their clearance and settlement systems compared with the Group of Thirty recommendations. In the U.S., a Working Group was created for this purpose, The U.S. Working Group concluded that, while the U.S. was in compliance with seven of the Group of Thirty recommendations, continued consideration should be given to the implementation of the two remaining recommendations, T+3 settlement and settlement in same-day funds.7

      Two subcommittees, a U.S. Steering Committee and a U.S. Working Committee of the Group of Thirty ("the U.S. committees") were formed to evaluate the benefits of shortening the settlement cycle and converting to the use of same-day funds. The U.S. committees urged adoption of the two recommendations and, in order to support a move to T+3 settlement, also recommended that: (1) Book-entry settlement be mandatory for transactions between financial intermediaries and between financial intermediaries and their institutional customers;8 and (2) all new securities issues should be made eligible for depository services.

      In November 1990, the Commission held a Roundtable to discuss the recommendations of the U.S. committees, Roundtable participants generally agreed that the two recommendations should be adopted, but urged that the timetables for implementation be sufficiently flexible so that obstacles to implementation could be fully explored and practical solutions found and implemented. Roundtable participants expressed concern that broker-dealers conducting a predominantly retail business might have difficulty operating in a three business day settlement timeframe in the national clearance and settlement system because of the need, among other things, to obtain payment from retail clients for purchase transactions.

      Following the Commission's Roundtable, former SEC Chairman Richard Breeden asked Howard Shallcross, Director of Operations, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), to form a committee to examine how retail firms and their customers could best be accommodated in a T+3 settlement environment and to report the committee's findings to the Commission. The committee was asked specifically to determine hew to solve the problem of timely payments for retail purchase transactions as well as any other retail issues that it considered appropriate. The Shallcross Committee prepared a draft report that recommended alternative risk reduction proposals, such as marking unsettled securities transactions to the market beginning on T+1.9 Subsequently, former Chairman Breeden asked the U.S. Steering Committee of the Group of Thirty to form a task force, chaired by John W. Bachmann, Managing Principal, Edward D. Jones & Co., to review what changes to the clearance and settlement system were necessary, to identify practical solutions, and to propose a reasonable timeframe for implementation of each of those solutions.10 The Bachmann Task Force11 ("Task Force") undertook that challenge, identifying many of the issues that would confront retail broker-dealers in a T+3 settlement environment and proposing solutions and timetables for resolving those issues.

      In May 1992, the Task Force presented its findings and recommendations to the Commission.12 Among other things, the Task Force concluded that "time equals risk" and that the settlement cycle for corporate and municipal securities should be compressed to T+3.13 The Task Force also evaluated the principal suggestion of the Shallcross Committee, i.e., that unsettled trades should be marked-to-the-market. The Task Force produced a quantitative analysis that showed that shortening the settlement cycle to T+3 would result in greater risk reduction than a daily mark-to-market without a shortened settlement cycle.14 The Task Force concluded that compared with T+5 settlement, T+3 settlement would result in a 58% reduction in risk to National Securities Clearing Corporation ("NSCC")15 in the event of the failure of an average large clearing member. The Task Force's data further showed that NSCCs average expected exposure in a T+5 settlement period with a daily mark-to-market would be 30% higher than its exposure to a T+3 settlement period without a daily mark-to-market.

      On June 22, 1992, the Commission published the Task Force Report in the Federal Register for public comment16 The Commission received over 1,000 comment letters from backs, broker-dealers, investment advisors, trade associations, clearing agencies, exchanges, transfer agents, and Individual investors. Although many of these commentators expressed concern about the potential loss of access to physical certificates,17 In large part they were supportive.

      The Commission agrees with the Task Force conclusion that "time equals risk." Based on that analysis and recent events demonstrating that vulnerabilities still exist in the U.S. clearance and settlement system, the Commission believes that it is prudent to shorten the time that unsettled trades remain outstanding.


      1 See Division of Market Regulation, Commission, The October 1987 Market Break Chapter 10 at 20-21 ("Market Break Report").

      2 Id. See also Working Group on Financial Markets, Interim Report to the President of the United States (May 1988) (Appendix D) (the Working Group is chaired by the Secretary of the Treasury and its members include the Chairmen of the SEC, the Commodity Futures Trading Commission, and the Board of Governors of die Federal Reserve System); Presidential Task Force on Market Mechanisms, Report to the President of the United States (January 1988) (the so-called "Brady Report"); and General Accounting Office, Preliminary Observations on the October 1987 Crash (January 1968).

      3 Since 1987, considerable progress has been made toward increasing clearing corporations' capabilities to handle large volumes of trades and manage financial risk. Examples include increases in the number of cross margining facilities sponsored by The Options Clearing Corporation ("OCC") and commodity clearing organizations, expansion of the depository system to include new financial products such as commercial paper, and development of extensive lines of communication between banking, securities, and commodities organizations.

      4 The Group of Thirty, established in 1978. is an independent, non-partisan, non-profit organization composed of international financial leaders whose focus is on international economic and financial issues.

      5 See Group of Thirty, Clearance and Settlement Systems in the World's Securities Markets (March 1989) ("Group of Thirty Report").

      6 These recommendations were; (1) By 1990, trade comparison between direct market participants should occur by the day following the date of trade execution; (2) by 1992, indirect market participants should be members of a trade comparison system which achieves positive affirmation of bade details; (3) by 1992, each country should have an effective and fully developed central securities depository; (4) by 1992, if appropriate, each country should implement a netting system; (5) by 1992, a delivery versus payment system should be employed as the method for settling all securities transactions; (6) countries should adopt a same-day funds payment method for settlement of securities transactions; (7) a rolling settlement system should be adopted by all markets as follows: (a) by 1990, final settlement should occur on the fifth day after the date of trade execution, (b) by 1992, final settlement should occur on the third day after the date of execution; (8) securities lending and borrowing should be encouraged as a method of expediting the settlement of securities transactions; and (9) by 1992, each country should adopt the standards for securities numbering and messages developed by the International Standards Organization.

      7 "Same-day funds" refers to payment in funds that are available on payment date and generally are transferred by electronic means.

      8 On June 11, 1993, the Commission approved a proposed rule change filed by the securities exchanges and the National Association of Securities Dealers ("NASD") that requires members, member organizations, or affiliated members of the securities exchanges and the NASD to use the facilities of a securities depository for the book-entry settlement of all transactions in depository eligible securities with another financial intermediary (broker, dealer, or bank). In addition, the rule prohibits members, member organizations, or affiliated members of the SROs from effecting a delivery-versus-payment ("DVP") or receipt-versus-payment ("RVP") transaction in a depository eligible security with an institutional customer unless the transaction is settled by book-entry using the facilities of a securities depository. Securities Exchange Act Release No. 32455 (June 11, 1993), 58 FR 33679.

      9 Shallcross Committee, Impact of T+3 Migration on the Retail Sector A Preface .o the Interim Report to the SEC (March 20, 1991).

      10 Letter from Richard C Breeden, Chairman, Commission, to Lewis W. Bernard, Chairman, U.S. Steering Committee, Group of Thirty duly 11, 1991).

      11 In addition to Mr. Bachmann, the members of the Task Force included: David M. Kelly, President and Chief Executive Officer, National Securities Clearing Corporation ("NSCC"); Richard C. Ketchum, Executive Vice President and Chief Operating Officer, NASD; John F. Lee, President, New York Clearing House; Gerard P. Lynch, Managing Director, Morgan Guaranty Trust Company of New York; James J. Mitchell, Senior Executive Vice President, Northern Trust Securities, Inc.: Richard J. Stream, Managing Director, Piper Jaffray Companies Inc.; and Arthur L. Thomas, Senior Vice President, Merrill Lynch.

      12 Bachmann Task Force. Report of the Bachmann Task Force on Clearance and Settlement in the U.S. Securities Markets (May 1992).

      13 The Task Force recommended that this be accomplished by July 1994. The Task Force made eight other recommendations that would facilitate settling securities transactions on T+3: Revising the Automated Clearing House ("ACH") system; requiring an interactive institutional delivery process; settling all transactions among financial intermediaries and their institutional customers in book-entry form only and in same-day funds; depository eligibility for new issues: monitoring flipping (i.e., the sale of stock back to the underwriting syndicate during the new issue stabilization period): expanding cross-margining; streamlining the handling of physical certificates; and monitoring all market activity.

      14 Task Force Report at 34-39.

      15 NSCC is the largest U.S. clearing corporation and is registered as a clearing agency under Section 17A of the 1934-Act NSCC, among other things, functions as a post-trade processing facility and as a guarantor of post-trade settlements. In the latter capacity, NSCC assumes the credit risk of fails to deliver and fails to receive by substituting itself us the contra party on the day after trade date. Trades that are not settled on settlement date are carried forward to the next settlement day as open obligations. NSCC seeks to protect against the financial risk of these open positions by obtaining contributions from its members to a pool of funds. Any sizable loss in liquidating the open commitments of a defaulting member essentially would be absorbed by all members.

      16 See Securities Exchange Act Release No. 30802 (June 15, 1992), 57 FR 27612.

      17 Over 800 of the comment letters were from individual investors responding to the recommendation to streamline the handling of physical certificates. The letters indicate a belief that the Task Force recommendation to streamline the handling of physical certificates would result in the elimination of physical certificates and force investors to hold securities in street name. The Task Force did not propose eliminating physical certificates for those retail investors who choose to maintain their record of ownership in that form.


      Appendix 3-Building Blocks

      A. Industry and SRO Initiatives
      1. Interactive Institutional Delivery ("ID") Process

      Moving settlement to T+3 requires that the affirmation1 process be completed on T+1. Early affirmation of institutional trades can be accomplished by enhancing OTC's existing batch processing ID system to permit DTC to process information on receipt and distribute reports on request.

      Commentators consider DTC's interactive ID system a critical building block to successful implementation of Rule 15c5-1. Twenty-one of the 101 commentators that support the proposed Rule express the need for early affirmation of institutional trades. These commentators believe that DTC's proposed interactive system will allow participants to be highly interactive, allowing completion of the confirmation/affirmation process on T+1, rather than on T+2 or T+3 as is the case in DTC's current batch processing ID system. One trade association, one clearing broker-dealer, and two retail broker-dealers conditioned their support of the proposal on DTC's interactive ID system being fully operational prior to adoption of the proposed Rule. Those commentators believed that T+3 settlement was not possible if affirmation/confirmation was not completed by T+1. Finally, five opposing commentators stated that their opposition to the Rule was based in part on the need to implement first DTC's interactive ID system.

      DTC is developing an enhanced ID system that would provide users with an interactive option and would unify the existing ID and International ID systems. DTC expects to offer the interactive system to ID users in early 1994.2 System users will be able to use the system either in the present batch environment or interactively, with the capability to accomplish all ID processing within a single business day. DTC plans to implement the enhanced system in stages. The proposed system includes a Standing Instructions Database ("SID"), to be implemented in late 1993;3 an Electronic Mail feature, to be implemented in late 1993 or early 1994;4 a "matching" system, to be implemented in mid-1994;5 and an Authorization/Exception Processing and Reporting feature to be implemented in mid-1994.6

      DTC has filed a proposed rule change under Section 19 of the 1934 Act regarding the interactive ID system. Although the Commission generally supports DTC's efforts towards an interactive ID system, Commission staff will review the proposal for consistency with the purposes of the 1934 Act.
      2. Revisions to the Automated Clearing House ("ACH") System

      To address the problem of timely payments between a retail broker and its customer, broker-dealers should consider ACH7 as one alternative to physical checks for payment and collection of funds to and from customers.

      Ten of the 100 commentators that supported the proposed Rule suggested that an electronic payment system that results in finality of payment would make T+3 settlement more practicable, particularly for retail transactions. Most of the commentators addressing this issue stated that ACH would be the desired method of payment if the securities and banking Industries could reach a consensus on the necessary revisions to Regulation E and NACHA operating rules so that transactions executed through registered broker-dealers would not be subject to rescission. Four commentators conditioned their support of Rule 15c6-1 on the implementation of a payment system that achieves finality of payment. NACHA, although it was officially neutral on the general merits of proposed Rule 15c6-1, stated that in a three-day settlement environment, the industry would need a payment system such as ACH for retail transactions.8 Five opposing commentators stated that one reason for their opposition was the lack of an electronic payments system that results in finality of payment, which was considered by those commentators as an essential building block for T+3 settlement.

      Following publication of the Bachmann Task Force Report, NACHA proposed a rule amendment that would remove the sixty-day right of rescission for payments in connection with securities transactions. That proposal was defeated. On August 30, 1993. NACHA approved a rule amendment that requires a receiving depository financial institution to obtain a signed affidavit from a consumer when the consumer claims that a transaction to his or her account is unauthorized or that an authorization has been revoked.9 With the affidavit process in place, a retail securities transaction can be processed through the ACH network as fellows: (1) A consumer will purchase securities from his or her broker; (2) the broker will initiate a debit to the consumer's account through its bank; and (3) the debit w ill be effected against the consumer's account at his or her bank. The consumer Claiming that a retail securities transaction was unauthorized or that the authorization for that entry had been revoked would go to his or her bank and sign an affidavit to that effect prior to the bank returning the transaction. Under NACHA rules, the consumer has fifteen days after the receiving depository financial institution sends or makes available to the consumer information pertaining to that debit entry to claim that a transaction was unauthorized or that the authorization was revoked. The receiving depository financial institution must return the rescinded transaction within sixty days of the original settlement date. This change modifies the current process for handling unauthorized transactions over the ACH network, making it consistent with the procedures In the check processing system.

      The Commission understands that further changes may be imminent. For example, NACHA is considering modifying the rule change to establish a dollar limit on the mandatory affidavit request and to establish a definition of what constitutes a reasonable timeframe for the receiving depository financial institution to respond to a request from the originating depository financial institution for a copy of the affidavit.10

      The Commission encourages banks, broker-dealers, clearing agencies, and securities industry representatives to continue to improve the ACH process. The Commission recognizes, however, that ACH represents one of several methods of effecting payments and, accordingly, encourages broker-dealers to pursue other ways to secure good funds on T+3, including wider use of asset management accounts.
      3. Mandatory Depository Eligibility

      Some commentators believe that T+3 settlement would be difficult to achieve without mandating depository eligibility for all securities. In connection with this, one commentator indicated that the cost of doing business in new issues would increase significantly unless mandatory depository eligibility is developed along with an automated means of tracking flipping.11

      Nine commentators believed that depository eligibility should be mandatory for all new issues. Two retail broker-dealers indicated that they would not support adoption of the proposed Rule without mandatory depository eligibility. Data Management Division, while neutral on the overall merits of proposed Rule 15c6-1, stated that depository eligibility for all securities should be mandatory.12 Three opposing commentators believed that all new issues should be depository eligible.

      As a practical matter, according to DTC, 94% of all issues listed on the New York Stock Exchange and 99% of issues traded in the over-the-counter market on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are depository eligible.13

      Representatives of SROs and the Legal and Regulatory Subgroup of the U.S. Working Committee of the Croup of Thirty ("Legal and Regulatory Subgroup") are drafting a uniform SRO rule for depository eligibility for new issues. The uniform rule is intended to incorporate a depository eligibility requirement into a listing standard for each registered national securities exchange and into the eligibility requirements for NASDAQ. Because listing standards for each SRO differ and the manner in which those standards are set forth in their respective rules is not uniform, however, individual SROs will consider the appropriate means to adopt such a uniform depository eligibility requirement to their current listing standards when all SROs have agreed upon and developed a uniform rule. Although the rules, if approved, would not roach settlement of transactions in securities that are not listed on a national exchange or NASDAQ, the Commission preliminarily believes this effort represents an important step towards improving the efficiency of the national clearance and settlement system, and indeed towards making T+3 settlement more practicable.

      As discussed above, an issue closely related to mandatory depository eligibility is how to prevent the practice of selling back to syndicate members during the new issue stabilization period, i.e., flipping. The current practice by lead managers in the settlement of IPOs is to issue and deliver certificates in physical form in order to track the sale of securities during the stabilization period. Most of the commentators addressing the depository eligibility issue suggested that an alternative method of monitoring flipping be developed. The U.S. Working Committee of '.he Group of Thirty Focus Group on Flipping ("Focus Group") has developed a conceptual framework as an alternative to the current practice for monitoring flipping. The Focus Group intends to provide the controls for underwriters to monitor flipping while allowing book-entry settlement to occur.

      Although a number of issues remain to be resolved, the Commission recognizes the potential benefits that can be achieved from mandatory depository eligibility and the development of an automated means of monitoring flipping, such as increasing the efficient operation of the clearance and settlement system. The Commission therefore encourages efforts to address concerns and advance these initiatives.
      4. Same-Day Funds Settlement

      Six commentators suggested that the industry should implement same-day funds settlement prior to shortening the settlement cycle. The Commission believes that significant risk reduction can be gained by converting to a same-day funds payment system. DTC and NSCC are preparing to convert to same-day funds settlement by late 1994 or early 1995. DTC and NSCC recently distributed a Memorandum that details how DTC and NSCC believe many aspects of the new same-day funds settlement system will function, and solicited comments on the proposal.

      DTC now processes securities deliveries through two different settlement systems, one that settles in same-day funds ("SDFS") and the other in next-day funds ("NDFS"). The NDFS system primarily services corporate equities and corporate and municipal debt issues; the SDFS system primarily services commercial paper and other money market-like instruments. The vast majority of transactions that settle at DTC settle in its NDFS system, although the total value of the transactions that settle in the SDFS system is much larger than that in the NDFS system. NSCC currently operates a single NDFS system in which the money settlement obligations of NSCC's participants are the net results of all NSCC activity.

      DTC's and NSCC's .NDFS systems and operations are intertwined. DTC is the nation's largest depository for corporate and municipal securities, while NSCC, in addition to its other services, operates the securities industry's largest trade clearance and settlement system for corporate securities. Under the proposed SDFS system, DTC will combine its NDFS and SDFS systems into a single SDFS system, using its current SDFS system as the base design. DTC and NSCC will employ a mandatory netting procedure (expected to be implemented prior to SDFS conversion) whereby a participant's net debit at one organization will be netted against the amount of its net credit, if any, at the other organization. Participants will continue to settle separately with DTC and NSCC.

      The same-day funds conversion project is intended to provide two major benefits: Standardization of the form in which funds are settled and risk reduction. It should simplify the cash management practices of firms that currently deal in both same-day and next-day funds settling securities, as well as reducing existing overnight exposure.

      The Commission encourages DTC's and NSCC's efforts to finalize the details of the same-day funds proposal. The Commission urges DTC and NSCC to start an educational campaign targeting retail participants, and have the flow of information begin well ahead of the implementation date for Rule 15c6-1.
      B. Regulatory Initiatives

      As discussed below, the Commission will recommend to other appropriate regulatory authorities that they amend their rules as necessary and appropriate to permit three business day settlement.
      1. Rule 10b-10

      Some commentators suggested that implementation of a T+3 settlement period will require amendments to the Commission's confirmation rule, Rule 10b-10 adopted under the 1934 Act.14 Rule 10b-10 requires that broker-dealers send customers written confirmation disclosing; information relevant to the transaction "at or before completion" of the transaction.15 Generally, Rule 15c1-1 under the 1934 Act defines "completion of the transaction" to mean the time when: (i) A customer is required to deliver the security being sold; (ii) a customer is required to pay for the security being purchased; or (iii) a broker-dealer makes a bookkeeping entry showing a transfer of the security from the customer's account or payment by the customer of the purchase price.16

      Currently, broker-dealers typically send customer confirmations the day .after trade date. While the confirmation must be sent by settlement, because the confirmation does not need to received prior to settlement, the current practice of sending the confirmation the day after trade date will satisfy Rule 10b-10 even under T+3.

      Implementation of T+3, however, may alter the confirmation's utility as a customer invoice because confirmation delivery and transfer of customer funds and securities may not be possible within the three day settlement period. Under the current five day settlement period, confirmations generally reach customers in time for the customer to review them prior to transferring funds or securities to the transacting broker-dealer. Under T+3, the customer frequently will not receive the confirmation through the mails by day three; thus, shortening the settlement period to three days may require broker-dealers either to Cover the cost of the transaction for a longer period of time or demand funds or securities from the customer earlier than under current practice.17 Accordingly, the Commission encourages broker-dealers to consider changes to their systems to dispatch confirmations as early as possible following execution of a trade. The Commission also encourages broker-dealers to develop and implement the systems necessary to provide customers, at the time of execution, the net purchase price.

      In addition to serving currently as an invoice, the confirmation serves other significant investor protection functions. In particular, the confirmation serves as a written record of the customer's transaction, thus satisfying the Statute of Frauds, 18 provides customers a means of checking the accuracy of their trades, and informs the customer of the broker-dealer's status and often its compensation in connection with the trade. Although the Commission believes that implementation of T+3 will not create compliance problems with regard to Rule 10b-10, it is continuing to consider the effect of T+3 on the confirmation's investor protection functions.
      2. Rules 15c3-1 and 15c3-3

      Rule 15c3-119 establishes the net capital requirements for brokers and dealers. Rule 15c3-320 requires brokers and dealers to maintain possession or control of all customer fully paid and excess margin securities. Commentators asked the Commission to review these rules to determine whether amendments will be required to conform them to a shorter settlement timeframe.

      In determining a broker-dealer's net capital under Rule 15c3-1, the broker-dealer deducts from net worth, as computed in accordance with generally accepted accounting principles, assets not readily convertible into cash, including most unsecured receivables. A broker-dealer also must deduct certain category specific percentages from the securities and commodity futures positions that it carries in its proprietary account. The rule also requires that a failed to deliver contract that has been outstanding for a certain specified period of time be treated as a proprietary position of the broker-dealer and subject to a percentage deduction. This time period is dependent upon the time from settlement date. A contract becomes a fail when it has not settled by the prescribed settlement date. By establishing a shorter settlement timeframe, Rule 15c6-1 will affect the 15c3-1 requirements correspondingly, thus a contract will become a fail in three business days rather than the current five business days.

      As with Rule 15c3-1, some of the requirements imposed on broker-dealers by Rule 15c3-3 are dependent upon the time from settlement. One commentator, Goldman Sachs,21 referred specifically to Rule 15c3-3(m).22 Rule 15c3-3(m) requires that a broker or dealer that has executed a sell order for a customer, and has not obtained possession of such securities from the customer within ten business days after the settlement data, must immediately close the transaction with the customer by purchasing securities of like kind and quantity.

      The Commission notes that Rule 15o6-1 merely changes the number of days following the trade date that settlement will occur. For example, under the new rule, the ten day time period referred to in Rule 15c3-3(m) would generally begin three business days following the trade date, instead of the five business day convention currently in effect. Therefore, Rules 15c3-1 and 15c3-3 are consistent with Rule 15c6-1.23
      3. Regulation T ("Reg T")

      Commentators urged the Commission, in conjunction with the Federal Reserve Board, to review Reg T24 to determine how, if at all, Reg T should be modified. Currently, Reg T does not require that any action be taken unless a customer fails to pay for securities within seven business days of the trade date. The concern is that Reg T as currently drafted could leave customers and brokers and dealers with the impression that payment from the customer is not due in a three day settlement environment until the expiration of the seven-day period specified by Reg T. Consistent failures of customers to make payment until seven days would diminish greatly the benefits to be achieved from Rule 15c6-1. Recently, the Federal Reserve Board published notice of its intent to review Reg T generally, including perhaps tying the deadline for payment to settlement date.25 Accordingly, the Commission has authorized the Division to request the Federal Reserve Board staff to consider whether conforming amendments to Reg T requiring payment from customers within two business days following the settlement date would be appropriate.
      4. Disclosure of Depository Eligibility In the Proposing Release, the Commission solicited comment on whether the Commission should adopt a disclosure requirement under the 1933 Act concerning depository eligibility of an IPO. The disclosure requirement, as discussed in the Proposing Release, would require disclosure of whether the securities being offered in an IPO are depository eligible, and if not, why not.

      Five commentators supported the adoption of a disclosure requirement for IPOs as described above. The Cashiers' Association, DTC, and CHX agreed that the Commission should adopt a disclosure requirement concerning depository eligibility of IPOs, but these commentators believed that it was not necessary to include as an exhibit to the registration statement a letter from a securities depository confirming that the securities are eligible for deposit with that depository. Three commentators opposed the proposal, stating that it was unnecessary.

      The Commission believes that depository eligibility is important to perfecting the national clearance and settlement system. Moreover, the Commission believes that disclosure regarding whether or not an IPO is, or will be, eligible for deposit at a securities depository is appropriate. SRO rules require broker-dealers to use depositories to confirm and settle trades in depository eligible securities. Disclosure that the securities are not depository eligible will facilitate compliance and efficient clearance and settlement in the secondary market immediately after the offering. Accordingly, the Commission is directing the staff to pursue requiring disclosure when neither the issuer nor the underwriter are intending to make the securities being offered depository eligible.

      1 Under standard practice, an affirmation serves as the Institution's authorization to the custodian to deliver securities against payment by (or accept securities and release payment to) the broker-dealer. A confirmation differs from an affirmation in that confirmation reports must contain all the information required by Rule 10b-10. If the broker-dealer includes all the necessary data about the trade in the ID transmission, he can comply with the trade confirmation requirements of Securities Exchange Act Rule 10b-10.17 CFR 240.10b-10 (1992).

      2 DTC. An Interactive Option for the Institutional Delivery System, Memorandum to Participants and Other ID Users (March 31, 1993).

      3 The SID feature will be a repository for customer account and settlement information such as customer name, agent and interested parties furnished by institutions, agents and broker-dealers. This SID will eliminate the need for the broker-dealer to maintain ail such information in its internal records and to provide all such information each time that it enters trade data into the ID system. See File No. SR-DTO-83-07, at 3-5, describing the features of the interactive ID system.

      4 The Electronic Mall feature will eliminate the need to make telephone calls or send facsimile transmissions by enabling broker-dealers and institutions to send and receive details of an order execution, allocations of block trades, or requests for cancellation (if the institution disagrees with a confirmation that the Institution has received through the ID system). Id.

      5 The enhanced ID system will match trade data received from the broker-dealer with the instructions received from the institution automatically with the results of the matching being reported through the distribution of various output reports to the broker-dealer, the agent and the institution. Id.

      6 This feature will allow delivering parties to authorize settlement of unaffirmed trades of DTC-eligible securities on the settlement date and later. Id

      7 ACH is a domestic electronic payment system operated under the direction of the National Automated Clearing House Association ("NACHA") and is utilized by over 22,000 banks, thrifts, and other depository financial institutions on behalf of corporations and individuals.

      8 Letter from Elliott McEntee, President & Chief Executive Officer, NACHA. to Jonathan G. Katz, Secretary, Commission June 10, 1993).

      9 Letter from Elliott McEntee, President & Chief Executive Officer, NACHA, to Jeff Marquardt, Assistant Director, Payment Systems Studies & Payment System Risk Division of Reserve Bank Operations & Payment Systems, Board of Governors (August 31, 1993).

      10 Id.

      11 Letter from Stanley I KrasVa. President. SO A. to Jonathan G. Katz, Secretary, Commission (June 22.1993). Flipping occurs when, during the new issue stabilization period, an investor sells the stock back to the syndicate or to another investor who in turn sells it back to the syndicate. Under current practice, the securities certificate number is used to identify which member of the syndicate sold the issue to the investor who "flipped" it back to the syndicate. Identifying that syndicate member allows the syndicate to recoup from the syndicate member a portion of the seller's concession.

      12 Letter from Salvatore N. Cucco, President Data Management Division, to Jonathan G. Kate, Secretary, Commission (June 16, 1893).

      13 Telephone conversation with Richard Netson, General Counsel, DTC (September 21, 1993).

      14 17 CFR 240.10b-10.

      15 17 CFR 240.10b-10(a).

      16 17 CFR 240.15c1-1(b).

      17 Rule 10b-10 does not specify mail delivery as the sole means of sending customer confirmations. Facsimile transmissions would be acceptable under the Rule as well.

      18 Uniform Commercial Code section 8-319 states that a "contract for the sale of securities is not enforceable by way of action or defense unless * * * there is some writing signed by the party against whom enforcement is sought or by his authorized agent or broker, sufficient to indicate that a contract has been made for sale of a stated quantity of described securities at a defined or stated price." U.C.C. 8-319 (1990).

      19 17 CFR 240.15c3-1.

      20 17 CFR 240.15c3-3.

      21 Letter from Anthony J. Leitner, Vice President-Associate General Counsel, Goldman Sachs, to Jonathan G. Katz, Secretary, Commission (June 30, 1993).

      22 17 CFR 240.15c3-3(m).

      23 Similarly, the Commission notes that the time periods indicated in the formula for determining reserve requirements for brokers and dealers. Rule 15c3-3a, also are consistent with Rule 15c6-1.

      24 Reg T, 12 CFR part 220, et. seq., imposes, among other things, initial margin requirements and payment rules on securities transactions. See 15 U.S.C. 78a et seq., part 220.

      25 See Securities Credit Transactions, Review of Regulation T, "Credit by Broken and Dealers" (August 18, 1992), 57 FR 37109.


      [FR Doc. 93-25093 Filed 10-12-93; 8:45 am)

      BILLING CODE 8010-01-P

    • 93-76 Mail Vote—NASD Solicits Member Vote On Filing Requirements For Use of Mutual Fund Rankings and Elimination Of Sunset Provisions in Prefiling Requirements For CMO Advertisements;

      Last Voting Date: December 31, 1993

      SUGGESTED ROUTING

      Senior Management
      Advertising
      Corporate Finance
      Government Securities
      Legal & Compliance
      Mutual Fund

      Executive Summary

      The NASD invites members to vote on an amendment to Article III, Section 35(c) of the Rules of Fair Practice that would require a member using mutual fund rankings in advertisements or sales literature to submit copies of the rankings and the data on which the rankings are based to the NASD Advertising Regulation Department for review. The amendment will also eliminate the sunset provisions in Article III, Subsection 35(c)(2) of the Rules of Fair Practice and in Subsection 8(c)(1)(B) of the Government Securities Rules, thereby making the prefiling requirement for advertisements relating to collateralized mortgage obligations (CMOs) permanent. The text of the proposed rule changes follow this Notice.

      Background and Description Of the Proposal

      The increasing number of mutual funds in recent years has been accompanied by an increasing number of mutual fund ranking entities (Ranking Entities). Ranking Entities, as well as mutual funds and fund affiliates, categorize and rank mutual funds by various criteria, including fund type; performance over a given period of years; total return; standardized yield calculated pursuant to Securities and Exchange Commission (SEC) rules; the variations in sales charges; and, risk/reward. References to such rankings in mutual fund advertisements and sales literature have also increased substantially in recent years as members try to sell mutual fund shares by promoting fund performance.

      The NASD Board of Governors believes that it is important for the NASD to be able to review and regulate the use of ranking materials and the development of customized rankings to prevent the misleading use of such rankings. The NASD is, therefore, proposing to amend Article III, Section 35(c) of the NASD Rules of Fair Practice to require that copies of mutual fund rankings and the data on which the rankings are based be submitted to the NASD Advertising Regulation Department for review.

      The NASD is also adopting mutual fund ranking guidelines (Guidelines) governing the NASD review. Although attached to this Notice, the Guidelines do not require member vote.

      Subsection 35(c)(1) is proposed to be amended to require any member that files advertisements or sales literature pursuant to Subsection 35(c)(1) that include or incorporate rankings or comparisons of the investment company with other investment companies, to include a copy of the ranking or comparison used in the advertising or sales literature. The requirements of this provision will permit the NASD staff to determine immediately whether the use of the ranking complies with the Guidelines and to avoid the need to research the ranking or obtain a copy of the source information to verify the accuracy of the material.

      Subsection 35(c)(2) currently requires that certain advertisements be filed 10 days before use. The NASD is proposing to amend the section to apply the preuse requirement to all investment company advertisements or sales literature that incorporate rankings or comparisons either generally published or created directly or indirectly by the investment company, its underwriter, or an affiliate.1 While the NASD is concerned about permitting investment companies or their affiliates to create ranking categories, rather than a Ranking Entity, it recognizes that a customized ranking may provide meaningful information to the investor. Such filings must also include a copy of the data, ranking, or comparison on which the ranking or comparison is based.

      The NASD is also proposing to amend Article III, Subsection 35(c)(2) of the Rules of Fair Practice and Subsection 8(c)(1)(B) of the Government Securities Rules to eliminate sunset provisions that cause the prefiling requirements relating to CMOs to expire on November 16, 1993. This change will make the prefiling requirement for CMO advertisements permanent.2

      Request for Vote

      The Board of Governors believes that requiring members to include rankings, comparisons, and data used when submitting for review advertisements and sales literature that incorporate mutual fund rankings or comparisons will enhance member compliance. The information provided to the NASD Advertising Regulation Department will assist it in assuring that the use of such information is accurate and presents investors with fair and meaningful data on which to make an informed investment decision. The NASD considers the proposed rule change necessary and appropriate and recommends that members vote their approval.

      As to the proposed elimination of the sunset provisions for the prefiling of collateralized mortgage obligation advertisements, the Board believes that the positive regulatory benefits seen since implementation of the provision (i.e., the reduction in misleading advertising) justifies a permanent prefiling requirement.

      The text of the proposed rule change that requires member vote is below. 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 by no later than December 31, 1993. The amendment will not be effective until it is filed with and approved by the SEC.

      Also included below is the text of the Guidelines For the Use of Rankings in Mutual Fund Advertisements and Sales Literature being filed separately with the SEC. The Guidelines are included for members' information and do not require member vote before submission to the SEC.

      Questions regarding this Notice should be directed to Thomas A. Pappas, Assistant Director, Advertising/Investment Companies Regulation Department, at (202) 728-8330; Elliott R. Curzon, Senior Attorney, Office of General Counsel, at (202) 728-8451; and Robert J. Smith, Attorney, Office of General Counsel, at (202) 728-8176.


      1 The proposed Guidelines permit the use of a ranking based on a category or subcategory created by a fund affiliate rather than by a Ranking Entity, so long as the ranking is based on the performance measurements of a Ranking Entity.

      2 To provide sufficient time for membership vote and SEC approval of the elimination of the sunset provisions, the NASD has submitted a rule change to the SEC to extend the sunset provisions temporarily.


      Text of Proposed Amendment to Section 35(c) of the Rules of Fair Practice

      Communications With the Public

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

      Sec. 35.

      * * * * *

      (c) Filing Requirements and Review Procedures
      (1) Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts) not included within the requirements of Subsection (c)(2) of this Section, and public direct participation programs (as defined in Article III, Section 34 of the Rules of Fair Practice) shall be filed with the Association's Advertising Department within 10 days of first use or publication by any member. Filing in advance of use is recommended. Members are not required to file advertising and sales literature which have previously been filed and which are used without change. Any investment company filing any advertisement or sales literature pursuant to this Subsection that includes or incorporates rankings or comparisons of the investment company with other investment companies shall include a copy of the ranking or comparison used in the advertisement or sales literature.
      (2) Advertisements concerning collateralized mortgage obligations registered under the Securities Act of 1933, and advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts) that include or incorporate rankings or comparisons of the investment company with other investment companies where the ranking or comparison category is not generally published or is the creation, either directly or indirectly, of the investment company, its underwriter or an affiliate, shall be filed with the Association's Advertising Department for review at least 10 days prior to use (or such shorter period as the Department may allow in particular circumstances) for approval and, if changed or expressly disapproved by the Association, shall be withheld from publication or circulation until any changes specified by the Association have been made or, in the event of disapproval, until the advertisement has been refiled for, and has received, Association approval. Any investment company filing any advertisement or sales literature pursuant to this Subsection shall include a copy of the data, ranking or comparison on which the ranking or comparison is based. [This subsection (c)(2) shall remain in effect for one year from November 16, 1992 unless modified or extended prior thereto by the Board of Governors.]

      * * * * *

      Text of Proposed Amendment To Section 8(c)(1)(B) of the Government Securities Rules

      Communications With the Public

      Sec. 8.

      (c) Filing Requirements and Review Procedures

      * * * * *
      (B) advertisements concerning collateralized mortgage obligations shall be filed with the Association's Advertising Regulation Department for review at least 10 days prior to use (or such shorter period as the Department may allow in particular circumstances) for approval and, if changed or expressly disapproved by the Association, shall be withheld from publication or circulation until any changes specified by the Association have been made or, in the event of disapproval, until the advertisement has been refiled for, and has received, Association approval. [This subsection (c)(1)(B) shall remain in effect for one year from November 16, 1992 unless modified or extended prior thereto by the Board of Governors.]

      * * * * *

      Guidelines for the Use of Rankings in Mutual Fund Advertisements and Sales Literature

      I. Definition of "Ranking Entity"

      For purposes of these guidelines, the term "Ranking Entity" refers to any entity that provides general information about mutual funds to the public, that is independent of the mutual fund and its affiliates, and whose services are not procured by the mutual fund or any of its affiliates to assign the fund a ranking. Examples of "Ranking Entities" include services such as Morningstar and Lipper and financial publications such as Money and Barron's.
      II. Required Disclosures
      A. Headlines/Prominent Statements
      1. A headline or other prominent statement must not state or imply that a mutual fund is the best performer in a category unless it is actually ranked first in the category.
      2. Prominent disclosure of the mutual fund's ranking, the total number of mutual funds in the category, the name of the category, and the period on which the ranking is based (i.e., the length of the period and the ending date; or, the first day of the period and the ending date), must appear in close proximity to any headline or other prominent statement that refers to a ranking.
      B. All advertisements and sales literature containing a mutual fund ranking must disclose, with respect to the ranking:
      1. the name of the category (e.g., growth funds);
      2. the number of funds in the category;
      3. the name of the Ranking Entity;
      4. the length of the period and the ending date, or, the first day of the period and the ending date;
      5. criteria on which the ranking is based;
      6. for load funds, whether the ranking takes into account sales charges;
      7. if fees have been waived or expenses advanced during the period on which the ranking is based, and the waiver or advancement had a material effect on the ranking, a statement to that effect; and
      8. the publisher of the ranking data(e.g., ABC Magazine, June 1993).
      The disclosure required by B1, B2, and B3 must be set forth prominently in the body of the advertisement or sales literature.
      C. If the mutual fund ranking consists of a symbol (e.g., a star system) rather than a number, the advertisement or sales literature also must disclose the meaning of the symbol (e.g., a four-star ranking indicates that the fund is in the top 30 percent of all mutual funds).
      D. All advertisements and sales literature containing a mutual fund ranking must disclose that past performance is no guarantee of future results.
      III. Time Periods
      A. Any mutual fund ranking set forth in an advertisement or sales literature must be, at a minimum, current to the most recent calendar quarter ended prior to the submission for publication.
      B. Except for money market mutual funds:
      1. advertisements and sales literature must not use any ranking based on a period of less than one year;
      2. a mutual fund ranking based on total return must be accompanied by rankings based on total return for the one-, five-, and ten-year periods (or life of the fund) supplied by the same Ranking Entity in the category and based on the same time period; and,
      3. a mutual fund ranking based on the current SEC standardized yield must be accompanied by rankings based on total return for the one-, five-, and ten-year periods (or life of the fund) supplied by the same Ranking Entity in the category and based on the same time period.
      IV. Categories
      A. The choice of category (including a subcategory of a broader category) on which the mutual fund ranking is based must be one that provides a sound basis for evaluating the performance of the fund.
      B. Subject to the standards below, a mutual fund ranking must be based only on (1) a published category or subcategory created by a Ranking Entity or (2) a category or subcategory created by a fund or a fund affiliate, but based on the performance measurements of a Ranking Entity.
      C. When the mutual fund ranking is based on a subcategory, the advertisement or sales literature must disclose the name of the full category and the fund's ranking and the number of funds in the full category. This requirement does not apply if the subcategory is (1) based solely on the investment objectives of the funds included and (2) created by a Ranking Entity. This disclosure could be included in a footnote.
      D. The advertisement or sales literature must not use any category or subcategory that is based upon the mutual funds' asset size (whether or not it has been created by a Ranking Entity).
      E. If an advertisement uses a category created by the mutual fund or a fund affiliate, including a "subcategory" of a category established by a Ranking Entity, the advertisement must prominently disclose:
      1. the fact that the fund or its affiliate has created the ranking category;
      2. the number of funds in the category;
      3. the basis for selecting the category; and
      4. the Ranking Entity that developed the research on which the ranking is based.
      F. An advertisement or sales literature containing a headline or other prominent statement that proclaims a mutual fund ranking created by a fund or its affiliate must indicate, in close proximity to the headline or statement, that the mutual fund ranking is based upon a category created by the fund or its affiliate.
      V. Multiple Class/Two-Tier Funds

      Mutual Fund rankings for more than one class or fund with the same portfolio must be accompanied by prominent disclosure of the fact that the funds or classes have a common portfolio.

    • 93-75 Nasdaq National Market(r) Additions, Changes, And Deletions as of September 24, 1993

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading

      As of September 24, 1993, the following 41 issues joined the Nasdaq National Market®, bringing the total number of issues to 3,264:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      ACOM

      A+ Communications, Inc.

      8/25/93

      1000

      GBIZ

      Grow Biz International, Inc.

      8/25/93

      1000

      GWALY

      Great Wall Electronic International Limited (ADR)

      8/25/93

      1000

      PFGC

      Performance Food Group Company

      8/25/93

      1000

      SKTV

      Silver King Communications, Inc.

      8/26/93

      1000

      SIMM

      Simmons Outdoor Corporation

      8/26/93

      1000

      OAKS

      River Oaks Furniture, Inc.

      8/27/93

      1000

      TAROF

      Taro Vit Industries Ltd.

      8/30/93

      1000

      GOTK

      Geotek Industries, Inc.

      9/1/93

      1000

      GOVTY

      Govett & Company Limited (ADR)

      9/1/93

      200

      FTCG

      First Colonial Group, Inc.

      9/3/93

      1000

      INBR

      INBRAND Corporation

      9/3/93

      1000

      BNTN

      Benton Oil & Gas Company

      9/9/93

      1000

      BSSI

      BioSafety Systems, Inc.

      9/9/93

      500

      CRNR

      Cornerstone Imaging, Inc.

      9/9/93

      1000

      CSNRW

      Casino Resource Corporation (Cl A 9/15/96 Wts)

      9/15/93

      500

      CSNR

      Casino Resource Corporation

      9/15/93

      500

      LDDS

      LDDS Communications, Inc.

      9/15/93

      1000

      PAIR

      PairGain Technologies, Inc.

      9/15/93

      1000

      ANTC

      ANTEC Corporation

      9/17/93

      500

      PHLY

      Philadelphia Consolidated Holding Corp.

      9/17/93

      1000

      RDMN

      Redman Industries Inc.

      9/17/93

      1000

      DIAUV

      Diasonics Ultrasound, Inc. (WI)

      9/20/93

      1000

      CASH

      First Midwest Financial, Inc.

      9/20/93

      200

      HLGRF

      Hollinger, Inc.

      9/20/93

      1000

      RPCLF

      Revenue Properties Company Limited

      9/20/93

      1000

      CBRA

      Cobra Golf Incorporated

      9/21/93

      1000

      NETM

      NetManage, Inc.

      9/21/93

      1000

      ASYT

      Asyst Technologies Inc.

      9/22/93

      1000

      KWND

      KENETECH Corporation

      9/22/93

      1000

      NXCO

      Neurex Corporation

      9/22/93

      1000

      WAMUM

      Washington Mutual Savings Bank

      9/22/93

      500

      APOD

      A Pea in the Pod, Inc.

      9/23/93

      1000

      HAVN

      Haven Bancorp Inc.

      9/23/93

      1000

      HTBB

      HomeTown Buffet Inc.

      9/23/93

      1000

      OROA

      OroAmerica, Inc.

      9/23/93

      1000

      GRIP

      Royal Grip, Inc.

      9/23/93

      1000

      SUMA

      Summa Four Inc.

      9/23/93

      1000

      APSI

      APS Holding Corporation

      9/24/93

      1000

      FCBF

      FCB Financial Corp.

      9/24/93

      500

      MCCO

      Monaco Coach Corporation

      9/24/93

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since August 25, 1993:

      New/Old Symbol

      New/Old Security

      Date of Change

      RLLY/RLLY

      Rally's Hamburgers, Inc./Rally's Inc.

      8/30/93

      OSFIF/BIIEF

      O S F, Inc./B I I Enterprises, Inc.

      8/31/93

      CCAXW/CCAXW

      Corrections Corporation of America (9/14/97 Wts)/Corrections Corporation of America (9/14/96 Wts)

      9/2/93

      NGCO/NGCOV

      National Gypsum Company/National Gypsum Company (WI)

      9/13/93

      JEWLY/RATNY

      Signet Group plc (ADR)/Ratners Group plc (ADR)

      9/14/93

      JEWLZ/RATNZ

      Signet Group plc (ADR Conv Pfd)/Ratners Group plc (ADR Pref)

      9/14/93

      MMDI/MMDI

      Momentum Corporation/Momentum Distribution Inc.

      9/15/93

      EXAM/FWCO

      Express America Holdings Corp./First Western Corp.

      9/21/93

      SIGGZ/JEWLZ

      Signet Group plc (ADR Conv Pfd)/Signet Group plc (ADR Conv Pfd)

      9/22/93

      SIGGY/JEWLY

      Signet Group plc (ADR)/Signet Group plc (ADR)

      9/22/93

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      CKCP

      Cybertek, Corporation

      8/30/93

      FFFC

      Franklin First Financial Corp.

      8/31/93

      HDRP

      H D R Power Systems Inc.

      8/31/93

      BTRIC

      BTR Realty, Inc.

      9/1/93

      CBKS

      Commonwealth Bancshares Corporation

      9/1/93

      CSTR

      Costar Corporation

      9/9/93

      SHRE

      Sahara Resorts

      9/9/93

      CMTKJ

      Cimflex Tecknowledge Corporation

      9/10/93

      SEMIW

      All American Semiconductor, Inc. (Cl A)

      9/13/93

      EQIC

      Equitable of Iowa Companies

      9/13/93

      ICFI

      ICF Kaiser International Inc.

      9/14/93

      BMED

      Ballard Medical Products

      9/15/93

      LDDSA

      LDDS Communications Inc. (Cl A)

      9/15/93

      NHDI

      NHD Stores, Inc.

      9/17/93

      PSBN

      Pioneer Bancorp Inc.

      9/24/93

      WCLBW

      Warehouse Club (Wts)

      9/24/93

      Questions regarding this Notice should be directed to Mark A. Esposito, Supervisor, Market Listing Qualifications, at (202) 728-8002. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 93-74 Veteran's Day and Thanksgiving Day: Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Veteran's Day, Thursday, November 11, 1993, and Thanksgiving Day, Thursday, November 25, 1993. On Thursday, November 11, The Nasdaq Stock MarketSM and the securities exchanges will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed in observance of Veteran's Day. All securities markets will be closed on Thursday, November 25, in observance of Thanksgiving Day.

      Trade Date

      Settlement Date

      Reg. T Date*

      Nov. 2

      Nov. 9

      Nov. 11

      3

      10

      12

      4

      12

      15

      5

      15

      16

      8

      16

      17

      9

      17

      18

      10

      18

      19

      11

      18

      22

      12

      19

      23

      17

      24

      29

      18

      26

      30

      19

      29

      Dec. 1

      22

      30

      2

      23

      Dec. 1

      3

      24

      2

      6

      25

      Markets Closed

      —

      26

      3

      7

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

      Note: November 11, 1993, is considered a business day for receiving customer payments under Regulation T of the Federal Reserve Board.

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

      Brokers, dealers, and municipal securities dealers should use these settlement dates to clear and settle 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 (203) 375-9609.

    • 93-73 Members' Obligations to Customers When Selling Collateralized Mortgage Obligations (CMOs)

      SUGGESTED ROUTING

      Senior Management
      Government Securities
      Legal & Compliance

      Executive Summary

      As part of its comprehensive program to monitor and enhance member sales practices, the NASD is publishing this Notice to remind members of their obligations under the Rules of Fair Practice when recommending CMOs to their customers. In light of the complexity and the varying risk characteristics of CMOs, Article III, Sections 1 and 2 of the Rules of Fair Practice, require that members must be conversant in all of the characteristics of CMOs to assess adequately the suitability of CMOs for their customers. Moreover, members must ensure that their customers understand the characteristics and risks associated with CMOs.

      Background

      With the decline in interest rates over the last several years, investors have sought alternatives to the ever-lower yields of certificates of deposit (CDs), money market funds, and government securities. The desire to maximize returns while maintaining a high degree of credit safety has significantly enhanced interest in asset-backed securities, particularly collateralized mortgage obligations.

      In recognition of the potential problems and in response to an increase in complaints related to CMO sales practices and advertising in the last few years, the NASD has taken a number of steps to address the issues relating to CMO sales practices. Among others, the initiatives taken by the NASD include the adoption of Guidelines Regarding Communications with the Public About Collateralized Mortgage Obligations (CMOs) that were published in Notice to Members 93-18 and the enactment of a pre-use filing requirement for CMO advertising as published in Notice to Members 92-59. These advertising-related initiatives are having a positive effect in achieving the desired compliance results.

      In continuing these efforts to oversee and enhance CMO sales practices, the NASD is reminding members of their obligations under the Rules of Fair Practice when recommending CMOs to their customers. In light of the complexity and the varying risk characteristics of CMOs, under Article III, Sections 1 and 2 of the Rules of Fair Practice, members and their associated persons must be conversant in all of the characteristics of CMOs to assess adequately the suitability of CMOs for their customers. Moreover, they must ensure that their customers understand the characteristics and risks of CMOs. Further, adequate supervisory procedures must be in place to monitor CMO activity within each NASD member firm.

      Among the matters members and representatives selling CMOs should be acquainted with are:

      General Characteristics

      Although CMOs entitle investors to payments of principal and interest, they differ from CDs, corporate bonds, and Treasury securities in significant ways. CDs, corporate bonds, and Treasuries are issued with stated maturities and fixed interest rates. When a CD or bond matures or is called, the issuer returns the face value to the investor in a single principal payment. In contrast, while CMOs have stated final maturity dates at which all principal must be returned, they can make principal payments throughout the life of the security. In addition, the timing of these payments may vary significantly depending on interest rate changes.

      Principal payments on CMOs arise from both the regular amortization of the underlying mortgages and from prepayments of those mortgages due to sales or refinancings. As recent history shows, when interest rates decline substantially, many homeowners choose to refinance their mortgages. This activity can result in CMOs paying off principal more rapidly than had been anticipated. Thus, a CMO investor may be faced with reinvesting his or her principal at a current lower rate. In a rising interest rate environment, homeowners may not refinance or sell their houses as quickly; thus, CMO investors may face holding their investment for longer than anticipated. While principal payments may be quite predictable for certain tranches or classes of a given CMO, other tranches of the same issue may be significantly less predictable.

      In addition, certain tranches may be structured in such a way that, depending on interest rates and prepayments, investors are at substantial risk and may lose all or a substantial portion of their principal. The risks associated with these less predictable tranches may make them unsuitable for many retail investors. Members must evaluate the suitability of such high-risk tranches for each individual investor based on the investor's sophistication and high-risk profile, and must ensure that the investor is aware of the risks and characteristics of the tranche.

      Maturity/Return of Principal/ Prepayment Assumptions

      As discussed above, investors have to know that CMOs are not the same as conventional debt securities or CDs and that time to maturity may vary as well as the amount of principal returned. Further, investors need to know that prepayment assumptions—estimates based on historic prepayment rates for each particular type of mortgage loan under various economic conditions from various geographic areas—are factored into the offering price, yield, and market value of a CMO. Explaining prepayment assumptions is important because the realization of the average-life and- yield estimates depends on their accuracy.

      Condition of the Secondary Market/Liquidity

      While there is a sizable secondary market for CMOs generally, there is less of a market for the more risky and complex tranches. CMOs are less uniform than traditional mortgage-backed securities and more expensive to trade. It is also harder to obtain current pricing information. Matching up buyers and sellers is often difficult, especially for the more esoteric tranches. Members should remind investors that, by selling their CMOs rather than waiting for the final principal payment, the securities may be worth more or less than their original face value. In addition, members should clearly inform investors of extra costs or commissions associated with CMO transactions.

      Impact of Purchasing at a Premium or a Discount

      While the principles of purchasing CMOs at a discount or a premium are similar to those of Treasuries, members should inform investors of the consequences of such purchases. Members need to advise investors of the factors and pricing assumptions of the discount or premium. In particular, for securities purchased at a premium, it should be clear that any guarantees on the securities only apply to the par value of the security and not to any premium paid.

      Interest-Only, Principal-Only, and Floater Tranches, Including Inverse Floaters

      Principal-Only (PO) Securities

      Some tranches are structured so that investors receive only principal payments generated by the underlying collateral. POs usually sell at a deep discount from face value on the assumption that the purchaser will ultimately receive the entire face value through scheduled payments and prepayments; however, the market values of POs are extremely sensitive to prepayment rates, which, in turn, vary with interest rate changes. If interest rates are falling and prepayments accelerate, the value of the PO will increase. On the other hand, if rates rise and prepayments slow, the value of the PO will drop.

      Interest-Only (IO) Securities

      These securities result from the creation of POs; thus, CMOs with PO tranches also have IO tranches. IO securities sell at a deep discount to their "notional" principal amount, namely the principal balance used to calculate the amount of interest due. They have no face or par value and, as the notional principal amortizes and prepays, the IO cash-flow declines.

      Unlike POs, IOs increase in value when interest rates rise and prepayment rates slow; consequently they are often used to "hedge" portfolios against interest rate risk. IO investors should be mindful that if prepayment rates are high, they may actually receive less cash back than they initially invested. Because of these risks, a member may sell IOs only to a sophisticated investor maintaining a high-risk profile. The member should make sure the investor is aware of the risks and characteristics of IOs.

      Floating-Rate Tranches

      Floating-rate tranches or "floaters" carry interest rates tied to a variable interest rate index, such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI), subject to an upper limit or cap and sometimes to a lower limit or "floor." The performance of these investments also depends on the way interest rate movements affect prepayment rates and average lives.

      Inverse Floaters (IFs)

      Inverse floaters are structured to offset floating-rate tranches. Interest payments on IFs vary inversely with an index. Because IFs are more leveraged than other tranches, they have high price volatility as interest rates move. As the rate of the index drops, the interest rate on the IF rises at an accelerated pace. Conversely, rising rates cause an IF's interest payments to drop dramatically. At worst, rising rates will lower interest payments and extend return of principal beyond the anticipated average life. As with other high-risk tranches, IFs are only suitable for sophisticated investors with a high-risk profile and the investor must be made aware of the risks and characteristics of IF being purchased.

      Accrual Bonds or Z-Tranches

      The final tranche of a CMO is often structured as a Z-tranche or an accrual bond. Z-tranche holders receive no cash payments for an extended period of time. During the time that the earlier tranches are outstanding, a Z-tranche receives "accrued interest" which is credit for periodic interest payments that increase the face amount of the security at a compounded rate but are not actually paid out to investors. After all previous tranches are retired, the Z-tranche holders start receiving cash payments that include both principal and continuing interest.

      While the presence of a Z-tranche can stabilize the cash flow in other tranches, the market value of Z-tranches can fluctuate widely, and their average life depends on other aspects of the offering. Because the interest on these securities is taxable when credited, even though the investor receives no actual payment, Z-tranches are often suggested as investments for tax-deferred retirement accounts. Thus, the wide variability of risk associated with Z-tranches requires member's suitability evaluations based on the combination of the Z-tranche with other investments as well as on the investor's sophistication and risk profile. The member must make the investor aware of the tranche's risks and characteristics.

      *****

      The educational and regulatory initiatives discussed in this Notice will help members meet their obligations to investors under the Rules of Fair Practice and should prevent investor misunderstanding that could lead not only to dissatisfaction with CMOs as an investment, but also to potential violations of NASD rules and regulations. If you have any questions concerning this Notice, please contact Walter Robertson, Director, Compliance Department at (202) 728-8221.

    • 93-72 SEC Approves Major Revisions to Rule 17a-11

      SUGGESTED ROUTING

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations

      Executive Summary

      The Securities and Exchange Commission (SEC) recently approved changes to Rule 17a-11 that eliminate certain burdensome filing requirements. The requirements to give notice basically are unchanged. These amendments are the first major revisions to the rule in more than 20 years, which took effect August 12, 1993.

      Background

      Adopted in 1971, SEC Rule 17a-11 requires broker/dealers to report net capital and other operational problems and to file reports regarding those problems within certain time periods.

      In October 1992, the SEC solicited comments on its proposal to relieve broker/dealers of the obligation to submit FOCUS reports when their net capital declines below certain levels. During the public comment period, the SEC Division of Market Regulation issued a no-action letter authorizing broker/dealers' designated examining authority (DEA) to waive the FOCUS filing requirements of paragraphs (a) and (b) of the rule when the notification was given by the broker/dealer within the specified time frames.

      After reviewing the comments, the SEC decided these changes would not compromise the ability of the DEA or the SEC to monitor the condition of broker/dealers. The SEC adopted the proposed amendments substantially as proposed.

      Summary of Amendments

      In general, the amendments reduce certain reporting burdens on broker/dealers by eliminating the requirement that a broker/dealer submit supplemental reports to the SEC and other regulatory organizations when its net capital declines below certain specified levels, or in other instances that indicate the existence of financial or operational difficulties. The specific rule changes are discussed below.

      Notice of Net Capital Deficiency

      Broker/dealers still have to transmit notice of a net capital deficiency on the same day it occurs. That notice must now specify the broker/dealer's net capital requirement and its current amount of net capital. However, the amended rule eliminates the requirement that broker/dealers file a FOCUS report within 24 hours after notifying the SEC of a net capital deficiency.

      The amended rule also requires a broker/dealer to give notice of a net capital deficiency when informed of such by its DEA or the SEC, even if the broker/dealer disagrees with the finding. The broker/dealer may specify in the notice its reasons for disagreeing.

      Notification Regarding Subordination Agreements

      The changes eliminate reference to the requirement that a broker/dealer notify the SEC telegraphically when its total outstanding principal amounts of satisfactory subordination agreements exceed the maximum allowable for more than 90 days. The SEC decided this reference was not needed since such a condition is a net capital violation that requires same-day notification to the DEA.

      Early Warning Levels

      Rule 17a-11 currently contains three early warning levels. First, a broker/dealer that computes its net capital under the basic method must give notice if its aggregate indebtedness exceeds 1,200 percent of its net capital. Second, a broker/dealer that computes its net capital under the alternative standard has to give notice if its net capital falls below 5 percent of its aggregate debit items computed under the Reserve Formula. Third, a broker/dealer that computes its net capital under either standard is required to give notice if its total net capital declines below 120 percent of its minimum requirement.

      Before, if any of these events occurred, a broker/dealer had to file a FOCUS report within 15 days after month end for three successive months. The amendments to the rule eliminate this filing requirement and replace it with a provision that requires a broker/dealer to give notice of any of these events within 24 hours of its occurrence. The SEC determined that the prompt notice requirement provides regulators with sufficient warning. Thereafter, any additional information necessary to monitor a broker/dealer's financial or operational condition may be requested by the DEA or the SEC.

      Notification of Books and Records Deficiency

      The amendments to the rule clarify the time within which a broker/ dealer must give notice if it fails to make and keep current its required books and records. Instead of requiring a broker/dealer to give notice "immediately," the rule now specifies that notice must be given the same day of the event.

      Transmittal of Required Notices and Reports

      The amended rule lets a broker/ dealer transmit any required notice by facsimile transmission or by telegraph. In addition, the reports regarding a books and records deficiency or a material inadequacy may be transmitted by overnight delivery.

      References to Other Financial Responsibility Notice Requirements

      The amended rule expands the list of references to the SEC's financial responsibility notice requirements to include all notice requirements contained in the net capital rule, the customer protection rule, and Rule 17a-5. This change does not add any additional reporting requirements; instead, it clarifies the references by including all pertinent ones rather than just some of them.

      Other Amendments

      The adopted amendments also include other changes. The structure of the rule has been reorganized and includes certain technical revisions.

      In addition, because some paragraphs have been redesignated, the SEC had to make technical revisions to Rule 17a-5 that refer to paragraphs in Rule 17a-11.

      One final amendment concerns Appendix D of the net capital rule. Currently Rule 15c3-1d prohibits a broker/dealer from entering into a temporary subordinated loan during any period in which the firm is subject to any of the reporting provisions of Rule 17a-11, including the period in which a broker/dealer had to file FOCUS reports, which requirement has now been eliminated.

      Therefore, to prevent a broker/dealer from obtaining temporary subordinated loans during periods of financial or operational difficulties, the SEC is prohibiting a broker/ dealer from obtaining a temporary subordinated loan if it has given notice under Rule 17a-11 within the preceding 30 calendar days.

      * * * * *

      A copy of the SEC's release concerning the change to Rule 17a-11, which was published in the Federal Register, Volume 58, Number 132, for July 13, 1993, is attached for your review. If you have any questions, please call Derick Black, Compliance Department, at (202) 728-8225.

      FEDERAL REGISTER

      EFFECTIVE DATE: The amendments shall become effective on August 12, 1993.

      FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, (202) 272-2904. Roger G. Coffin, (202) 272-7375. or Elizabeth K. King, (202) 272-3738. Division of Market Regulation, 450 Fifth Street. NW., Washington, DC 20549.

      SUPPLEMENTARY INFORMATION:

      I. Introduction
      A. Background

      Section 17(a) of the Exchange Act provides the Commission with the authority to promulgate rules requiring registered broker-dealers to make and transmit reports that the Commission deems necessary in the public interest or for the protection of investors. Pursuant to this authority, the Commission adopted Rule 17a-11 (the "Rule") in 1971.1 The Rule imposes a duty on broker-dealers to report net capital and other operational problems and to file reports regarding those problems within certain time periods. Although there have been minor revisions to the Rule since it was adopted, this is the first comprehensive examination of Rule 17a-11 in over 20 years. The Commission believes that the requirements to file FOCUS Reports may be eliminated without compromising the ability of the Commission or the Designated Examining Authorities ("DEAs") to monitor the condition of broker-dealers.
      B. Proposal

      On October 26.1992, the Commission proposed for comment amendments to Rule 17a-112 that, in part, would relieve broker-dealers of the obligation to furnish the Commission with Part II or Part HA of Form X-17A-5 ("FOCUS Report")3 when their net capital declines below certain levels. During the public comment period, the Commission authorized the Division to issue a no-action letter permitting the DEAs to waive the requirement to file a FOCUS Report as currently required by paragraphs (a) and (b) of Rule 17a-11. In response to its proposal to amend Rule 17a-11, the Commission received two comment letters, one from the National Association of Securities Dealers, Inc. (the "NASD"), and one from the Chicago Mercantile Exchange (the "CME"), both of which supported the proposed amendments. The Commission is adopting the proposed amendments in substantially the form as proposed.
      II. Rule Amendments
      A. Paragraph (a)

      Currently, paragraph (a) of Rule Hall requires every broker-dealer whose net capital falls below its required minimum level, or whose total outstanding principal amounts of satisfactory subordination agreements exceed allowable levels for more than 90 days, to do two things. First, the broker-dealer must give notice of the event on that same day. Second, the broker-dealer must file a FOCUS Report within 24 hours of the notice.

      The Commission is eliminating the requirement that broker-dealers file a FOCUS Report within 24 hours after notifying the Commission of a net capital deficiency. Broker-dealers will remain obligated to transmit notice of a net capital deficiency on the same day of the occurrence. Unlike the previous rule, however, the amendments require the notice to specify the broker-dealer's net capital requirement and its current amount of net capital.4 The amendments also require a broker-dealer who has been notified by the Commission or its DEA of a net capital deficiency to give notice of the deficiency, even if the broker-dealer disagrees with the Commission's or the DEA's determination. In such a case, the amendments permit the broker-dealer to specify the reasons for its disagreement in the notice.

      The same-day notice requirement gives the Commission and the DEAs adequate early warning of financial or operational problems. After receiving notice of a capital deficiency, the Commission or a DEA will be able to increase its surveillance of a broker-dealer experiencing difficulty and to obtain any additional information necessary to assess the broker-dealer's financial condition.

      The amendments also eliminate the notification requirement for broker-dealers whose total outstanding principal amounts of satisfactory subordination agreements exceed the maximum allowable for a period in excess of 90 days. A broker-dealer is currently required, pursuant to paragraph (c)(2) of Rule 15c3-1d, to give notice to its DEA if, after giving effect to all subordinated loans that are mature or which are scheduled to mature within six months, its net capital declines below the identical levels contained in paragraph (a) of Rule 17a-11. The Commission believes that the notice provided for in Rule 15c3-1d is sufficient to give regulators an early warning of problems involving a broker-dealer's subordinated loan agreements.
      B. Paragraph (b)

      Paragraph (b) of Rule 17a-11 currently requires every broker-dealer whose net capital does not equal or exceed a certain level to file a monthly FOCUS Report for at least three months. The capital level contained in paragraph (b) is higher than the minimum level referred to in paragraph (a), and is referred to as an "early warning level."5 When a broker-dealer's net capital level is declining, it would first trigger the filing requirements set forth in paragraph (b) of the Rule. If the broker-dealer's net capital continues to drop, and it falls below the broker-dealer's base minimum capital requirement, the broker-dealer would be required to comply with the additional FOCUS Report filing and notice requirements of paragraph (a) of the Rule.

      The amendments to paragraph (b) of the Rule eliminate the requirement that a broker-dealer file a FOCUS Report within 15 days after the end of each month for three successive months. In lieu of this requirement, the amendments require brokers-dealers to give notice promptly (but within 24 hours) after the event triggering the filing requirement. The Commission expects that this notice requirement will be sufficient to alert the Commission and the broker-dealer's DEA that a broker-dealer, may be experiencing financial or operational difficulty.

      Thereafter, the Commission or the DEA may require any additional information that it deems necessary to monitor the condition of the broker-dealer.

      In their comment letters, both the NASD and the CME supported the proposed elimination of the reporting requirements. The NASD and the CME agreed that prompt notice by a broker-dealer experiencing financial or operational difficulties will provide its DEA with sufficient early warning to monitor the broker-dealer's condition.
      C. Paragraph (b)(4)

      The Commission is amending certain other paragraphs of Rule 17a-11. For example, there are references in paragraph (b)(4) of Rule 17a-11 to three existing notice provisions set forth in the net capital rule requiring broker-dealers subject to those provisions to give notice in accordance thereto. However, paragraph (b)(4) of Rule 17 a-11 does not reference all of the applicable net capital6 or customer protection rule7 notice provisions (such as the requirement to give notice of large withdrawals of capital under paragraph (e) of Rule 15c3-1), and the Commission believes it would be appropriate for the Rule to do so. Accordingly, the Commission is amending Rule 17a-11 to refer to five previously existing notice provisions contained in the net capital rule, the customer protection rule, and Rule 17a-5.

      These amendments do not add any additional reporting burdens because they simply reference certain notice sections for clarification purposes and do not, by themselves, create an obligation to report. Additionally, the net capital rule, the customer protection rule and Rule 17a-5 will remain unchanged (with the exception of minor technical revisions to Rule 17a-5 and Rule 15c3-1d discussed below). Rather, the Rule will be clarified to contain a complete, rather than a partial, listing of the Commission's financial responsibility notice requirements.
      D. Paragraph (c)

      Under current paragraph (c) of Rule 17a-11, every broker-dealer is required to give notice immediately if it fails to make and keep current its required books and records. In order to clarify the time within which notice must be transmitted under paragraph (c) of the Rule, the amendments require notice to be provided the same day of the event.
      E. Paragraph (f)

      Paragraph (f) of the Rule (which will be redesignated as paragraph (g)) requires broker-dealers to give notice by telegraph and to transmit reports to the principal office of the Commission in Washington, DC, the regional office of the Commission for the region in which the broker-dealer has its principal place of business, and the broker-dealer's DEA. The amendments specify that notice required by the Rule may be given or transmitted by means of either a facsimile transmission or telegraph. The amendments also state that the report required by paragraph (c) or paragraph (d) of Rule 17a-11 may be transmitted by overnight delivery.
      F. Other Amendments

      The Commission is adopting amendments that reorganize the Rule 17a-11's structure and make certain technical revisions. For example, references in the current Rule to "his" will be changed to "its" in order to eliminate any gender-specific language.

      In addition, because the amendments will redesignate the notice requirement currently contained in paragraph (f) of Rule 17a-11 to paragraph (g), certain sections of Rule 17a-5 that refer to paragraph (f) require technical modification. Accordingly, the Commission is adopting revisions to certain sections of Rule 17a-5 that would change the references to paragraph (f) of Rule 17a-11 to paragraph (g).

      Finally, paragraph (c)(5)(i) of Rule 15c3-1d permits a broker-dealer to obtain temporary subordinated loans in certain circumstances in order to participate in activities such as securities underwritings. Currently. Rule 15c3-1d prohibits a broker-dealer from entering into a temporary subordinated loan during any period in which the broker-dealer is subject to "any of the reporting provisions" of Rule 17a-11.8 This provision was intended to cover the period in which a broker-dealer was required to file FOCUS reports under Rule 17a-11. which requirement is being eliminated by the Commission.

      In order to retain the net capital rule's prohibition against a broker-dealer obtaining a temporary subordinated loan during a period of financial or operational difficulty, the Commission is making a technical amendment to paragraph (c)(5)(i) of Rule 15c3-1d. Based on a recommendation by the NASD, paragraph (c)(5)(i) is being amended to prohibit a broker-dealer from obtaining a temporary subordinated loan if it has given notice under Rule 17a-11 within the preceding thirty calendar days. This amendment will enable the DEAs to prevent a broker-dealer from obtaining temporary subordinated loans during periods in which the broker-dealer may be experiencing financial or operational difficulties.
      III. Summary of Final Regulatory Flexibility Analysis

      The Commission has prepared a Final Regulatory Flexibility Analysis (FRFA") in accordance with 5 U.S.C. 604 concerning the final rule amendments. The FRFA states that the Commission did not receive any comments concerning the Initial Regulatory Flexibility Analysis. A copy of the FRFA may be obtained by contacting Elizabeth K. King, Division of Market Regulation, U.S. Securities and Exchange Commission. 450 Fifth Street. NW., Washington. DC, 20549, (202) 272-3881.
      IV. Statutory Analysis

      Pursuant to the Securities Exchange Act of 1934 and particularly section 15 thereof, 15 U.S.C. 78o, the Commission is amending §§ 240.17a-11, 240.17a-5, and 15c3-1d of Title 17 of the Code of Federal Regulations in the manner set forth below.

      List of Subjects in 17 CFR Part 240

      Brokers, Confidential business information. Reporting and recordkeeping requirements. Securities.

      Text of the Amendments

      In accordance with the foregoing. Title 17, Chapter II of the Code of Federal Regulations is amended as follows:

      PART 240-GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

      1. The authority citation for Part 240 continues to read in part as follows:

      Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and 80b-11, unless otherwise noted.

      * * * * *
      2. § 240.15c3-1d is amended by revising the second sentence of the introductory text of paragraph (c)(5)(i) to read as follows:

      § 240.15c3-1d Satisfactory Subordination Agreements (Appendix D to 17 CFR 240.15c3-1).

      * * * * *
      (c) * * *
      (5) * * *
      (i) * * * This temporary relief shall not apply to a broker or dealer if, within the preceding thirty calendar days, it has given notice pursuant to § 240.17a-11. or if immediately prior to entering into such subordination agreement, either:
      * * * * *
      2. § 240.17a-5 is amended by revising paragraph (c)(2)(iii) and revising the first three sentences of paragraph (h)(2) to read as follows:

      § 240.17a-5 Reports to be made by certain brokers and dealers.

      * * * * *
      (c) * * *
      (2)* * *
      (iii) If in connection with the most recent annual audit report pursuant to § 240.17a-5, the independent accountant commented on any material inadequacies in accordance with paragraphs (g) and (h) of this section, and § 240.17a-11(e), there shall be a statement by the broker or dealer that a copy of such report and comments is currently available for the customer's inspection at the principal office of the Commission in Washington, DC, and the regional office of the Commission for the region in which the broker or dealer has its principal place of business; and
      * * * * *
      (h) * * *
      (2) If, during the course of the audit or interim work, the independent public accountant determines that any material inadequacies exist in the accounting system, internal accounting control, procedures for safeguarding securities, or as otherwise defined in paragraph (g)(3) of this section, then the independent public accountant shall call it to the attention of the chief financial officer of the broker or denier, who shall have a responsibility to inform the Commission and the designated examining authority by telegraphic or facsimile notice within 24 hours thereafter as set forth in § 240.17a-11 (e) and (g). The broker or dealer shall also furnish the accountant with a copy of said notice to the Commission by telegram or facsimile within said 24 hour period. If the accountant fails to receive such notice from the broker or dealer within said 24 hour period, or if the accountant disagrees with the statements contained in the notice of the broker or dealer, the accountant shall have a responsibility to inform the Commission and the designated examining authority by report of material inadequacy within 24 hours thereafter as set forth in §240.17a-11(g). * * *
      * * * * *
      4. By revising § 240.17a-11 to read as follows:

      §240.17a-11 Notification provisions for brokers and dealers.
      (a) This section shall apply to every broker or dealer registered with the Commission pursuant to section 15 of the Act.
      (b) Every broker or dealer whose net capital declines below the minimum amount required pursuant to § 240.15c3-1 shall give notice of such deficiency that same day in accordance, with paragraph (g) of this section. The notice shall specify the broker or dealer's net capital requirement and its current amount of net capital. If a broker or dealer is informed by its designated examining authority or the Commission that it is, or has been, in violation of § 240.15c3-1 and the broker or dealer has not given notice of the capital deficiency under this § 240.17a-11, the broker or dealer, even if it does not agree that it is, or has been, in violation of § 240.15C3-1, shall give notice of the claimed deficiency, which notice may specify the broker's or dealer's reasons for its disagreement.
      (c) Every broker or dealer shall send notice promptly (but within 24 hours) after the occurrence of the events specified in paragraphs (c)(l), (c)(2) or (c)(3) of this section in accordance with paragraph (g) of this section:
      (1) If a computation made by a broker or dealer subject to the aggregate indebtedness standard of § 240.15c3-1 shows that its aggregate indebtedness is in excess of 1,200 percent of its net capital; or
      (2) If a computation made by a broker or dealer, which has elected the alternative standard of § 240.15c3-1, shows that its net capital is less than 5 percent of aggregate debit items computed in accordance with § 240.15c3-3a Exhibit A: Formula for Determination Reserve Requirement of Brokers and Dealers under § 240.15c3-3; or
      (3) If a computation made by a broker or dealer pursuant to § 240.15c3-1 shows that its total net capital is less than 120 percent of the broker or dealer's required minimum net capital.
      (d) Every broker or dealer who fails to make and keep currant the books and records required by § 240.17a-3, shall give notice of this fact that same day in accordance with paragraph (g) of this section, specifying the books and records which have not been made or which are not current. The broker or dealer shall also transmit a report in accordance with paragraph (g) of this section within 48 hours of the notice stating what the broker or dealer has done or is doing to correct the situation.
      (e) Whenever any broker or dealer discovers, or is notified by an independent public accountant, pursuant to § 240.17a-5(h)(2) of the existence of any material inadequacy as defined in § 240.17a-5(g), the broker or dealer shall:
      (1) Give notice, in accordance with paragraph (g) of this section, of the material inadequacy within 24 hours of such discovery or notification; and
      (2) Transmit a report in accordance with paragraph (g) of this section within 48 hours of the notice stating what the broker or dealer has done or is doing to correct the situation.
      (f) Every national securities exchange or national securities association that learns that a member broker or dealer has failed to send notice or transmit a report as required by paragraphs (b), (c), (d), or (e) of this section, even after being advised by the securities exchange or the national securities association to send notice or transmit a report, shall immediately give notice of such failure in accordance with paragraph (g) of this section.
      (g) Every notice or report required to be given or transmitted by this section shall be given or transmitted to the principal office of the Commission in Washington, D.C., the regional office of the Commission for the region in which the broker or dealer has its principal place of business, the designated examining authority of which such broker or dealer is a member, and the Commodity Futures Trading Commission if the broker or dealer is registered as a futures commission merchant with such Commission. For the purposes of this section, "notice" shall be given or transmitted by telegraphic notice or facsimile transmission. The report required by paragraphs (d) or (e)(2) of this section may be transmitted by overnight delivery.
      (h) Other notice provisions relating to the Commission's financial responsibility or reporting rules are contained in § 240.15c3-1(a)(6)(iv)(B), §240.15c3-1(a)(6)(v), §240.15c3-1(a)(7)(iv), § 240.15c3-1(c)(2)(x)(B)(J), § 240.15c3-1(c)(2)(x)(F)(3), § 240.15c3-1(e), §240.15c3-1d(c)(2), §240.15c3-3(i) and § 240.17a-5(h)(2).

      Dated: July 7, 1993.

      By the Commission.

      Margaret H. McFarland,

      Deputy Secretary.

      [FR Doc. 93-16480 Filed 7-12-93; 8:45 am)

      BILLING CODE 8010-01-M


      1 Securities Exchange Act Release No. 9268 (July 30, 1971), 38 FR 14725 (Aug. 11, 1971).

      2 Securities Exchange Act Release No. 31155 (Oct. 26, 1992), 57 FR 49156 (Oct. 30, 1992).

      3 FOCUS Reports contain schedules including the broker-dealer's: net capital: assets and liabilities; and income and expenses. Generally. Part IIA is filed by broker-dealers that do not clear or carry customer accounts, and those broker-dealers that are subject to the requirements of paragraphs (a)(2) and (a)(3) of Rule 15C3-1. Part II is filed by all other broker-dealers engaged in a general securities business and subject to paragraph (a)(l) of Rule 15c3-1.

      4 Many of the notices received by the Commission already contain this information. The Commission believes it would be appropriate, however, to specify the contents of the notice in the Rule to standardize the notices received.

      5 There are three early warning levels. First, a broker-dealer that has elected to compute its net capital under the basic method must give notice if its aggregate indebtedness, as defined in Rule 15c3-1, exceeds 1,200 percent of its net capital. Second, a broker-dealer that computes its net capital under the alternative standard is required to give notice if its net capital falls below 5 percent of its aggregate debit items computed in accordance with the Formula for Determination of Reserve Requirement for Brokers and Dealers under Rule 15c3-3. Third, a broker-dealer that computes its net capital under either standard is required to give notice if its total net capital declines below 120 percent of its minimum requirement. If a broker-dealer falls out of net capital compliance, it must comply with both paragraphs (a) and (b) of Rule 17a-11.

      6 Rule 15c3-1 (17 CFR 240.15c3-1).

      7 17 CFR 240.15c3-3.

      8 17 CFR 240.15c3-1d(c)(5)(i).

    • 93-71 SEC Provides Relief From Its Net Capital Rule's "Ready Market" Provisions for Foreign Equity Securities; Seeks Comments for Proposed Rulemaking

      SUGGESTED ROUTING

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations

      Executive Summary

      On August 13, 1993, the Securities and Exchange Commission (SEC) issued a no-action letter that allows broker/dealers to treat foreign equity securities listed on the FT-Actuaries World Indexes (Indexes) as having a "ready market" under SEC Rule 15c3-1 (net capital rule). The SEC also published a concept release seeking public comment on whether its no-action letter approach is appropriate or if there are better alternative approaches.

      Background

      The net capital rule requires a broker/dealer to make certain deductions from its net worth to determine its net capital. Generally, these deductions include assets not readily convertible into cash, most unsecured receivables, and certain percentage deductions related to the securities positions the broker/dealer owns or treats as proprietary positions. A 100 percent deduction is taken for securities for which there is no "ready market" as defined in the net capital rule.

      Under the rule, a ready market includes "a recognized established securities market in which there exists independent bona fide offers to buy and sell so that a price reasonably related to the last sale price or current bona fide competitive bid and offer quotations can be determined for a particular security almost instantaneously and where payment will be received in settlement of a sale at such price within a relatively short time conforming to trade custom."

      In 1975, the SEC's Division of Market Regulation issued an interpretive letter that addressed the application of the net capital rule's ready market provisions to foreign equity securities. That letter specified that foreign equity securities have ready markets if they are publicly issued in a principal securities market and listed on one of the principal exchanges in the major money markets outside the United States.

      The 12 exchanges recognized as "principal exchanges" were Amsterdam, Brussels, Frankfurt, Johannesburg, London, Luxembourg, Montreal, Paris, Sydney, Tokyo, Toronto, and Zurich. Because the SEC said securities listed on these exchanges have a ready market, these securities were subject to haircuts similar to comparable United States securities traded on United States markets.

      Current SEC Position

      The Division of Market Regulation recently issued a no-action letter that supersedes all prior staff opinions and interpretations regarding the ready marketability of foreign equity securities. In a letter dated August 13, 1993, the SEC stated that broker/dealers may treat foreign equities listed on the Indexes as having a ready market for purposes of the net capital rule.

      The Indexes are compiled jointly by the Financial Times Limited; Goldman, Sachs & Co.; and County NatWest/Wood Mackenzie (collectively, the Consortium) in conjunction with the Institute of Actuaries and The Faculty of Actuaries. The Indexes include securities listed on exchanges in 24 countries. The SEC's position makes these securities subject to the haircuts specified in paragraph (C)(2)(vi)(J) of the net capital rule, rather than the 100 percent deduction required for securities with no ready market. Broker/dealers now have an increased number of foreign equity securities meeting the ready market criteria.

      The SEC no-action letter that follows this Notice details the election process for securities on the Indexes. In its letter, the SEC notes that the components of the Indexes will be made available on a quarterly basis. Members may rely on the current quarterly Indexes until the publication of the next ones.

      The SEC intends to review this position in the near future. To that end, the SEC published a concept release in the August 20, 1993, Federal Register, seeking comments on a number of questions regarding the treatment of foreign equity securities under the ready market provisions of the net capital rule.

      Questions concerning the Notice may be directed to Brad Darfler, Compliance Department, at (202) 728-8946.

      * * * * *

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-32748; File No S7-24-93]

      Net Capital Rule

      AGENCY: Securities and Exchange Commission.

      ACTION: Concept release, request for comments.

      SUMMARY: The Securities and Exchange Commission (the "Commission") solicits comment on a number of questions regarding the treatment of foreign equity securities under the "ready market" provisions of the net capital rule, Rule 15c3-l, under the Securities Exchange Act of 1934 ("Exchange Act"). Following receipt of public comments, the Commission will determine whether proposed rulemaking or other action is appropriate In the interim, the Commission is authorizing the Division of Market Regulation ("Division") to issue a no-action letter as to relief to be accorded foreign equity securities under the ready market provisions. The Commission seeks comment on whether this treatment should be revised.

      DATES: Comments should be received on or before October 13, 1993

      ADDRESSES: People washing to submit written comments should file three copies thereof with Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. 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, Associate Director, (202) 272-2904, Michael P. Jamroz, Branch Chief, (202) 272-2372, or Timothy H. Thompson, Staff Attorney, (202)272-2398.

      SUPPLEMENTARY INFORMATION:

      I. Introduction

      In determining a broker-dealer's net capital under Rule I5c3-1 of the Securities Exchange Act of 1934, the net capital rule ("Rule"), the broker-dealer deducts from net worth, as computed in accordance with generally accepted accounting principles, assets not readily convertible into cash, including most unsecured receivables, and certain percentage deductions related to the securities and commodity positions that it carries. Paragraph (c)(2)(vii) of the Rule requires a 100% deduction for securities held by the broker-dealer for which there is no "ready market" as defined in paragraph (c)(11) of the Rule

      Paragraph (c)(11) defines a ready market to "include a recognized established securities market in which there exists independent bona fide offers to buy and sell 30 that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined for a particular security almost instantaneously and where payment will be received in settlement of a sale at such price within a relatively short time conforming to trade custom." 1

      Generally, for domestic equity securities, the Rule has recognized as liquid those securities which are traded on the United States securities exchanges, NASDAQ securities, and certain other OTC securities where the broker-dealer can demonstrate that there are independent market makers for the security who quote the securities in an inter-dealer network.2

      With respect to foreign securities, in December 1975, the Division of Market Regulation ("Division") issued an interpretive letter deeming a "ready market" to exist in certain circumstances.3 Specifically, as described in that letter, only foreign equity securities that were publicly issued in a principal securities market and were listed on one of the principal exchanges in the major money markets outside the United States were deemed to have ready markets and receive haircuts similar to comparable United States securities traded on United States markets. The 12 exchanges in 11 countries which the Division recognized as being "principal exchanges in the major money markets" are: Amsterdam, Brussels, Frankfurt, Johannesburg, London, Luxembourg, Montreal, Paris, Sydney, Tokyo, Toronto, and Zurich.
      II. Concerns With the 1975 Approach

      The Securities Industry Association ("SIA") has requested that the Commission adopt the FT-Actuaries World Indexes ("FT-A World Indexes")4 as a ready market test for foreign equity securities.5 The SIA believes this treatment will more accurately reflect the liquidity of foreign securities in today s markets. The SIA suggests that the Division's current ready market interpretation could hinder U.S. broker-dealers in the global marketplace for securities.

      The FT-Actuaries World Indexes are indices on exchanges from 24 countries6 and are jointly compiled by The Financial Times Limited, Goldman, Sachs & Co. and County NatWest/Wood Mackenzie (together, the "Consortium") in conjunction with The Institute of Actuaries and the Faculty of Actuaries.7

      The Consortium generally attempts to include the largest, most liquid exchanges in its indexes so long as they meet certain standards for data dissemination and international interest. In determining which issues to include from a particular exchange, the Consortium subjects the issues listed on the exchange to five tests to screen out any small capitalization, illiquid, or restricted ownership stock. The Consortium also considers the economic sectoral make-up of a market before determining which individual stocks to include.

      In an earlier letter, the Capital Committee of the SIA stated that "the interpretation of 'ready market' contained in the 1975 letter ... no longer accurately assesses the liquidity of foreign securities and results, in some cases, in onerous haircuts on securities that trade in what are in fact demonstrably liquid markets."8 The Capital Committee argued that since 1975 "new foreign securities markets have been established and the volume of trading in foreign securities by U.S. broker-dealers has increased significantly."

      An objective approach that recognizes the most liquid individual securities from a large number of markets may be preferable to recognizing the stocks listed on particular exchanges in total for a number of reasons. First the process of recognizing ready markets can raise sensitive perception concerns for foreign markets. The use of an objective approach which recognizes some securities from virtually all developed markets would solve most of these concerns. It also would, in the case of the SIA proposal, shift responsibility to a credible group which compiles a widely-followed index. Moreover, it would avoid the difficulties inherent in a case-by-case determination by the Commission of ready market status; reliance would be placed on the objective determination of the index compilers. Second, the objective approach would eliminate the incongruity of giving capital value to illiquid securities listed on a recognized exchange while giving no value to world class securities which are traded on exchanges not now recognized.
      III. Questions for Comment

      The Commission seeks comment on whether it would be advisable for the Commission to recognize privately prepared indexes for ready market purposes. The Commission also seeks comment on whether the advantage of having a system where the most liquid securities generally are considered to be readily marketable outweighs problems that may arise from the Commission adopting this role. Finally, the Commission seeks recommendations on alternative approaches.

      By the Commission

      Dated: August 16, 1993

      Margaret H. McFarland,

      Deputy Secretary,

      [FR Doc. 93-20140 Filed 8-19-93; 8:45 am]

      BILLING CODE 8010-81-P


      1 The Rule also deem a ready market to mist where securities have been accepted as collateral by a bank where the broker-dealer can demonstrate that the excess of the market value of the securities over the amount of the loan is sufficient to make the loan acceptable as a fully secured loan to banks regularly making secured loans to brokers and dealers.

      2 If a broker-dealer holds a large position of a particular security measured in relation to the normal trading volume in that security (a blockage), the broker-dealer has the burden of proof of showing to its designated examining authority that the amount in excess of a certain trading volume has a ready market. Otherwise he matt take a 100% haircut on the excess amount. The aggregate of the most recent four week inter-dealer trading volume in the security is treated as readily marketable by the broker-dealer- See letter from Michael A. Macchiaroli, Assistant Director, Division of Market Regulation, to Edward Kwalwasser, Esq., Senior Vice President, New York Stock Exchange Inc., and Thomas R. Cassella. Vice President, National Association of Securities Dealers, Inc., dated October 5, 1987.

      3 Letter from Nelson S. Kibler, Assistant Director, Division of Market Regulation, to Anthony M. O'Connor, Co-chairman, International Committee, SIA, dated December 29, 1975.

      4 The markets represented in the FT-A World Indexes and the number of securities from each market (in parentheses) are: 1 Austria (18), 2. Belgium (42). 3. Denmark (33), 4. Finland (23), S. France (98), 6. Germany (62), 7. Ireland (15), 8. Italy (73), 9. Netherlands (24), 10. Norway (22), 11 Spain (46), 12. Sweden (36), 13. Switzerland (55), 14. United Kingdom (219), 15. Canada (108), 16. United States (519), 17. Australia (68), 18. Hong Kong (55), 19. Japan (470), 20. Malaysia (69), 21. New Zealand (13). 22. Singapore (38), 23. Mexico (18), and 24. South Africa (60). As of Friday, June 4, 1893. Source: Financial Times.

      5 Letter from Dominic Carone, Chairman, Capital Committee, SIA, to Michael A. Macchiaroli, Assistant Director, Division of Market Regulation, dated October 8, 1992. By letter dated August 13, 1993 the Division took a no-action position in which it stated that broker-dealers may treat foreign equity securities listed on the FT-A World Indexes as having a ready market for purposes of Rule 15c3-1 of the Exchange Act. That letter withdraw the applicability of all prior staff opinions relating to the ready marketability of foreign equity securities, including the 1975 letter referred to in footnote 3.

      6 All U S. securities would continue to be considered readily marketable if they are quoted on an established securities market. Of the 2, 184 equities on the FT-A World Indexes as of June 4, 1993, 519 are U.S. securities.

      7 The Faculty of Actuaries and the Institute of Actuaries are two professional actuarial societies based in the United Kingdom. These societies have participated in the development and calculation of indexes on the UK market since 1929.

      8 See supra, note 5.

      UNITED STATES

      SECURITIES AND EXCHANGE COMMISSION

      WASHINGTON. D.C. 20549

      August 13, 1993

      DIVISION OF MARKET REGULATION

      Dominic A. Carone

      Chairman

      Capital Committee

      Securities Industry Association

      120 Broadway

      New York, New York 10271

      Re: Ready Marketability of Foreign Equity Securities

      Dear Mr. Carone:

      Your letter, dated October 8, 1992, 1/ requests on behalf of the Capital Committee of the Securities Industry Association ("SIA") , that the Division of Market Regulation ("Division") advise the SIA, on behalf of its members and similarly situated broker-dealers, that the Division will not recommend that the Commission take enforcement action if broker-dealers treat the foreign equity issues that are listed on the FT-Actuaries World Indexes (the "Indexes") as having a ready market with respect to the ready market and haircut provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 (17 C.F.R. § 240.15c3-1) ("Rule").

      I.

      In determining a broker-dealer's net capital under the Rule, a broker-dealer is required generally to deduct from net worth as computed in accordance with generally accepted accounting principles, assets not readily convertible into cash, most unsecured receivables, and certain percentage deductions related to the securities positions that it carries. Paragraph (c) (2) (vii) of the Rule includes a 100% deduction for securities held by a broker-dealer for which there is no ready market as defined in paragraph (c) (11) of the Rule. A lesser deduction is required for securities which are deemed to have a ready market.

      With respect to foreign securities, in December 1975, the Division issued an interpretive letter deeming a "ready market" to exist in certain circumstances.2/ Specifically, as described in that letter, only foreign equity securities that were publicly issued in a principal securities market and are listed on one of the principal exchanges in the major money markets outside the United States are deemed to have ready markets and receive haircuts similar to comparable United States securities traded on United States markets. The 12 exchanges in 11 countries which the Division recognized as being "principal exchanges in the major money markets" are: Amsterdam, Brussels, Frankfurt, Johannesburg, London, Luxembourg, Montreal, Paris, Sydney, Tokyo, Toronto, and Zurich.3/

      In your letter, you state that "since 1975, new foreign securities markets have been established and the volume of trading in foreign securities by U.S. broker-dealers has significantly increased," thus, causing U.S. broker-dealers to compete in a global marketplace. You argue that U.S. broker-dealers are adversely affected in this global marketplace because the interpretation of ready market contained in the 1975 letter no longer accurately assesses the liquidity of foreign equity securities. Thus, the SIA Capital Committee recommends that the Division recommend no action if broker-dealers treat the foreign equity securities listed on the FT-Actuaries World Indices 8S having a ready market.4/
      II.

      the FT-A World Indices are jointly compiled by The Financial Times Limited, Goldman, Sachs & Co., and County NatWest/Wood Mackenzie (together, the "Consortium") in conjunction with The Institute of Actuaries and The Faculty of Actuaries. The aim of the Consortium was to create and maintain a series of high-quality equity market indices for use by the global investment community.

      The Consortium reviews annually the exchanges to be included in the indices. In determining which exchanges to include the Consortium looks at the following criteria: direct equity-investment by non-nationals must be available; accurate and timely data must be available; no significant exchange controls should exist which would prevent the timely repatriation of capital or dividends; significant international investor interest in the local equity market must have been demonstrated; and adequate liquidity must exist.

      We understand that, in determining which issues to include on the Indices the Consortium subjects the issues listed in the different markets to five investibility screens to determine the investible universe, The first screen, the Size Screen, excludes the bottom 5% of any market's capitalization. The second screen, the Total Restriction Screen, excludes any foreign security which foreign investors are barred from owning. The third screen, the Partial Restriction Screen, excludes a portion of the capitalization of an issue where the security has restrictions on foreign ownership. A fourth screen, the "Free Float" Screen, generally excludes a security where one or more identifiable holders acting in concert holds more than 75% of the outstanding issue. The fifth screen, the Liquidity Screen, excludes any security that fails to trade for more than fifteen working days within each of two successive quarters.

      Once the Consortium has determined the investible universe for a given market, it selects constituent stocks in order to capture about 85% of this investible universe. The Consortium also determines the economic sectoral make-up of each market before determining the individual stocks to include. The stocks are selected so that the index reflects the economic sector distribution of the investible universe.
      III.

      Based on the above, the Division will not recommend to the Commission that enforcement action be taken as to section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-1 thereunder if broker-dealers treat foreign equity securities listed on the FT-A World Indices as having a ready market for the purposes of the Rule. These securities will be subject to the haircuts specified under paragraph (c)(2)(vi)(J). All prior staff opinions relating to the ready marketability of foreign equity securities, including those contained in the letter to Anthony O'Connor of the SIA International Committee, dated December 29, 1975, are hereby withdrawn and should not be relied upon. You also should note that this letter is not intended to validate the use of the Indexes in any other context, but that the relief provided by this no-action letter is limited specifically to the terms herein.

      You should be aware that this is a staff position with respect to enforcement action only and does not purport to express any legal conclusions, This position is based solely on the foregoing description; any factual variations may warrant a different response. This position may be withdrawn or modified if the staff determines that such action is necessary in the public interest, for the protection of investors, or otherwise, in furtherance of the purposes of the securities laws. In any event, the position stated herein will be reviewed by June 30, 1995. We expect to work with your Committee in determining the efficacy of this approach.

      Sincerely,

      Michael A. Macchiaroli

      Associate Director


      1/ Letter from Dominic A. Carone, Chairman, Capital Committee, Securities Industry Association, to Michael A. Macchiaroli, Assistant Director, Division of Market Regulation, dated October 22, 1992.

      2/ Letter from Nelson S. Kibler, Assistant Director, Division of Market Regulation, to Anthony M. O'Connor, Co-Chairman, International Committee, SIA, dated December 29, 1975.

      3/ Letter from Nelson S. Kibler, Assistant Director, Division of Market Regulation, to Anthony M. O'Connor, Co-Chairman, International Committee, Securities Industry Association, dated December 29, 1975.

      4/ The components of the Indices will be made available to the New York Stock Exchange and the National Association of Securities Dealers on a quarterly basis for distribution to their members. Reliance may be placed on the quarterly Indices until publication of the following quarterly Indices.

    • 93-70 SEC Amends Rule 17a-5 Giving Additional Responsibilities to Designated Examining Authorities

      SUGGESTED ROUTING

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved changes to Rule 17a-5. This rule authorizes the designated examining authority (DEA) to grant or deny requests from broker/dealers for extensions of time to file their FOCUS and audited annual financial reports. Also, these amendments permit the DEA to approve a member's request for a change in a date as of which it files the audited annual financial report. Members must now submit these requests to their DEA, not the SEC.

      Background

      Rule 17a-5 requires broker/dealers to file with the SEC monthly and quarterly reports concerning their financial and operational status. However, the rule allows broker/dealers to file these reports with their DEA, instead of the SEC, if the DEA has a plan on file with the SEC that conforms to paragraph (a)(4) of the rule. Currently, all self-regulatory organizations that are DEAs have approved plans on file.

      Under these plans, broker/dealers have filed FOCUS reports with their DEA, and the DEA has provided copies of applicable parts of the reports periodically to the SEC. Also, pursuant to the rule, broker/ dealers have filed their annual audits with their DEA and the SEC.

      Until now, authority to grant filing extensions for these reports, however, has rested with the SEC; likewise, the SEC approves changes in the "as of" date for filing annual audits. Last March, the SEC proposed delegating this responsibility to the DEA.

      The proposal noted that, because the DEA is most familiar with the current financial and operational conditions of the member firms, it is in a better position to respond to their requests. The NASD agreed and supported the proposed rule changes in a comment letter.

      Approved Amendments

      On August 25, the SEC approved the following amendments to Rule 17a-5. The effective date of these changes is October 1, 1993.

      • The authority to grant or deny requests for extensions of time for the filing of FOCUS reports is given primarily to a broker/dealer's DEA.

      • The DEA has the primary responsibility to grant or deny broker/ dealers' requests for extensions of time to file audited annual financial reports.

      • The DEA has the authority to approve changes in the "as of" date of the audited annual financial reports.

      Because the authority to approve these requests has been given to the DEA, the SEC also is amending the rule to delete references that give this authority to SEC regional administrators.

      Submitting Requests to NASD

      Members designated to the NASD must submit, in writing, their requests for extensions of time for filing FOCUS reports or annual audits to the appropriate NASD district office. Members also should contact the district office regarding changes in the firm's audit date.

      Questions concerning this Notice should be directed to Samuel Luque, Associate Director, Compliance, at (202) 728-8472.

    • 93-69 Broker/Dealer and Agent Renewals for 1993-94

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations
      Registration

      Executive Summary

      The 1993-94 NASD broker/dealer and agent registration renewal cycle begins in early November. This program simplifies the renewal process through the payment of one invoice amount that will include fees for NASD personnel assessments; NASD branch-office fees; and New York Stock Exchange (NYSE), American Stock Exchange (ASE), Chicago Board Options Exchange (CBOE), Pacific Stock Exchange (PSE) maintenance fees; in addition, it is planned that Philadelphia Stock Exchange (PHLX) maintenance fees will also be collected through this invoice. The invoice also includes state agent renewal fees and state broker/dealer renewal fees. Members should read this Notice and the instruction materials included in the invoice package to ensure continued eligibility to do business in the states effective January 1, 1994.

      Initial Renewal Invoices

      On or around November 11, 1993, initial renewal invoices will be mailed to all member firms. The invoices will include fees for NASD personnel assessments NASD branch office fees; NYSE, ASE, CBOE, PSE, and PHLX (proposed) 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 17, 1993.

      NASD personnel assessments for 1994 will be based on the number of registered personnel with an approved NASD license as of December 31, 1993. That personnel assessment is $10 per person. NASD branch office assessments will be based on the number of active branches as of December 31, 1993. This branch office assessment is $50 per branch.

      Agent renewal fees for NYSE, ASE, CBOE, PSE, PHLX (proposed), and state affiliations are listed in a table enclosed with each invoice. The table includes a list of broker/dealer renewal fees for states that are participating in this year's broker/dealer renewal program. NYSE, ASE, CBOE, PSE, and PHLX (proposed) maintenance fees—collected by the NASD for firms that are registered with NYSE/ASE/CBOE/PSE/PHLX as well as the NASD—are based on the number of NYSE-, ASE-, CBOE-, PSE-, and PHLX-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 ensure 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's Central Registration Depository (CRD) number included on the check. Submit the check along with the top portion of the invoice and mail 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 17, 1993, deadline will mean a loss of eligibility to do business in the states effective January 1, 1994.

      Filing Form U-5

      Members may wish to avoid unwanted renewals by filing Form U-5 for agent terminations in one or more jurisdiction affiliations. Because of the increased convenience and flexibility reported by members that used post-dated Forms U-5 for renewals in previous years, the NASD will again process post-dated agent terminations this year. From November 1 to December 17, the NASD will accept and process Forms U-5 (both partial and full terminations) with post-dated dates of termination. Under this procedure, if the Form U-5 indicates a termination date of December 31, 1993, 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 17, 1993. Also, postdated Forms U-5 cannot be processed if the date of termination indicated is January 1, 1994, or thereafter.

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

      The NASD encourages members having access to the Firm Access Query System (FAQS) to utilize electronic filings for the submission of all Forms U-5 and Page 1s of Form U-4. FAQS offers several advantages to firms in this regard, including the ability to process terminations immediately, ensure in-house control over agent registrations, and reduce normal and express mailing costs as well as long-distance telephone charges. It also allows members to handle quickly and efficiently 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 1993. The system will be operational from 7 a.m. to 11 p.m., Eastern Time (ET) Mondays through Fridays and will also be available on Saturdays from 9 a.m. to 5 p.m., ET during these months.

      Filing Forms BDW

      The CRD Phase II program, now in its fifth 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 that are not participating in Phase II. They are:

      Alabama
      Michigan
      Puerto Rico
      American Stock Exchange
      Chicago Board Options Exchange
      New York Stock Exchange
      Pacific Stock Exchange.

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

      The deadline for receipt of Forms BDW by the CRD for firms desiring to terminate an affiliation before year-end 1993 is December 17, 1993. This same date applies to the filing of Forms BDW with the jurisdictions that are not participating in Phase II. Post-dated Forms BDW filed with the CRD will be accepted and processed in the same manner as post-dated Forms U-5.

      Removing Open Registrations

      For the seventh year, the NASD will include in the initial invoice package a roster of firm agents whose NASD registration is either terminated or purged due to a deficient condition older 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.

      Final Adjusted Invoices

      On or about January 17, 1994, 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, 1993. 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 with the NASD, NYSE, ASE, CBOE, PSE, PHLX (proposed), and each state. Persons whose registrations are 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 will also receive an NASD branch office roster that lists all branches for which they have been assessed.

      Firms then will have a two-month period in which to reconcile any discrepancies on the rosters. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the final adjusted invoice package will appear in the January 1994 issue of Notices to Members, as well as on the inside cover of the renewal roster.

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

      Philadelphia Stock Exchange Slated to Join CRD

      The PHLX is scheduled to become a participant in the CRD. Once the participation has been officially approved, the CRD will process requests for the PHLX General Securities Representative (GS) registration only and will collect renewal fees for any agent who is approved with the PHLX-GS registration. The PHLX agent renewal fee will be $8.

      NASD Collects Florida Broker/Dealer Renewal Fees

      For the first time this year, the NASD will be collecting Florida broker/dealer renewal fees on its initial and final adjusted renewal invoices. If a firm is registered in Florida on CRD by November 5, 1993, its invoice will reflect the $200 Florida broker/dealer renewal fee in addition to the $20 per agent renewal fee. In the past, all Florida broker/dealer renewal fees were paid by firms directly to the state.

      Questions concerning this Notice may be directed to the NASD Member Services Phone Center at (301) 590-6500.

    • 93-68 Quotation and Trade-Reporting Rules for Members Dealing in High-Yield Bonds

      SUGGESTED ROUTING

      Senior Management
      Corporate Debt
      Institutional
      Legal & Compliance
      Municipal
      Operations
      Systems
      Trading

      Executive Summary

      On March 18, 1993, the Securities and Exchange Commission (SEC) approved NASD rules regarding quotation- and transaction-reporting requirements for members trading high-yield, fixed-income securities. The following Notice answers some commonly asked questions about members' new obligations when they are participating in the high-yield market. The new rules can be found in the NASD Manual and the system is scheduled to begin rollout in November 1993, with full implementation in early 1994.

      Questions About the Fixed Income Pricing SystemSM

      The Fixed Income Pricing SystemSM (FIPS) requires dealers and brokers to display real-time quotes and to enter trade reports for certain high-yield corporate bonds. Participation in FIPS is mandatory for NASD® members holding themselves out as brokers or dealers in FIPS securities. FIPS has been designed to provide greater transparency and improved surveillance to the high-yield bond market. Under the rules of FIPS, NASD members that participate in the high-yield bond market must report all of their over-the-counter transactions in FIPS bonds within five minutes of execution. Trade reports in all other (non-FIPS) high-yield bonds are required by end-of-day. FIPS also gives buyers and sellers ready access to market information. The FIPS consolidated quotation and volume display reveals pricing and trading activity in the marketplace, helping prepare market participants for their own bond trading.

      The following covers the most commonly asked questions regarding FIPS functions and the role of participants.

      Question #1: What is FIPS?
      Answer: The Fixed Income Pricing System, "FIPS," is a screen-based system operated by The Nasdaq Stock Market, Inc., that enables Nasdaq® to collect, process, and display quotes and summary transaction information in eligible high-yield corporate bonds to participants in the system and through information vendors. FIPS market hours for live quotations are 9:30 a.m. to 4 p.m., Eastern Time (ET). Trade reporting hours are from 9 a.m. to 5 p.m., ET.
      Question #2: What securities are eligible for quoting in FIPS?
      Answer: FIPS securities are fixed income corporate bonds rated BB+ or lower by Standard & Poor's Corporation. Nasdaq established an advisory committee to develop and monitor a list of the top-tier high-yield bonds based on volume, price, name recognition of the issue, research following, and representation from diverse industry groups. As a result, 35 bonds have been initially designated for mandatory quotation in FIPS and that number should rise to 50 within the first year of operation. FIPS participants may also voluntarily display quotes on any other high-yield bonds in which they wish to make markets.

      High-yield securities quoted in FIPS that have matured, that have been called, that have been upgraded in rating to investment quality (higher than BB+), or that have been downgraded to an extent that the issue's trading characteristics do not warrant inclusion in the system, will be withdrawn from FIPS and replaced with another issue.
      Question #3: What is a FIPS participant?
      Answer: A FIPS participant is any NASD member that is registered as a FIPS dealer or broker. A FIPS dealer buys and sells FIPS securities for its own account on a regular basis. A FIPS broker or broker's broker regularly buys and sells FIPS bonds for the accounts of others.
      Question #4: How does a member participate in FIPS?
      Answer: To participate as a FIPS dealer or broker, a member must apply for authorization as such with Nasdaq. The application will become effective upon receipt of Nasdaq approval by the member. Once authorized, a participant may begin quoting FIPS securities by first registering in each FIPS security through its FIPS terminal. If a FIPS dealer or broker no longer holds itself out as a dealer or broker in a FIPS security, the participant may voluntarily terminate its registration in that security while maintaining its registration in other FIPS securities.
      Question #5: What are the obligations of a FIPS participant?
      Answer: FIPS participants must continuously quote the FIPS securities in which they are acting as a dealer or broker. Quotations may be one- or two-sided and must be reasonably related to the prevailing market in each bond. Quotes must reflect a size of 100 bonds ($100,000 par value) and be in increments of 1/8 percentage points. Odd-lot quotations (less than 100 bonds) may also be displayed. FIPS dealers may enter quotations into FIPS under their own name or through a FIPS broker. Quotes entered under a dealer's own name will be identified as such; all others will bear the name of the broker with the dealer remaining anonymous.

      A FIPS broker must transmit all quotes received from FIPS dealers to FIPS for dissemination to FIPS participants and information vendors.
      Question #6: What happens if a member's ability to enter or update its quotes is impaired?
      Answer: The member must contact Nasdaq Market Operations at (800) 243-4284 to request withdrawal of its quotations; however, should the member remain in FIPS, it must execute any orders received from another member at its quotations as disseminated through FIPS.
      Question #7: Is a FIPS security subject to quotation halts?
      Answer: Nasdaq may halt quotations in a FIPS security by withdrawing all broker and dealer quotations in the issue under the following circumstances:
      • Nasdaq or an exchange halts trading in any equity security of a FIPS issuer.

      • A FIPS issuer makes a public announcement, or information about the issuer becomes known, that affects trading in the FIPS bond.
      Question #8: What is the procedure for reporting trades in FIPS securities and all other high-yield bonds?
      Answer: Between 9 a.m and 5 p.m., ET, members must report all transactions in FIPS securities regardless of size or price within five minutes of the execution. Trade reports not filed within five minutes will be considered late and must include the execution time on the report.

      Trades in all other high-yield securities (i.e., those not quoted in FIPS) may be reported anytime between 9 a.m. and 5 p.m., ET on trade date but, if not reported by 5 p.m. on trade date, the trade must be reported as late in a manner designated by Nasdaq.
      Question #9: How are trade reports submitted?
      Answer: Members with a FIPS terminal can submit their trade reports directly to Nasdaq via these terminals, through the dial-up capability provided by the service, or through a computer-to-computer interface with FIPS.

      Members without FIPS terminals that averaged five or fewer trades a day in either FIPS securities or other high-yield bonds during the previous calendar quarter may use the FIPS service desk to report trades.
      Question #10: Who is responsible for reporting a high-yield bond transaction?
      Answer: The obligation to report a transaction in FIPS securities or other high-yield bonds depends on the role of each party in the trade. In transactions between:
      • A FIPS dealer and a FIPS broker—the broker reports the trade.

      • Two FIPS dealers—the sell-side dealer reports the trade.

      • A FIPS participant and non-par-ticipant—the FIPS participant reports the trade.

      • Two non-participants—the sell-side participant reports the trade.

      • A member and non-member—the member reports the trade.

      • A clearing firm and a correspondent firm—whichever firm executed the trade.

      • A dealer in a riskless principaltransaction—the dealer reports as a cross (riskless principal) transaction.
      Question #11: When trade reporting, what details must be included in the report?
      Answer: Each trade report must include the FIPS security symbol or CUSIP number (if the firm has a computer-to-computer interface with FIPS), number of bonds, unit price (net of commissions, commission equivalents, or accrued interest), time of execution (for late trades or for trades in securities not displayed in FIPS), capacity identifier (principal, agent, or riskless principal), and whether the trade is a buy, sell, or cross. In addition, the report must identify the contra-side broker or dealer or indicate that the contra-side was a customer. For multiple contra-sides, the member must break out the other parties separately in the report along with the number of bonds, unit price, and time of execution associated with each contra-side trade.
      Question #12: How should members report odd-lot trades involving fractions of bonds, for example, 10 1/2 bonds @98.125?
      Answer: When reporting such a trade, the member has to round up to the nearest whole dollar and bond, for example, report 11 bonds @ 99. Of course, the confirmation to the customer would have to reflect the actual transaction of 10 1/2 bonds @98.125.
      Question #13: What transactions do not have to be reported?
      Answer: The following transactions do not have to be reported:
      • Transactions that are part of a primary distribution or a registered secondary distribution.

      • Transactions made as part of a private offering under Section 4(2) of the Securities Act of 1933.

      • Transactions where both sides agree to a price unrelated to the current market, for example, so the seller can make a gift of the securities.

      • Transactions to acquire underlying securities at a previously established price unrelated to the current market.

      • Transactions executed on an exchange.
      Question #14: Must members report a trade involving an issue that they know has gone high-yield before Nasdaq becomes aware of it or will Nasdaq simply reject such trade reports?
      Answer: A trade report in a high-yield bond is not due until after an issue becomes a part of the Nasdaq high-yield data base. A trade report for a bond not in the data base will be rejected.
      Question #15: What will Nasdaq do with the quotation and volume information it collects through FIPS?
      Answer: Nasdaq and information vendors will disseminate all quotations on a real-time basis during FIPS operating hours. The information disseminated will include bids and offers from brokers and dealers as well as a calculation of an inside market for each FIPS bond.

      Each hour, Nasdaq and vendors will disseminate summary transaction information that will include the high execution price, low execution price, and volume for all transactions reported both in that hour and cumulatively in FIPS securities, aggregated from individual transaction reports made by members. In addition, an end-of-day summary will be disseminated with the day's overall high and low prices and cumulative volume. Transaction information in non-FIPS bonds will be monitored by Nasdaq for surveillance purposes only and not disseminated publicly.

      * * * * *

      The rules are effective and full implementation of the system is scheduled for early 1994. For general information on FIPS, call S. William Broka, Vice President, Trading and Market Services at (202) 728-8050; questions on the FIPS rules may be directed to Beth E. Weimer, Associate General Counsel at (202) 728-6998; and questions regarding equipment needs may be directed to Market Data Services at (301) 948-6162.

    • 93-67 Board Eliminates Disclosure Safe Harbor For Members Trading Ahead of Their Own Customers' Limit Orders

      SUGGESTED ROUTING

      Senior Management
      Institutional
      Legal & Compliance
      Systems
      Trading

      Executive Summary

      In July, the NASD Board of Governors solicited member comment on eliminating a safe harbor for members trading ahead of customer limit orders. After reviewing comments received from members and others, the Board has taken action to eliminate the disclosure safe harbor and to replace it with a prohibition against members' trading ahead of their own customers' limit orders. The new requirement must be approved by the Securities and Exchange Commission (SEC) before it is implemented. The text of the proposed rule follows the discussion below.

      Background and Description of Rule

      In July 1993, the Board reviewed the background of the Manning disclosure safe harbor and voted to replace it with an Interpretation of Article III, Section 1 of the Rules of Fair Practice that would eliminate the safe-harbor approach and effectively prohibit a member from trading ahead of a customer's limit order.1 Because of the significance of this change to The Nasdaq Stock MarketSM, the Board authorized a Notice to Members soliciting comment on how elimination of the safe harbor and adoption of rules prohibiting trading ahead of customer limit orders would affect the operation of member firms and the treatment of investors' orders. The Board also solicited comment on any unintended effects or unacceptable consequences of any new requirements on member firms. Specifically, comment was requested on the impact of the requirements on integrated broker/dealers handling their own customer order flow, on customer limit orders received from other member firms (so-called member-to-member trades), and on market liquidity.

      In response to Notice to Members 93-49, the NASD received approximately 30 comment letters from members and others. The vast majority of commenters supported elimination of the disclosure safe harbor for market makers trading ahead of their own retail clients. Commenters noted that elimination of the safe harbor would level the playing field for investors, enhance the image of The Nasdaq Stock Market, and instill greater confidence in investors that their limit orders in Nasdaq® would be handled fairly.

      Many commenters, however, responded that the NASD should draw a distinction between orders from a member's own customers and orders from another broker/dealer. They pointed out that if the new rule effectively requires a market maker to give a limit order from another broker/dealer priority over its own quote, the potential for profit would be severely reduced and market-maker commitment would also suffer.

      After full consideration of the concerns articulated in the comment process, the Board decided to eliminate the disclosure safe harbor and to prohibit member firms that hold their own customer limit orders from trading ahead of those orders. The language of the Interpretation establishes that a member holding its customer's limit order may not continue to trade its market-making position without executing that limit order under the specific terms and conditions that the customer understands and accepts. A member trading ahead of its customer would violate Article III, Section 1 of the

      Rules of Fair Practice regarding just and equitable principles of trade.

      In this regard, some commenters noted that the NASD should distinguish between retail and institutional customer limit orders, so that a market maker's ability to commit capital to large institutional orders would not be impaired by a narrow reading of "trading ahead." The NASD believes, however, that filling institutional-sized orders generally involves best-effort commitments and trading strategies other than a straight acceptance of a limit order. Firms accepting institutional orders on a best-efforts basis that may involve trading to cover a short position or buying stock along with the institution would not violate the rule as long as the firm maintains a clear understanding with its institutional clientele of the terms under which the order is being executed. Accordingly, the NASD does not distinguish between institutional and retail customers in the Interpretation because the proposed language that allows members to establish specific terms and conditions on each order clearly encompasses institutional orders.

      Further, to avoid any unintended consequences from a broader application of the rule, the Board authorized a special task force to examine ramifications of extending limit-order protections to include member-to-member transactions. The task force will analyze the proposal's effect on market liquidity, volume of limit orders, market-maker commitment, spreads, and volatility.

      The Board has taken this action as a part of a broader program to ensure investor protection and enhance the quality of the Nasdaq marketplace. The affirmative obligation for firms to protect their customer limit orders and to give them standing over their own market-making activity enhances opportunities for price improvement that directly benefits public investors.

      The rule must be approved by the SEC before it becomes effective. Questions regarding this Notice may be directed to Beth E. Weimer, Associate General Counsel, at (202) 728-6998.


      1 See Notice to Members 90-37 (June 1990) and Notice to Members 93-49 (July 1993).


      Text of Proposed Interpretation to Article III, Section 1 of the Rules of Fair Practice

      (Note: Proposed language is underlined.)

      A member firm that accepts and holds an unexecuted limit order from its customer in a Nasdaq security and that continues to trade the subject security for its own market-making account at prices that would satisfy the customer's limit order, without executing that limit order under the specific terms and conditions by which the order was accepted by the firm, shall be deemed to have acted in a manner inconsistent with just and equitable principles of trade, in violation of Article III, Section 1 of the Rules of Fair Practice. Nothing in this section, however, requires members to accept limit orders from their customers.

    • 93-66 Nasdaq National Market(r) Additions, Changes, And Deletions as of August 24, 1993

      SUGGESTED ROUTING

      Internal Audit
      Operations
      Systems
      Trading

      As of August 24, 1993, the following 66 issues joined the Nasdaq National Market®, bringing the total number of issues to 3,238:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      OMEG

      Omega Environmental, Inc.

      7/26/93

      1000

      MPFC

      Mountain Parks Financial Corp.

      7/27/93

      500

      XLTCW

      Excel Technology, Inc. (2/8/98 Wts)

      7/28/93

      500

      OMGR

      Omni Insurance Group, Inc.

      7/29/93

      1000

      QDRMY

      Servicios Financieros Quadrum, S.A. (ADR)

      7/29/93

      500

      CEUS

      Cairn Energy USA, Inc.

      7/30/93

      1000

      CYDS

      Cygne Designs, Inc.

      7/30/93

      1000

      GFII

      Greenfield Industries, Inc.

      7/30/93

      1000

      SGHT

      StarSight Telecast, Inc.

      7/30/93

      1000

      NWSS

      Network Solutions, Inc.

      8/2/93

      1000

      VALFA

      Valley Fashions Corp. (Cl A)

      8/2/93

      1000

      VICF

      Victoria Financial Corporation

      8/2/93

      1000

      ZALEV

      Zale Corporation (WI)

      8/2/93

      1000

      ZALWV

      Zale Corporation (7/29/98 Wts) (WI)

      8/2/93

      1000

      ACTL

      Actel Corporation

      8/3/93

      1000

      COBI

      CoBancorp, Inc.

      8/3/93

      200

      BPTI

      Best Power Technology, Inc.

      8/4/93

      1000

      MOCNF

      Mid Ocean Limited

      8/4/93

      1000

      ARTHF

      Arethusa (Off-Shore) Limited

      8/5/93

      500

      CDTS

      Conductus, Inc.

      8/5/93

      1000

      EPTK

      EP Technologies, Inc.

      8/5/93

      1000

      MADGF

      Madge, N.V.

      8/5/93

      1000

      NSDB

      NSD Bancorp, Inc.

      8/5/93

      200

      NRMI

      National Record Mart, Inc.

      8/5/93

      1000

      PREF

      Preferred Entertainment, Inc.

      8/5/93

      500

      QRSI

      QuickResponse Services, Inc.

      8/5/93

      500

      UNIF

      Uniflex, Inc.

      8/5/93

      500

      AIRM

      Air Methods Corporation

      8/6/93

      500

      AHCC

      Arbor Health Care Company

      8/6/93

      1000

      DUAL

      Dual Drilling Company

      8/6/93

      1000

      LAUR

      Laurel Bancorp, Inc.

      8/6/93

      500

      MCRI

      Monarch Casino & Resort, Inc.

      8/6/93

      1000

      RFSI

      RFS Hotel Investors, Inc.

      8/6/93

      1000

      PRETB

      The Price REIT, Inc. (Ser B)

      8/6/93

      1000

      ATRM

      Aetrium Incorporated

      8/10/93

      1000

      DVCO

      DavCo Restaurants, Inc.

      8/10/93

      1000

      INOD

      Innodata Corporation

      8/10/93

      1000

      INODW

      Innodata Corporation (8/9/97 Wts)

      8/10/93

      1000

      WHFI

      Wholesome and Hearty Foods, Inc.

      8/10/93

      1000

      CACS

      Casino & Credit Services, Inc.

      8/11/93

      1000

      CACSW

      Casino & Credit Services, Inc. (8/10/98 Wts)

      8/11/93

      1000

      CCAL

      CenCall Communications Corp.

      8/11/93

      1000

      FAHNF

      Fahnestock Viner Holdings, Inc. (Cl A)

      8/11/93

      1000

      HEII

      HEI, Inc.

      8/11/93

      1000

      IMAG

      Image Industries, Inc.

      8/11/93

      1000

      TRIP

      Triangle Pacific Corp.

      8/11/93

      500

      EZCIA

      EZ Communications, Inc. (Cl A)

      8/12/93

      1000

      HOMS

      Home State Holdings, Inc.

      8/12/93

      1000

      WELL

      The WellCare Management Group, Inc.

      8/12/93

      500

      ELEK

      Elek-Tek, Inc.

      8/13/93

      500

      MANU

      Manugistics Group, Inc.

      8/13/93

      500

      NGCOV

      National Gypsum Company (WI)

      8/16/93

      1000

      NGCWV

      National Gypsum Company (7/1/00 Wts) (WI)

      8/16/93

      1000

      KURZ

      Kurzweil Applied Intelligence, Inc.

      8/17/93

      1000

      OLHC

      Old Lyme Holding Corporation

      8/17/93

      1000

      PROI

      CFI ProServices, Inc.

      8/18/93

      1000

      LCIIP

      LCI International, Inc. (Pfd)

      8/18/93

      500

      SPSS

      SPSS Inc.

      8/18/93

      1000

      FMDAY

      Futuremedia Public Limited Company (ADR)

      8/19/93

      1000

      FMDYW

      Futuremedia Public Limited Company (ADR) (8/19/96 Wts)

      8/19/93

      1000

      LDRY

      Landry's Seafood Restaurants, Inc.

      8/19/93

      1000

      LEVL

      Level One Communications Incorporated

      8/19/93

      500

      MLTI

      The Multicare Companies, Inc.

      8/19/93

      1000

      TGIS

      Thomas Group, Inc.

      8/19/93

      200

      GAMBY

      Gambro Incorporated (ADR)

      8/23/93

      1000

      SGIH

      Scientific Games Holding Corp.

      8/24/93

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since July 23, 1993:

      New/Old Symbol

      New/Old Security

      Date of Change

      RPIC/RPICA

      Republic Pictures Corp./Republic Pictures Corp. (Cl A)

      7/28/93

      HTEC/DTMD

      Hydron Technologies, Inc./Dento-Med Industries, Inc.

      7/30/93

      PNJI/PNJIV

      Phillips & Jacobs, Inc./Phillips & Jacobs, Inc. (WI)

      8/6/93

      TDSC/TDSSF

      3-D Systems Corp./3-D Systems Inc.

      8/16/93

      SNRS/SNRS

      Sunrise Technologies International Inc./Sunrise Technologies Inc.

      8/18/93

      FSBI/FSVA

      Fidelity Bancorp, Inc./Fidelity Savings Bank

      8/20/93

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      LPAI

      La Petite Academy, Inc.

      7/26/93

      LPAIG

      La Petite Academy, Inc. (Conv Dbs)

      7/26/93

      CRFC

      Crestar Financial Corporation

      7/28/93

      DAHL

      Dahlberg, Inc.

      8/2/93

      PCEP

      Perception Technology Corp.

      8/2/93

      SCLNW

      SciClone Pharmaceuticals Inc. (3/16/97 Wts)

      8/9/93

      PFBC

      Pioneer Fed BanCorp, Inc.

      8/10/93

      PTRK

      Preston Corp.

      8/11/93

      DMED

      Diametrics Medical, Inc.

      8/12/93

      NCBR

      National Community Banks Inc.

      8/12/93

      NCBRP

      National Community Banks Inc. (Pfd)

      8/12/93

      VIFS

      Village Financial Services Ltd.

      8/12/93

      CFBKO

      Citizens Federal Bank (Ser 93 Pfd)

      8/17/93

      ENCL

      Enclean, Inc.

      8/19/93

      Questions regarding this Notice should be directed to Mark A. Esposito, Supervisor, Market Listing Qualifications, at (202) 728-8002. Questions pertaining to trade reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 93-65 Columbus Day: Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading

      The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 11, 1993. On this day, The Nasdaq Stock MarketSM and the securities exchanges will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed.

      Trade Date

      Settlement Date

      Reg. T Date*

      Sept. 30

      Oct. 7

      Oct. 11

      Oct. 1

      8

      12

      4

      12

      13

      5

      13

      14

      6

      14

      15

      7

      15

      18

      8

      18

      19

      11

      18

      20

      12

      19

      21

      Note: October 11, 1993, is considered a business day for receiving customer payments under Regulation T of the Federal Reserve Board.

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

      Brokers, dealers, and municipal securities dealers should use these settlement dates to clear and settle 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 (203) 375-9609.

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

    • 93-64 SEC Approves Amendments Concerning Arbitration of Employment-Related Disputes: Effective October 1, 1993

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance

      Executive Summary

      On August 25, 1993, the Securities and Exchange Commission (SEC) approved amendments to Part I, Section 1, and Part II, Sections 8 and 9, of the Code of Arbitration Procedure (Code) to clarify that employment-related disputes are arbitrable and to provide that employment discrimination or employment claims involving public policy issues should be heard by a panel composed of a majority of public arbitrators.

      The amendment is effective October 1, 1993. The text of the amendment follows this Notice.

      Background

      On August 25, 1993, the SEC approved amendments to Part I, Section 1, and Part II, Sections 8 and 9, of the Code. The amendments clarify that employment-related disputes are arbitrable under the Code and provide that in cases involving employment discrimination or employment claims involving public policy issues, the panel should consist of a majority of public arbitrators.

      Amended Section 1 of the Code provides that disputes, claims, or controversies arising out of the employment or termination of employment of an associated person are eligible for submission to arbitration. This change insures that a party to such disputes may compel arbitration. The amendment to Section 8 specifies that matters arising out of the "employment or termination of employment" of an associated person are arbitrable. The amendments cure an existing ambiguity between the language of Section 8, which requires the arbitration of disputes "eligible for submission under Part I between or among members and/or associated persons," and Part I, Section 1, which does not refer to employment disputes as eligible for submission. A new subsection 2 to Section 1 also clarifies that such employment-related disputes are eligible for submission if they are between or among members and associated persons. Finally, amendments to subsection 1(3) clarify that disputes between or among associated persons and public customers are eligible for submission to arbitration.

      The NASD has amended Section 8 to clarify that employment disputes are arbitrable through language which parallels the language of the New York Stock Exchange's arbitration code. Amended Section 8 requires the submission of a claim arising out of the employment or termination of employment of an associated person by and with a member.

      The NASD also amended Section 9(a) to provide that claims arising out of the employment or termination of employment of an associated person, and that relate exclusively to disputes involving employment contracts, promissory notes, receipt of commissions, or wrongful discharge, the panel of arbitrators shall be made up of industry arbitrators as provided by Sections 9(b)(i), (b)(ii), or 10 of the Code. In all other instances, including age, sex, or race discrimination, sexual harassment claims, or other public policy issues would govern selection of Section 13 or 19, the panel of arbitrators. This would result in a panel with either a single public arbitrator or a majority of public arbitrators. These amendments reflect the NASD's view that disputes involving employment contracts, promissory notes, receipt of commissions, and wrongful discharge implicate industry practice and require industry experience.

      Other disputes, however, involving public policy issues such as employment discrimination and sexual harassment require little industry expertise and the interests of the parties are better served by a panel consisting of a majority of public arbitrators.

      Questions concerning this Notice may be directed to the NASD Arbitration Department at (212) 480-4881.

      Text of Amendments to Part I, Section 1, and Part II, Sections 8 And 9 of the Code of Arbitration Procedure

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

      Part I. Administrative Provisions

      Matters Eligible for Submission

      Sec. 1. This Code of Arbitration Procedure is prescribed and adopted pursuant to Article VII, Section 1(a)(3) of the By-Laws of the National Association of Securities Dealers, Inc., (the Association) for the arbitration of any dispute, claim or controversy arising out of or in connection with the business of any member of the Association, or arising out of the employment or termination of employment of associated person(s) with any member, with the exception of disputes involving the insurance business of any member which is also an insurance company:

      (1) between or among members;
      (2) between or among members and associated persons;
      [2](3) between or among members or associated persons and public customers, or others; and
      [3](4) between or among members, registered clearing agencies with which the Association has entered into an agreement to utilize the Association's arbitration facilities and procedures, and participants, pledgees or other persons using the facilities or a registered clearing agency, as these terms are defined under the rules of such a registered clearing agency.

      * * * * *

      Part II. Industry and Clearing Controversies

      Required Submission

      Sec. 8.

      (a) Any dispute, claim or controversy eligible for submission under Part I of this Code between or among members and/or associated persons, and/or certain others, arising in connection with the business of such member(s) or in connection with the activities of such associated persons(s), or arising out of the employment or termination of employment of such associated person(s) by and with such member, shall be arbitrated under this Code, at the instance of:
      (1) a member against another member;
      (2) a member against a person associated with a member or a person associated with a member against a member; and,
      (3) a person associated with a member against a person associated with a member.

      * * * * *

      Composition of Panels

      Sec. 9.

      (a) In disputes subject to arbitration that arise out of the employment or termination of employment of an associated person, and that relate exclusively to disputes involving employment contracts, promissory notes or receipt of commissions the panel of arbitrators shall be appointed as provided by Sections 9(b)(i), (b)(ii) or 10 of the Code, whichever is applicable. In all other disputes arising out of the employment or termination of employment of an associated person, the panel of arbitrators shall be appointed as provided by Sections 13 or 19 of the Code, whichever is applicable.
      [(a)] (b)(i) Except as otherwise provided in Section 9(a) or 10 of the Code, in all arbitration matters between or among members and/or persons associated with members, and where the amount in controversy does not exceed $30,000, the Director of Arbitration shall appoint a single arbitrator to decide the matter in controversy. The arbitrator chosen shall be from the securities industry. Upon the request of a party in its initial filing or the arbitrator, the Director of Arbitration shall appoint a panel of three (3) arbitrators, all of whom shall be from the securities industry.
      [(b)] (ii) Except as otherwise provided in Section 9(a), in [In] all arbitration matters between or among members and/or persons associated with members and where the amount in controversy exceeds $30,000, a panel shall consist of three arbitrators, all of whom shall be from the securities industry.

    • 93-63 SEC Approves Changes To Make All Arbitration Awards Publicly Available: Effective October 1, 1993

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance

      Executive Summary

      On August 12, 1993, the Securities and Exchange Commission (SEC) approved an amendment to Part III, Section 41(f) of the Code of Arbitration Procedure (Code) making all NASD arbitration awards publicly available. The amendment is effective October 1, 1993. The text of the amendment follows this Notice.

      Background

      On August 12, 1993, the SEC approved an amendment to Section 41(f) of Part III of the Code making all arbitration awards, their contents, and the names of the arbitrators publicly available. Subsection 41(f), adopted May 10, 1989, made customer arbitration awards publicly available, but with the names of the arbitrators deleted. Industry arbitration awards, including awards involving employment disputes have not previously been available to the public. Parties to an arbitration may, however, obtain copies of awards previously rendered by the arbitrators selected to decide their case.

      The amendment to Section 41(f) announced here deletes reference to awards involving public customers, thereby making all awards publicly available; deletes the requirement of removing arbitrators' names from such awards; and deletes the provision for obtaining awards by the arbitrators chosen to hear a particular case involving a public customer, since all awards will now be available. Customer awards issued after May 10, 1989, will include the names of the arbitrators, while industry awards issued after October 1, 1993, including employment cases, will include arbitrators' names.

      The amendment was prompted because the current system has become burdensome to both the parties and the Arbitration Department staff. Further, the amendment will make the Code consistent with all other securities industry self-regulatory organizations, some of which make customer awards publicly available without deletion of arbitrators' names, and others that make all awards, including awards in employment cases, available.

      Upon implementation of the rule, the NASD will provide parties to an NASD arbitration with a list of all publicly available NASD awards rendered by each arbitrator selected for the case. Listings will include the case name and number, as well as whether the arbitrator concurred or dissented in the decision. The NASD's office in Rockville, Maryland will handle requests and will distribute awards by mail or, in certain instances, by facsimile.

      Finally, a party to an arbitration that makes a request will receive, at no cost, either the last five awards rendered by each arbitrator or all the awards rendered by the arbitrator in the last 12 months, whichever is the greater number. Any additional awards will be provided at a cost of $5 per award up to a maximum of $70 per case. Persons not a party to an arbitration will be charged $5 per award, with no ceiling on total charges.

      Questions concerning this Notice may be directed to the NASD Arbitration Department at (212) 480-4881.

      Text of Amendment to Part III, Section 41 of the Code of Arbitration Procedure

      (Note: Deletions are in brackets.)

      Part III — Uniform Code of Arbitration

      * * * * *

      Awards Sec. 41.

      * * * * *

      (f) All awards [involving public customers] and their contents[, excluding the names of the arbitrators,] shall be made publicly available. [A party to an arbitration involving a public customer may request that the Director of Arbitration provide copies of all awards rendered by the arbitrator(s) chosen to decide its case. A party wishing to obtain such information must notify the Director of Arbitration within three (3) business days of receipt of notification of the identity of the person(s) named to the panel.]

      * * * * *

    • 93-62 Requirements Governing Real-Time Trade Reporting in Over-the-Counter Equity Securities

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading


      Training

      Executive Summary

      On July 16, 1993, the Securities and Exchange Commission (SEC) approved an NASD rule change to implement real-time trade reporting for members' over-the-counter transactions in equity securities that were not previously reportable to the NASD in this manner.1 The equity securities covered by this rule change are those for which members now submit aggregate volume and price range data pursuant to Schedule H to the NASD By-Laws. Regional listings that are ineligible for transaction reporting over the Consolidated Tape are also covered. The new reporting requirements closely track those applicable to Nasdaq-listed securities and will replace the existing reporting procedure under Schedule H. This rule change takes effect on December 20, 1993. The text of the rule change follows this Notice.

      Background and Description of Rule Change

      The SEC recently approved an NASD rule change (File No. SR-NASD-92-48) that will require real-time reporting of members' over-the-counter transactions in OTC equity securities which are those not classified as a "designated security" for purposes of the reporting requirements contained in Parts XI and XII of Schedule D, or as an "eligible security" in Schedule G to the NASD By-Laws. The securities covered by this rule change are those for which members now submit aggregate volume and price range data pursuant to Section 2 of Schedule H to the NASD By-Laws. When this rule change takes effect on December 20, 1993, Schedule H reporting will be eliminated for these securities.

      Today, many OTC equity securities are quoted in the NASD's OTC Bulletin Board® service (OTCBB) and/or in a printed quotation medium such as the Pink Sheets™ publication. It should be noted that the new reporting requirements extend to members' over-the-counter transactions in all issues classified as OTC equity securities regardless of whether they are quoted in any particular quotation medium.2 Additionally, the requirements will encompass over-the-counter trades in a small number of equities that are listed on one or more regional stock exchanges, but do not qualify for transaction reporting via the Consolidated Tape facility. Members' principal trades in such securities currently fall within the scope of Schedule H reporting.3 Hence, the new reporting rules will supplant Schedule H reporting for these transactions as well.

      The NASD will implement the new trade-reporting regime in two phases. Beginning in December, the NASD will collect and process transaction reports of OTC equity securities exclusively for regulatory purposes. During the first half of 1994, the second phase will commence with real-time dissemination of these transaction reports via the Nasdaq network and the networks of commercial vendors.4 At that point, member firms and their customers will be able to access last-sale price and volume information for OTC equity securities throughout the business day.

      The requirements governing trade-by-trade reporting for OTC equity securities — within 90 seconds of execution — mirror the requirements that members have observed for many years respecting issues listed on the Nasdaq National Market®. For example, the data elements comprising a transaction report for an OTC equity security will be identical to those now required for reporting trades in Nasdaq securities through the Automated Confirmation Transaction (ACTSM) service: security symbol, number of shares, transaction price, and a symbol indicating whether the trade is a buy, sell, or cross.5 Similarly, the reported price must exclude any markup, markdown, or commission associated with the transaction. Trade reports may be entered through the Nasdaq Workstation® service or a Computer-to-Computer Interface (CTCI) with the ACT processor6. The comparison and risk management functions offered by ACT will be available for transactions in OTC equity securities provided they are eligible for processing through the facilities of the National Securities Clearing Corporation.

      These new requirements distinguish between an "OTC market maker" and a "non-market maker" for purposes of fixing the reporting obligation in a given situation. The term "OTC market maker" is defined as an NASD member that holds itself out as a market maker by entering proprietary quotations or indications of interest for a particular OTC equity security in any interdealer quotation system (e.g., the Pink Sheets or OTCBB). A firm is classified as a "non-market maker" based on the absence of a market-making commitment in any inter-dealer quotation system for the particular OTC equity security. Thus, a firm may be an OTC market maker in some issues and a non-market maker in others.

      In transactions between two firms qualified as an OTC market maker in the OTC equity security, only the member representing the sell side reports. If the transaction is between an OTC market maker and a non-market maker in the security, the OTC market maker must always report the transaction. If both members are non-market makers, only the member on the sell side reports the transaction. In transactions between a member and a non-member (e.g., a customer), the member must report.

      When implemented, this rule change will materially enhance the NASD's regulatory data base and permit automated surveillance comparable to The Nasdaq Stock Market. The collection of transactional data for OTC equity securities through ACT will also allow the NASD to eliminate Schedule H price/volume reporting for these issues. From an operational standpoint, the new reporting rules will provide consistent trade-reporting and audit-trail requirements across all market segments that the NASD regulates. Finally, development of a facility for collecting and disseminating transaction price and volume data for OTC equity securities will support the NASD's efforts to gain SEC designation of the OTCBB as an automated quotation system for penny stocks pursuant to Securities Exchange Act Section 17B.

      Questions regarding this Notice may be directed to Michael J. Kulczak, Associate General Counsel, NASD Office of General Counsel at (202) 728-8811 or NASD Market Surveillance at (800) 925-8156 or (301) 590-6080.


      1 SEC Release No. 34-32647 (July 16, 1993) 58 FR 39262 (July 22, 1993).

      2 The term "OTC equity security" excludes "restricted securities," as defined by Rule 144(a)(3) under the Securities Act of 1933, as well as any securities designated in The PORTALSM Market. Such securities are currently excluded from Schedule H reporting as well.

      3 The reporting of price and volume information pursuant to Section 2 of Schedule H is limited to a member's principal transactions. Under the new reporting rule for OTC equity securities, a member will be required to report dual-agency and principal trades within 90 seconds of execution.

      4 However, OTC equity securities trade reports submitted for foreign/ADR issues will not be disseminated. These transaction reports will be captured solely for regulatory purposes. This limitation traces to SEC concerns relating to the trading of unregistered foreign securities (either directly or in ADR form) in the U.S. over-the-counter markets. Nevertheless, such trade reports would still be required to be submitted within 90 seconds following execution.

      5 Entry of counter-party information is mandated under paragraph (d)(4) of the ACT Rules for trade comparison and audit trail purposes.

      6 Additionally, the ACT service desk is available to receive transactional reports by telephone in the event of system failure. The service desk will also accept transaction reports in OTC equity securities from firms that do not have Nasdaq Workstation service, provided that the level of such trading activity remains de minimis.


      Text of New Part XIII to Schedule D To the NASD By-Laws

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

      Reporting Transactions in Over-the-Counter Equity Securities

      Part XIII

      This Part has been adopted pursuant to Article VII of the Corporation's By-Laws and sets forth the trade reporting requirements applicable to members' transactions in equity securities for which real-time trade reporting is not otherwise required (hereinafter referred to as "OTC Equity Securities"). Members shall utilize the Automated Confirmation Transaction Service ("ACT") for trade reporting in OTC Equity Securities.

      Section 1 — Definitions

      (a) Terms used in this Part shall have the same meaning as those defined in the Association's By-Laws and Rules of Fair Practice unless otherwise specified herein.
      (b) "OTC Equity Security" means any equity security not classified as a "designated security," for purposes of Parts XI and XII of Schedule D to the Corporation's By-Laws. This term also includes certain exchange-listed securities that do not otherwise qualify for real-time trade reporting because they are not "eligible securities" as defined by Section 1(d) of Schedule G to the NASD By-Laws. The term "OTC Equity Security" shall not include "restricted securities," as defined by Rule 144(a)(3) under the Securities Act of 1933, nor any securities designated in the PORTAL Market.
      (c) "Automated Confirmation Transaction Service" or ACT is the service that, among other things, accommodates reporting and dissemination of last sale reports in OTC Equity Securities. Regarding those OTC Equity Securities that are not eligible for clearance and settlement through the facilities of the National Securities Clearing Corporation, the ACT comparison function will not be available. However, ACT will support the entry and dissemination of last sale data on such securities.
      (d) "OTC Market Maker" means a member of the Association that holds itself out as a market maker by entering proprietary quotations or indications of interest for a particular OTC Equity Security in any inter-dealer quotation system, including any system that the Securities and Exchange Commission has qualified pursuant to Section 17B of the Securities Exchange Act of 1934. A member is an OTC Market Maker only in those OTC Equity Securities in which it displays market making interest via an inter-dealer quotation system.
      (e) "Non-Market Maker" means a member of the Association that is not an OTC Market Maker with respect to a particular OTC Equity Security.

      Section 2 — Transaction Reporting

      (a) When and How Transactions are Reported
      (1) OTC Market Makers shall, within 90 seconds after execution, transmit through ACT last sale reports of transactions in OTC Equity Securities executed during normal market hours. Transactions not reported within 90 seconds after execution shall be designated as late.
      (2) Non-Market Makers shall, within 90 seconds after execution, transmit through ACT or the ACT service desk (if qualified pursuant to Part IX of Schedule D to the By-Laws), or if ACT is unavailable due to system or transmission failure, by telephone to the Market Operations Department, last sale reports of transactions in OTC Equity Securities executed during normal market hours. Transactions not reported within 90 seconds after execution shall be designated as late.
      (3) Last sale reports of transactions in OTC Equity Securities executed between 9:00 a.m. and 9:30 a.m. Eastern Time shall be transmitted through ACT within 90 seconds after execution and shall be designated as ".T" trades to denote their execution outside normal market hours. Last sale reports of transactions in OTC Equity Securities executed between the hours of 4:00 p.m. and 5:15 p.m. Eastern Time shall also be transmitted through ACT within 90 seconds after execution; trades executed and reported after 4 p.m. Eastern Time shall be designated as ".T" to denote their execution outside normal market hours.
      (4) All members shall report weekly to the Market Operations Department, on a form designated by the Board of Governors, last sale reports of transactions in OTC Equity Securities that are executed outside the hours of 9:00 a.m. and 5:15 p.m. Eastern Time.
      (5) A pattern or practice of late reporting without exceptional circumstances may be considered conduct inconsistent with high standards of commercial honor and just and equitable principles of trade, in violation of Article III, Section 1 of the Rules of Fair Practice.
      (b) Which Party Reports Transaction
      (1) In transactions between two OTC Market Makers, only the member representing the sell side shall report.
      (2) In transactions between an OTC Market Maker and a Non-Market Maker, only the OTC Market Maker shall report.
      (3) In transactions between two Non-Market Makers, only the member representing the sell side shall report.
      (4) In transactions between a member and a customer, the member shall report.
      (c) Information To Be Reported

      Each last sale report shall contain the following information:
      (1) Symbol of the OTC Equity Security;
      (2) Number of shares;
      (3) Price of the transaction as required by paragraph (d) below; and
      (4) A symbol indicating whether the transaction is a buy, sell, or cross.
      (d) Procedures for Reporting Price and Volume

      Members that are required to report pursuant to paragraph (b) above shall transmit last sale reports for all purchases and sales in OTC Equity Securities in the following manner:
      (1) For agency transactions, report the number of shares and the price excluding the commission charged.
      (2) For dual agency transactions, report the number of shares only once, and report the price excluding the commission charged.
      (3) For principal transactions, except as provided below, report each purchase and sale transaction separately and report the number of shares and the price. For principal transactions that are executed at a price which includes a mark-up, markdown or service charge, the price reported shall exclude the mark-up, mark-down or service charge. Such reported price shall be reasonably related to the prevailing market, taking into consideration all relevant circumstances including, but not limited to, market conditions with respect to the OTC Equity Security, the number of shares involved in the transaction, the published bids and offers with size displayed in any inter-dealer quotation system at the time of the execution (including the reporting firm's own quotation), the cost of execution and the expenses involved in clearing the transaction.
      Exception: A "riskless" principal transaction in which a Non-Market Maker, after having received from a customer an order to buy, purchases the security as principal from another member or customer to satisfy the order to buy or, after receiving from a customer an order to sell, sells the security as principal to another member or customer to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the mark-up or mark-down.
      (e) Transactions Not Required To Be Reported

      The following types of transactions shall not be reported:
      (1) Transactions which are part of a primary distribution by an issuer or a registered secondary distribution (other than "shelf distributions") or of an unregistered secondary distribution;
      (2) Transactions made in reliance on Section 4(2) of the Securities Act of 1933;
      (3) Transactions where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security;
      (4) Purchases or sales of securities effected upon the exercise of an option pursuant to the terms thereof or the exercise of any other right to acquire securities at a pre-established consideration unrelated to the current market.

      Interpretation of the Board of Governors

      The Corporation seeks to emphasize the obligations of members to report transactions in OTC Equity Securities within 90 seconds after execution. All transactions in OTC Equity Securities not reported within 90 seconds after execution shall be reported as late, and the Corporation routinely monitors members' compliance with the 90 second requirement. If the Corporation finds a pattern or practice of unexcused late reporting, that is, repeated reports of executions in OTC Equity Securities after 90 seconds without reasonable justification or exceptional circumstances, the member may be found to be in violation of Article III, Section 1 of the Corporation's Rules of Fair Practice. Exceptional circumstances will be determined on a case-by-case basis and may include conditions such as extreme volatility in an OTC Equity Security, or in the market as a whole. Timely reporting of all transactions in OTC Equity Securities is necessary and appropriate for the fair and orderly operation of the marketplace, and to ensure the collection of adequate information for surveillance purposes; the Corporation will, therefore, view noncompliance as a rule violation.

      Part [XIII] XIV

      Mutual Fund Quotation Program

    • 93-61 Mail Vote — NASD Solicits Member Vote on New Rule Governing the Pricing of Open Orders;

      Last Voting Date: October 29, 1993

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations
      Trading

      Executive Summary

      The NASD invites members to vote on a proposed new section to the Rules of Fair Practice that would require a member holding an open order to adjust the order by the amount of any dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-inter-est. The text of the proposed amendment follows this Notice. The last date for member vote is October 29, 1993.

      Background and Description of The Proposal

      The NASD is proposing to amend Article III of the Rules of Fair Practice to require a member holding an open order to adjust the price and, if necessary, the size of the order by the amount of any dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest. An open order is one that remains in effect until it is executed, canceled, or expires. Such orders are also known as "good 'til canceled," "limit," or "stop limit."

      Because no current NASD rule governs open orders, members holding such orders adjust them according to their own procedures unless the rules of another self-regulatory organization apply to the transaction. These procedures can vary from automatic adjustment, automatic withdrawal, reconfirmation of the order with the customer, or no action. Further, the procedures may vary among orders entered at the same firm because the orders are routed to different firms for execution. As a result, investors may find that their open orders are executed without adjustment after the ex-date at a higher cost per share than they intended based on their valuation of the security. For example, an investor that enters a limit order for a security at $10 per share before the dividend date may have evaluated the security based on the impending dividend declaration. If the investor's order remains open after the ex-dividend date, the investor may find the order "in the money" and executed at a price that assumed a dividend even though he would not be entitled to the dividend.

      Moreover, the fact that some members might adjust open orders on ex-dates while others do not, creates confusion for customers and is inconsistent with the high quality and confidence the NASD has sought to promote in The Nasdaq Stock MarketSM and the markets for securities traded over-the-counter. Therefore, the NASD Board of Governors has determined to recommend the adoption of a Rule of Fair Practice to set forth a standard for business practices and ethics in dealing with customer open orders.

      Proposed subsection (a) of the new Rule of Fair Practice would require a member holding an open order from a customer or broker/dealer, before executing or permitting the order to be executed, to adjust the price of the order by the amount of any dividend, payment, or other distribution on the ex-date. Paragraphs (a)(i) through (a)(iii) specify the adjustment procedures for certain situations. Paragraph (a)(i) provides that, in the case of a cash dividend or distribution, the price of the order shall be reduced by subtracting the dollar amount of the dividend or distribution from the price of the order and rounding the result to the next lower 1/8 of a dollar. For example, if an issuer declares a $.30 per share dividend, on the ex-dividend date the price of an investor's open order to purchase 100 shares of that security at $10 per share would be reduced by $.30, which, when rounded down to the nearest variation in trading units, results in a price of 9 5/8 per share. Thus, the investor's initial valuation at $10 per share before the ex-dividend date is proportionately maintained by revising the order to 9 5/8 per share after the ex-date, reflecting the diminished post-dividend value of the security.

      Paragraph (a)(ii) provides that for stock dividends or splits, the price of the order shall be reduced by rounding the dollar value of the dividend or split to the next higher 1/8 of a dollar and subtracting that amount from the price of the order. Another method of calculating the price adjustment is to express it as a mathematical formula where the new price per share (rounded to the next lower 1/8) is equal to the number of shares being exchanged for new shares multiplied by the current price per share and is then divided by the number of new shares.

      Where:

      n = resulting or new price,

      D = number of new shares being distributed,

      C = number of shares being exchanged for new shares,

      P = current price per share;

      Then: n = (P x C)/D.

      Example #1 — For an open order @ $10 per share and a 3 for 2 distribution, the resulting price per share is:

      n = (10 x 2)/3 = 20/3 = $6.67, rounded down to the nearest 1/8 = 6 5/8 per share.
      Example #2 — For an open order @ $10 per share and a 5 for 3 distribution, the resulting price per share is:

      n = (10 x 3)/5 = 30/5 = $6, which does not require rounding = 6.

      Paragraph (a)(ii) also provides for increasing the size of the order to maintain its proportionality with the dollar amount of the original order, taking into account the price reduction. This is accomplished by multiplying the number of shares of the original order by the number of shares to be distributed for each share. The result is then divided by the number of shares to be exchanged for new shares in the distribution. For example, in a 3 for 2 distribution, multiply the size of the original order by 3 and divide the result by 2. Finally, round the resulting number of shares to the next lower round lot. Expressing this as a formula:

      Where:

      n = the resulting number of shares,

      O = the number of shares in the original order,

      D = number of new shares being distributed,

      C = number of shares being exchanged for new shares;

      Then: n = (O x D)/C.

      Example #1 — For a 100-share open order and a 3 for 2 distribution, the resulting number of shares is:

      n = (100 x 3)/2 = 150 shares, which when rounded down to the next lower round lot = 100 shares, the size of the original order.
      Example #2 — For a 1,000-share open order and a 3 for 2 distribution, the resulting number of shares is:

      n = (1,000 x 3)/2 = 1,500 shares, which is equal to a round lot and therefore does not require rounding.
      Example #3 — For a 1,000-share open order and a 5 for 3 distribution the resulting number of shares is:

      n = (1,000 x 5)/3 = 1,666 shares, which when rounded down to the next lower round lot = 1,600 shares.

      Paragraph (a)(iii) provides that when a dividend is payable at the option of the stockholder in either cash or securities, the order shall be reduced by the dollar value of the cash or securities, whichever is greater, according to the formulas in Paragraphs (a)(i) and (a)(ii) of the proposed rule. Moreover, if the stockholder opts for securities, the size of the order shall be increased according to the formula in Paragraph (a)(ii).

      Proposed subsection (b) requires the member to reconfirm an open order before execution if the value of the distribution cannot be determined. Proposed subsection (c) requires open orders to be cancelled where the security is the subject of a reverse split. Proposed subsection

      (d) defines the term "open order" as an order to buy that remains in effect for a definite or indefinite period of time until it is either executed, canceled, or expires, including, but not limited to, orders marked "good 'til canceled," "limit," or "stop limit."

      Finally, proposed subsection (e) exempts: (1) open orders subject to the rules of a registered national securities exchange, (2) open stop orders to buy, and (3) open sell orders, as well as orders marked "do not reduce" or "do not increase." Open stop orders to buy and open sell orders are exempt because the assumptions underlying such an order may not include the value of an upcoming dividend and the combination of stop and limit prices in such an order makes the effect of repricing unpredictable.

      Orders marked "do not reduce" or "do not increase" are the method for the customer to state that he is aware of the implications of not adjusting the order on the ex-date.

      Request for Vote

      The Board of Governors believes that the adoption of a single method of handling the adjustment of open orders after the ex-date is important to enhancing the quality of The Nasdaq Stock Market and the over-the-counter marketplace. In addition to eliminating the basic unfairness associated with the failure to adjust such orders, the incorporation of a uniform standard contributes to the order and predictability that form the basis for investor confidence and participation. The Board considers the proposal necessary and appropriate and recommends that members vote their approval.

      The text of the proposed new section that requires member vote is below. Please mark the enclosed 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 29, 1993. The amendment will not be effective until it is filed with and approved by the Securities and Exchange Commission.

      Questions concerning this Notice should be directed to Elliott R. Curzon, Senior Attorney, at (202) 728-8451, and Robert J. Smith, Attorney, (202) 728-8176 at the Office of General Counsel.

      Text of Proposed Rule of Fair Practice

      (Note: New language is underlined.)

      Sec__

      (a) A member holding an open order from a customer or another broker/dealer shall, before executing or permitting the order to be executed, reduce, increase, or adjust the price and the number of shares of such order by an amount equal to the dividend, payment, or distribution, on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, as follows:
      (i) In the case of a cash dividend or distribution, the price of the order shall be reduced by subtracting the dollar amount of the dividend or distribution from the price of the order and rounding the result to the next lower 1/8 of a dollar;
      (ii) In the case of a stock dividend or split, the price of the order shall be reduced by rounding the dollar value of the stock dividend or split to the next higher 1/8 of a dollar and subtracting that amount from the price of the order; provided, further, that the size of the order shall be increased by (1) multiplying the size of the original order by the numerator of the ratio of the dividend or split, (2) dividing the result by the denominator of the ratio of the dividend or split, and (3) rounding the result to the next lower round lot; and
      (iii) In the case of a dividend payable in either cash or securities at the option of the stockholder, the price of the order shall be reduced by the dollar value of the cash or securities, whichever is greater, according to the formulas in (a)(i) or (a)(ii), above; provided, that if the stockholder opts for securities, the size of the order shall be increased pursuant to the formula in (a)(ii), above.
      (b) If the value of the distribution cannot be determined, the member shall not execute or permit such order to be executed without reconfirming the order with the customer.
      (c) If a security is the subject of a reverse split, all open orders shall be canceled.
      (d) The term "open order" means an order to buy or an open stop order to sell, including but not limited to "good 'til canceled," "limit," or "stop limit" orders which remain in effect for a definite or indefinite period until executed, canceled, or expired.
      (e) The provisions of this rule shall not apply to orders: (1) governed by the rules of a registered national securities exchange; (2) marked "do not reduce"; (3) marked "do not increase"; (4) open stop orders to buy; or (5) open sell orders.

    • 93-60 Nasdaq National Market(r) Additions, Changes, And Deletions as of July 22, 1993

      SUGGESTED ROUTING

      Internal Audit
      Operations
      Systems
      Trading

      As of July 22, 1993, the following 72 issues joined the Nasdaq National Market®, bringing the total number of issues to 3,186:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      CFBKP

      Citizens Federal Bank, A Federal Savings Bank

      6/23/93

      200

      PITC

      Pittencrieff Communications, Inc.

      6/23/93

      1000

      RCAP

      Re Capital Corporation

      6/23/93

      1000

      FNCO

      Funco, Inc.

      6/24/93

      1000

      GRXR

      Ground Round Restaurants, Inc.

      6/24/93

      1000

      MBLF

      MBLA Financial Corporation

      6/24/93

      200

      META

      Metatec Corporation

      6/24/93

      1000

      MEGZ

      Megahertz Corporation

      6/24/93

      1000

      EGLS

      Electroglas, Inc.

      6/25/93

      1000

      LOTO

      Lottery Enterprises, Inc.

      6/25/93

      1000

      RCSBP

      The Rochester Community Savings Bank Series B Pfd

      6/25/93

      200

      BLYH

      Blyth Holdings, Inc.

      6/28/93

      1000

      FFYF

      FFY Financial Corp.

      6/28/93

      1000

      SHLO

      Shiloh Industries, Inc.

      6/29/93

      1000

      ROSE

      T R Financial Corp.

      6/29/93

      1000

      ABTC

      ABT Building Products Corp.

      6/30/93

      1000

      COTN

      Delta and Pine Land Company

      6/30/93

      500

      GTWYR

      Gateway Financial Corporation (7/23/93 Rts)

      6/30/93

      1000

      HUNT

      Huntco Inc. (Cl A)

      6/30/93

      500

      ISCX

      Industrial Scientific Corp.

      6/30/93

      500

      SODK

      Sodak Gaming, Inc.

      6/30/93

      1000

      AERN

      AER Energy Resources, Inc.

      7/1/93

      1000

      BAIB

      Bailey Corporation

      7/1/93

      1000

      BBTK

      BroadBand Technologies, Inc.

      7/1/93

      1000

      FFBS

      FFBS Bancorp, Inc.

      7/1/93

      200

      GNCMA

      General Communication, Inc. (Cl A)

      7/1/93

      1000

      GMBS

      George Mason Bankshares, Inc.

      7/1/93

      200

      PNCL

      Pinnacle Micro, Inc.

      7/1/93

      1000

      REGL

      Regal Cinemas, Inc.

      7/1/93

      1000

      STLYD

      Stanley Furniture Company, Inc.

      7/2/93

      1000

      COOK

      California Culinary Academy, Inc.

      7/6/93

      500

      CYRK

      Cyrk, Inc.

      7/7/93

      1000

      HZWV

      Horizon Bancorp, Inc.

      7/7/93

      200

      MVBI

      Mississippi Valley Bancshares, Inc.

      7/8/93

      1000

      PCTV

      People's Choice TV Corp.

      7/8/93

      1000

      PRCP

      Perceptron, Inc.

      7/8/93

      1000

      TITN

      Titan Holdings, Inc.

      7/8/93

      1000

      GZTC

      Genzyme Transgenics Corp.

      7/9/93

      1000

      PBSF

      Pacific Bank, N.A. (The)

      7/9/93

      1000

      SCSLP

      Suncoast Sav. and Loan Association Series A Pfd Stk ($5 P/V)

      7/9/93

      1000

      SUNH

      Sundance Homes, Inc.

      7/9/93

      1000

      CTEA

      Celestial Seasonings, Inc.

      7/13/93

      1000

      FSFT

      FOURTH SHIFT Corporation

      7/14/93

      1000

      CENT

      Central Garden & Pet Company

      7/15/93

      1000

      STEK

      Steck-Vaughn Publishing Corp.

      7/15/93

      200

      CCUR

      Concurrent Computer Corp.

      7/16/93

      1000

      CYRX

      Cyrix Corporation

      7/16/93

      1000

      EVSI

      Evans Systems, Inc.

      7/16/93

      500

      GARI

      General Atlantic Resources, Inc.

      7/16/93

      1000

      HLYW

      Hollywood Entertainment Corp.

      7/16/93

      1000

      JAII

      Johnstown America Industries, Inc.

      7/16/93

      1000

      MCLL

      Metrocall, Inc.

      7/16/93

      1000

      RURL

      Rural/Metro Corporation

      7/16/93

      1000

      CFBN

      Community First Bank

      7/19/93

      200

      KTEL

      K-tel International, Inc.

      7/19/93

      200

      DWTI

      Dataware Technologies, Inc.

      7/20/93

      1000

      FDEF

      First Federal Savings and Loan

      7/20/93

      1000

      DIVE

      American Oilfield Divers, Inc.

      7/21/93

      1000

      ACAI

      Atlantic Coast Airlines, Inc.

      7/21/93

      1000

      PNJIV

      Phillips & Jacobs, Incorporated (WI)

      7/21/93

      500

      RIMG

      Rimage Corporation

      7/21/93

      1000

      STCR

      Starcraft Automotive Corporation

      7/21/93

      1000

      ARRW

      Arrow Transportation Co.

      7/22/93

      1000

      MDLI

      MDL Information Systems, Inc.

      7/22/93

      1000

      RXTC

      Renal Treatment Centers, Inc.

      7/22/93

      1000

      STNT

      Stant Corporation

      7/22/93

      1000

      MRGN

      The Morgan Group, Inc. (Cl A)

      7/22/93

      1000

      UIHIA

      United International Holdings, Inc. (Cl A)

      7/22/93

      1000

      KTEC

      Key Technology, Inc.

      7/23/93

      1000

      MRSI

      MRS Technology, Inc.

      7/23/93

      1000

      PETM

      PETsMART, Inc.

      7/23/93

      500

      WNDR

      Wonderware Corporation

      7/23/93

      1000

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since June 23, 1993:

      New/Old Symbol

      New/Old Security

      Date of Change

      STLTF/STLTF

      Stolt-Nielsen S.A./Stolt Tankers and Terminals Holdings S.A.

      6/24/93

      DNKG/DNKG

      Sofamor/Danek Group, Inc./Danek Group, Inc.

      6/25/93

      FSPG/FSPG

      First Home Savings Bank, F.S.B./First Home Sav Bank, S.L.A.

      6/28/93

      ICFI/ICFI

      ICF Kaiser International, Inc./ICF International, Inc.

      6/28/93

      ARGT/FISL

      ArgentBank/First Interstate Bank of Southern Louisiana

      6/29/93

      MBNY/MBNY

      Merchants New York Bancorp, Inc./Merchants Bank of New York

      7/1/93

      ZING/ZEUS

      Zing Technologies, Inc./Zeus Components, Inc.

      7/2/93

      DSSI/DSSI

      Data Systems & Software Inc./Defense Software & Systems, Inc.

      7/12/93

      ADLI/ADLI

      American Dental Technologies, Inc./American Dental Laser Inc.

      7/14/93

      ACTYF/CALGF

      Applied Carbon Technology, Inc./Cal Graphite Corp.

      7/14/93

      NAUT/SOME

      Nautica Enterprises, Inc./State-O-Maine, Inc.

      7/15/93

      CRCC/CRCC

      Craftmatic Industries, Inc./Craftmatic/Contour Industries, Inc.

      7/19/93

      GTWYR/GTWYR

      Gateway Fin Corp (7-23-93 Rts)/Gateway Fin Corp (7/19/93 Rts)

      7/20/93

      INDE/INDE

      Independent TeleMedia Group Inc./Independent Entmt Group Inc.

      7/20/93

      CALL/CALL

      NEXTEL Communications, Inc. (Cl A)/Fleet Call, Inc. (Cl A)

      7/23/93

      MSEA/MSEA

      Metropolitan Bancorp/Metropolitan Fed Savings & Loan of Seattle

      7/23/93

      MDBK/REGB

      Medford Savings Bank/Regional Bancorp, Inc.

      7/23/93

      VTEL/VTEL

      Vtel Corp./Videotelecom Corp.

      7/23/93

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      AIIC

      American Integrity Corporation

      6/23/93

      PLTZ

      Pulitzer Publishing Company

      6/23/93

      ERICR

      LM Ericsson Telephone Company (6/30/93 Rts)

      6/24/93

      ARIB

      Aspen Imaging International, Inc.

      6/25/93

      CBTF

      CB & T Financial Corp.

      6/28/93

      HROK

      Home Federal Savings Bank

      7/1/93

      HFIN

      Horizon Financial Services, Inc.

      7/1/93

      ERLY

      Erly Industries, Inc.

      7/2/93

      GACC

      Great American Communications

      7/2/93

      HMEC

      Hall-Mark Electronics

      7/2/93

      OPTXE

      Optek Technology, Inc.

      7/2/93

      SWEL

      Southwestern Electric Service

      7/2/93

      PBSFE

      The Pacific Bank, N.A.

      7/2/93

      OSBNR

      Osborn Communications Corporation (7/2/93 Rts)

      7/6/93

      BNHBR

      BNH Banshares, Inc. (7/16/93 Rts)

      7/7/93

      GLTX

      Goldtex, Inc.

      7/9/93

      PNUT

      Jimbo's Jumbos, Inc.

      7/9/93

      SOCS

      Society for Savings Bancorp Inc.

      7/12/93

      GRNC

      GranCare, Inc.

      7/13/93

      AZTR

      Aztar Corporation

      7/14/93

      CHOS

      Columbia Hospital Corporation

      7/14/93

      MLTF

      Multibank Financial Corp.

      7/14/93

      UCOAE

      United Coasts Corporation

      7/14/93

      NALR

      Naylor Industries, Inc.

      7/15/93

      AHTS

      American Health Services Corp.

      7/16/93

      GENIP

      Genetics Institute, Inc. (Pfd)

      7/16/93

      PERC

      Perceptronics, Inc.

      7/16/93

      PSSP

      Price/Stern/Sloan, Inc.

      7/19/93

      HICI

      Home Intensive Care, Inc.

      7/20/93

      SETC

      Sierra Real Estate Equity

      7/20/93

      USAS

      USA Waste Services, Inc.

      7/21/93

      Questions regarding this Notice should be directed to Mark A. Esposito, Supervisor, Market Listing Qualifications, at (202) 728-8002. Questions pertaining to trade-reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 93-59 Labor Day: Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading

      The Nasdaq Stock MarketSM and the securities exchanges will be closed on Monday, September 6, 1993, in observance of Labor Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date

      Settlement Date

      Reg. T Date*

      Aug. 27

      Sept. 3

      Sept. 8

      30

      7

      9

      31

      8

      10

      Sept. 1

      9

      13

      2

      10

      14

      3

      13

      15

      6

      Markets Closed

      —

      7

      14

      16

      Brokers, dealers, and municipal securities dealers should use these settlement dates to clear and settle 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; after August 20, 1993, call (203) 375-9609.

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

    • 93-58 NASD Member Buying Services Provides Members With Discounted Products And Services

      SUGGESTED ROUTING

      Senior Management
      Corporate Finance
      Government Securities
      Institutional
      Internal Audit
      Legal & Compliance
      Municipal
      Mutual Fund
      Operations
      Options
      Registration
      Research
      Syndicate
      Systems
      Trading
      Training

      Executive Summary

      The NASD® has created a Member Buying Services department and consolidated responsibility for the operation of its existing sponsored programs under the Member Services business line.

      The mission of Member Buying Services is to provide members with group purchasing opportunities that reduce their costs and promote their efficiency.

      During the coming year, the new department will focus on enhancing existing services and the value they provide to members. In early 1994, Member Buying Services will survey members to measure their satisfaction with existing programs and identify additional services that, because of its membership, the NASD can either acquire for firms or provide for firms at a deeper discount.

      The existing NASD-sponsored programs under Member Buying Services are: the NASD/MCI Long-Distance Communications Program, NASD Member Firm Insurance Program, NASD Registered Representative Insurance Program, and the NASD Fidelity Bond, State Surety Bond, and Signature Guarantee Bond Programs.

      Background

      The NASD sponsored its first program in 1949 with a group life insurance plan for members, and in 1953 added major medical and dental. In 1982, to help members obtain the requisite fidelity bond coverage at cost effective rates, the NASD sponsored a fidelity bond program. In 1991, MCI joined with the NASD to offer members discounted rates on long-distance voice and data communications.

      Placing responsibility for group purchasing programs under one business line will result in a coordinated effort to identify members' needs and in the introduction of new services. The business line will also monitor the competitiveness of sponsored programs to ensure that members continue to receive the best possible service and value. The NASD staff and its contracted agents will also mediate disputes with the service providers, if needed.

      Please contact Dean Boyle at (301) 590-6525 with your questions concerning this Notice. For additional information on any of the Member Buying Services programs described below, call the number listed at the end of the program description.

      NASD/MCI Long-Distance Communications Program

      The NASD/MCI program offers participating NASD members savings of up to 30 percent on comprehensive voice and data telecommunications services. As an added NASD membership benefit, each participating firm also receives a rebate directly from the NASD based on their monthly MCI usage. In 1992, the NASD rebated approximately $2.4 million to the 650 participating firms.

      The NASD sponsors eight different MCI services with a program to fulfill every firm's communications needs. The three most popular MCI services offered and their discounted rates before the NASD rebate are:

      • MCI 800 Service provides nationwide and international coverage, single-number dialing, choice of dedicated or switched lines, Direct Termination Overflow (automatically switches 800-line call overflow to a normal business line so that customers never get a busy signal), and routing and coverage control. MCI discounts are 21 to 27 percent off MCI's rates based on usage.

      • MCI Vision gives firms the ability to customize long-distance coverage based on specific needs, including flexible access, flat-rate pricing, and the option of a single invoice for multiple locations. Discounts are 7 to 22 percent off all domestic and interstate usage.

      • VNET service lets firms use part of MCI's public switched network as if it were a private network providing the benefits of customized dialing and consolidated billing, MCI network management capabilities, and reporting and configuration management. Member firm discounts are 3 to 21 percent off based on interstate rates.

      In addition to MCI's regular services, a special calling card is available to member firms. The Nasdaq/MCI * Card provides members with real-time stock quotes, voice news, conference calling, speed dialing, and voice messaging capability.

      For more information about the NASD/MCI special discount program, contact your local MCI account representative or call (800) 627-3276.

      NASD Member Firm Insurance Program

      The NASD Member Firm Insurance Plan is designed for member firms with two to 50 employees. The plan with The Travelers offers eligible firms a number of insurance options for Major Medical, Dental, Term Life, and Accidental Death and Dismemberment (AD&D). Over the past several months, revisions to the program have made it competitive across the United States based on price and options.

      The NASD Member Firm Insurance Plan is available to qualified member firms in all 50 states and the District of Columbia. The plan is tailored on a state-by-state basis to ensure that it conforms to each state's laws and regulations.

      The NASD plan offers members options for all major types of medical insurance to meet almost any budget. The plan currently offers three comprehensive medical options, four term life and AD&D options, and two dental programs.

      The NASD's plan administrator, Seabury & Smith, is available to work with members to help assess their insurance requirements, determine eligibility for the plan, and provide quotes for comparison to existing insurance premiums and features.

      For additional information on the NASD Member Firm Insurance Program, please contact Patrick Mulkey at (800) 424-9883, extension 354, or, in the District of Columbia, at (202) 457-6820.

      NASD Registered Representative Insurance Program

      The Registered Representative Insurance Program makes insurance available to employees of members that cannot provide coverage for their employees or for employees not qualified for the member's plan. The NASD must receive authorization to enroll employees from a member firm before its employees can participate in the program.

      The plan offers competitive rates on Accidental Death and Dismemberment, Long-Term Disability, and Term-Life Insurance through CIGNA. National Casualty underwrites the Major Medical portion of the plan that is available to qualified participants.

      Please contact Jeanne Law at (800) 336-0883, or, in the District of Columbia, at (202) 293-0883, for additional information on the plan and the types of coverage offered in your state.

      NASD Fidelity Bond Program

      The Fidelity Bond Program provides members with fidelity bond protection in coverage amounts from $25,000 to $500,000. More than 3,300 member firms are covered under the plan that provides fidelity coverage for losses resulting from destruction or fraudulent acts by employees, loss of property on premises, loss of property in transit, etc. NASD rules require fidelity bond coverage.

      Seabury & Smith is the plan administrator and the fidelity bond is underwritten by National Union Fire Insurance Company.

      For additional information on the plan, please contact Kathryn Jacobson at (800) 922-9242 or (202) 296-9640 in the District of Columbia.

      NASD State Surety Bond Program

      The NASD also sponsors a State Surety Bond Program that is available to members in all states that require a Surety Bond for broker/ dealer registration. This bond provides third-party protection to the public and enables an aggrieved individual to put in a claim under the bond for a broker/dealer's noncompliance with the state's statute. Currently, more than 1,300 NASD members participate in this program.

      For more information, please contact Kathy Jacobson at Seabury & Smith, (800) 922-9242 or (202) 296-9640.

      Signature Guarantee Bond Program

      The Signature Guarantee Bond Program is available to NASD members that serve as guarantors of signatures. This bond is required by Rule 17AD-15 of the Securities Exchange Act of 1934. Currently, more than 300 NASD members participate in the program.

      For more information, please contact Kathy Jacobson at Seabury & Smith, (800) 922-9242 or (202) 296-9640.

    • 93-57 SOES Tier Levels Set to Change for 517 Issues On September 1, 1993

      SUGGESTED ROUTING

      Senior Management
      Internal Audit
      Operations
      Trading

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

      • A 1,000-share maximum ordersize was applied to those Nasdaq National Market 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 National Market 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 National Market 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 National Market 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 tier levels were established, 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 May 28, 1993, using the aforementioned formula. 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 200share 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. In adopting this policy, the Committee was attempting to minimize market-maker exposure on issues for which the tier level increased and 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 National Market issues that will require a SOES tier-level change on September 1, 1993.

      Nasdaq National Market SOES Changes
      (Effective September 1, 1993)
      All Issues in Alphabetical Order by Name

      Symbol

      Company Name

      Old Tier Level

      New Tier Level

      SRCE

      1ST SOURCE CORP

      500

      1000

             

      A

           

      SKFRY

      A B SKF ADR

      500

      1000

      AELNA

      A E L INDS CL A

      1000

      500

      ALTI

      A L T A I INC

      500

      200

      AMCRY

      A M C O R LTD ADR

      1000

      500

      ARIS

      A R I NETWORK SVCS

      1000

      500

      ARONB

      AARON RENTS INC CL B

      1000

      500

      ABBK

      ABINGTON SAVINGS BK

      500

      1000

      ACLE

      ACCEL INT'L CORP

      1000

      500

      ACET

      ACETO CORP

      1000

      500

      ADLAC

      ADELPHIA COMM CP CL A

      500

      1000

      AVCR

      ADVACARE INC

      500

      1000

      LAIS

      ADVAN INTERVENTIONAL

      500

      1000

      AHLDY

      AHOLD LTD ADR

      500

      1000

      ARSN

      AIRSENSORS INC

      500

      1000

      ATNG

      ALATENN RESOURCES

      1000

      500

      SEMIW

      ALL AMER SEMI WTS A

      500

      1000

      SEMIZ

      ALL AMER SEMI WTS B

      500

      1000

      AORGB

      ALLEN ORGAN CO CL B

      500

      200

      ABCI

      ALLIED BANK CAPITAL

      200

      500

      ARELW

      ALPHAREL INC WTS 94

      500

      1000

      PDRR

      ALPINE MEADOWS TAHOE

      1000

      500

      AMBC

      AMER BNCP OHIO

      500

      200

      ACOL

      AMER COLLOID CO

      500

      1000

      ACPI

      AMER CONSUMER PROD

      500

      200

      AMFB

      AMER FED BK FSB

      500

      1000

      AIFC

      AMER INDEMNITY FIN

      500

      1000

      ANUC

      AMER NUCLEAR CORP

      500

      1000

      AMSC

      AMER SUPERCONDUCTOR

      500

      1000

      AMGD

      AMER VANGUARD CORP

      500

      1000

      AMWD

      AMER WOODMARK CORP

      500

      1000

      ATAXZ

      AMERICA FRST TX 2 LP

      1000

      500

      ASGR

      AMERICA SERVICE GP

      500

      1000

      AMOS

      AMOSKEAG CO

      500

      1000

      ANRG

      ANERGEN INC

      500

      1000

      ARGY

      ARGOSY GAMING CO

      500

      1000

      ATKM

      ATEK METALS CENTER

      200

      500

      AGLF

      ATLANTIC GULF COMM

      500

      1000

      AUFN

      AUTOFINANCE GP INC

      200

      500

      AIMM

      AUTOIMMUNE INC

      500

      1000

      TOTE

      AUTOTOTE CORP CL A

      500

      1000

      AUTR

      AUTOTROL CORP

      500

      200

      AVTR

      AVATAR HLDGS INC

      500

      1000

             

      B

           

      BARZ

      B A R R A INC

      1000

      500

      BFEN

      B F ENTERPRISES INC

      500

      200

      BFSI

      B F S BANKORP INC

      500

      1000

      BIIEF

      B I I ENTERPRISES

      1000

      500

      BKCS

      B K C SEMICONDUCTORS

      500

      200

      BKLA

      B K L A BNCP

      200

      500

      BMRG

      B M R FIN GP INC

      500

      200

      BNHB

      B N H BNSH INC

      500

      1000

      BPMI

      BADGER PAPER MILLS

      500

      200

      BLCC

      BALCHEM CORP

      500

      200

      BTEK

      BALTEK CORP

      200

      500

      BOMS

      BANCORPSOUTH INC

      500

      1000

      BNHC

      BANK OF NEW HAMP CORP

      500

      1000

      ASAL

      BANKATLANTIC FSB

      500

      1000

      BNYN

      BANYAN SYSTEMS INC

      200

      500

      BPILF

      BASIC PET INT'L LTD

      200

      500

      BELD

      BELDEN BLAKE CORP

      500

      1000

      BNHN

      BENIHANA NAT'L CORP

      1000

      500

      BIGO

      BIG O TIRES INC

      500

      1000

      BLSC

      BIO LOGIC SYS CORP

      1000

      500

      BTGCZ

      BIO-TECH GEN WTS 96

      500

      200

      BINC

      BIOSPHERICS INC

      1000

      500

      BORAY

      BORAL LTD ADS

      200

      500

      BOSA

      BOSTON ACOUSTICS INC

      500

      1000

      BOXXA

      BOX ENERGY CORP CL A

      500

      200

      BSBC

      BRANFORD SAVINGS BK

      500

      1000

      BBIOY

      BRITISH BIO-TECH ADR

      500

      200

      BSIS

      BROADWAY & SEYMOUR

      200

      500

      BTLR

      BUTLER MFG CO

      500

      1000

             

      C

           

      LAWR

      C M S/D A T A CORP

      500

      1000

      CPAK

      C P A C INC

      500

      1000

      CSPI

      C S P INC

      500

      1000

      CRBI

      CAL REP BANCORP INC

      200

      500

      CABI

      CALIFORNIA BANCSHARE

      500

      1000

      CCLPZ

      CALLON CON LP UTS

      500

      1000

      CLZRW

      CANDELA LASER CP WTS

      500

      200

      CANO

      CANONIE ENVIR SVC

      1000

      500

      CNTBY

      CANTAB PHARM PLC ADR

      1000

      500

      CAII

      CAPITAL ASSOCIATES

      500

      1000

      CSWC

      CAPITAL SOUTHWEST CP

      500

      200

      CAVR

      CARVER CORP

      500

      1000

      CATY

      CATHAY BANCORP INC

      1000

      500

      CEGE

      CELL GENESYS INC

      500

      1000

      CEBC

      CENTENNIAL BNCP

      1000

      500

      CEBK

      CENTRAL CO-OP BANK

      500

      1000

      CJER

      CENTRAL JERSEY BNCP

      1000

      500

      CMBI

      CENTRAL MTGE BCSHS

      500

      1000

      CPSA

      CENTRAL PENN FIN CORP

      500

      1000

      CSBC

      CENTRAL SOUTHERN HLD

      500

      200

      CRDN

      CERADYNE INC

      1000

      500

      CJGPF

      CHAI-NA-TA GINS LTD

      500

      1000

      CHLN

      CHALONE WINE GP LTD

      1000

      500

      CHANF

      CHANDLER INS CO LTD

      1000

      500

      CFED

      CHARTER FSB BANCORP

      1000

      500

      CHBC

      CHATTAHOOCHEE BNCP

      1000

      500

      CHEM

      CHEMPOWER INC

      500

      1000

      DOCKS

      CHICAGO DOCK SBI

      500

      1000

      CDCRA

      CHILDRENS DIS CTRS CL A

      200

      500

      CSFT

      CHIPSOFT INC CL A

      500

      1000

      DOSEW

      CHOICE DRUG SYS WTS

      1000

      500

      CINS

      CIRCLE INCOME SHARES

      1000

      500

      CNCN

      CITIZENS NAT'L CORP FL

      200

      500

      CHCO

      CITY HOLDING CO

      500

      200

      CLDRP

      CLIFFS DRILLING PFD

      500

      200

      CHTB

      COHASSET SAVINGS BK

      200

      500

      COLB

      COLUMBIA BKNG SYS

      200

      500

      CCOA

      COMCOA INC

      200

      500

      CBVA

      COMMERCE BANK (VA)

      1000

      500

      CBNB

      COMMERCEBANCORP

      1000

      500

      CBOR

      COMMERCIAL BNCP ORE

      200

      500

      CBKS

      COMMNWLTH BCSHS

      500

      1000

      CABL

      COMM CABLE INC

      500

      1000

      CBKI

      COMMUNITY BANKS INC

      500

      200

      CBNH

      COMMUNITY BKSHS

      500

      1000

      CBSI

      COMMUNITY BK SYSTEM

      500

      1000

      CLRI

      COMPUTER LANGUAGE

      500

      1000

      COSI

      COMPUTER OUTSOURCING

      500

      1000

      CMTL

      COMTECH TELECOMM CP

      500

      1000

      COND

      CONDOR SVCS INC

      500

      1000

      CTWS

      CONN WATER SVCS INC

      1000

      500

      CONS

      CONSERVATIVE SAV CORP

      200

      500

      COPI

      CONSOLIDATED PRODS

      500

      1000

      CSTN

      CORNERSTONE FIN CORP

      200

      500

      COSCB

      COSMETIC CENTER CL B

      1000

      500

      CSLH

      COTTON STATES LIFE

      200

      500

      CRRC

      COURIER CORP

      500

      200

      CRCC

      CRAFTMATIC CONTOUR

      200

      500

      CACC

      CREDIT ACCEPTANCE CP

      500

      1000

      CREE

      CREE RESEARCH INC

      500

      1000

      XCOM

      CROSSCOMM CORP

      500

      1000

      CRWN

      CROWN BOOKS CORP

      500

      1000

      CULP

      CULP INC

      500

      1000

      CUNB

      CUPERTINO NAT'L BNCP

      500

      200

      CTII

      CYTOTHERAPEUTICS INC

      500

      1000

             

      D

           

      DSPT

      D S P TECH INC

      500

      1000

      DMCVA

      DAIRY MART STORES CL A

      1000

      500

      DANKY

      DANKA BUSINESS ADR

      500

      1000

      DARTA

      DART GROUP CORP CL A

      200

      500

      DATX

      DATA TRANSLATION INC

      200

      500

      DKEY

      DATAKEY INC

      500

      1000

      DMAR

      DATAMARINE INT'L INC

      500

      200

      DWCHWDATAWATCH

      CORP WTS

      1000

      500

      DATM

      DATUM INC

      500

      1000

      DWSN

      DAWSON GEOPHYSICAL

      500

      1000

      DSSI

      DEFENSE SOFTWARE SYS

      500

      1000

      DLFI

      DELPHI FIN GP CL A

      500

      1000

      DIDIF

      DESTRON/I D I INC

      500

      1000

      DTRX

      DETREX CORP

      1000

      500

      DPGE

      DIAL PAGE INC

      500

      1000

      DICN

      DICEON ELCTRONICS

      500

      1000

      DIPCZ

      DIGITAL PRODS WTS B

      500

      200

      DVCR

      DIVERSICARE INC

      500

      1000

      DRCO

      DYNAMICS RES CORP

      500

      1000

             

      E

           

      EMCI

      E M C INSURANCE GP

      500

      1000

      EROQ

      E N V I R O Q CORP

      500

      1000

      EZEMA

      E Z EM INC CL A

      500

      200

      EZEMB

      E Z EM INC CL B

      1000

      500

      EDCO

      EDISON CONTROL CORP

      200

      500

      ELCN

      ELCO INDS INC

      500

      1000

      EFII

      ELEC IMAGING INC

      200

      500

      ELRC

      ELECTRO RENT CORP

      500

      200

      EFSB

      ELMWOOD BANCORP

      500

      1000

      ENNI

      ENERGYNORTH INC

      500

      1000

      ENEX

      ENEX RESOURCE CORP

      500

      1000

      EVTC

      ENVIR TECHS INC

      200

      500

      EVTCW

      ENVIR TECHS INC WTS

      200

      500

      ENVG

      ENVIROGEN INC

      500

      1000

      ENZNW

      ENZON INC WTS 94

      500

      200

      ENZY

      ENZYMATICS INC

      1000

      500

      ECGC

      ESSEX COUNTY GAS CO

      500

      200

      ESEX

      ESSEX CORP

      1000

      500

      EVAN

      EVANS INC

      500

      1000

      XLTCP

      EXCEL TECH CONV PFD

      500

      1000

      XLTC

      EXCEL TECH INC

      500

      1000

      EZCOF

      EZCONY INTERAMERICA

      500

      1000

             

      F

           

      FMBN

      F & M BANCORP (MD)

      500

      200

      FFFG

      F F O FIN GP INC

      1000

      500

      FICI

      FAIR ISAAC AND CO

      500

      1000

      FARL

      FARREL CORP

      1000

      500

      TFSB

      FEDERAL SAV BK THE

      200

      500

      FFRV

      FIDELITY FED SAV VA

      200

      500

      FIRE

      FIN INST INS GP LTD

      200

      500

      FACT

      FIRST ALBANY COS INC

      1000

      500

      FAMA

      FIRST AMARILLO BNCP

      500

      1000

      FBII

      FIRST BANCP INDIANA

      500

      1000

      FBNKP

      FIRST BKS CUM PFD C

      500

      200

      FCNCA

      FIRST CITIZENS CL A

      500

      1000

      FCOLZ

      FIRST COL BKSHS DEP

      500

      200

      FFBA

      FIRST FED SAV BK CO

      200

      500

      FFWV

      FIRST FIDELTIY BNCP

      200

      500

      FRCC

      FIRST FIN CARIB CORP

      500

      1000

      FFHS

      FIRST FRANKLIN CORP

      200

      500

      FGHC

      FIRST GEORG HLDGS

      1000

      500

      FIBI

      FIRST INTER BANCORP

      500

      1000

      FMSB

      FIRST MUTUAL SAV BK

      200

      500

      MTCL

      FIRST NAT'L BANK CORP

      200

      500

      FOBBA

      FIRST OAK BROOK CL A

      500

      200

      FSOU

      FIRST SOUTHERN BNCP

      500

      1000

      FSFI

      FIRST STATE FIN SVC

      500

      1000

      FFSW

      FIRSTFEDERAL FIN

      200

      500

      FLSTP

      FLAGSTAR COS INC PFD

      200

      500

      FLXS

      FLEXSTEEL INDS

      500

      1000

      FFPC

      FLORIDA FIRST FED

      1000

      500

      FLBK

      FLORIDABANK FSB

      1000

      500

      FOOT

      FOOTHILL INDEPENDENT

      500

      1000

      FOILO

      FOREST OIL CORP PFD

      500

      1000

      FSBX

      FRAMINGHAM SAV BK

      500

      1000

      FSVB

      FRANKLIN BK NAT ASSN

      500

      1000

      FSVBP

      FRANKLIN BK NAT PFD A

      500

      1000

      FRML

      FREYMILLER TRUCKING

      500

      1000

             

      G

           

      GBCB

      G B C BANCORP

      1000

      500

      GWCC

      G W C CORP

      500

      1000

      GZEA

      G Z A GEOENVIRONMENT

      1000

      500

      GBND

      GEN BINDING CORP

      500

      1000

      GCOR

      GENCOR INDS INC

      1000

      500

      GENBB

      GENESEE CORP CL B

      200

      500

      GENIW

      GENETICS INSTIT WTS

      1000

      500

      GBFH

      GEORGIA BONDED FIBER

      500

      200

      GILD

      GILEAD SCIENCES INC

      500

      1000

      GBCI

      GLACIER BANCORP

      500

      1000

      GEMS

      GLENAYRE TECHS INC

      500

      1000

      CHIK

      GOLDEN POULTRY CO

      1000

      500

      GBTVK

      GRANITE BRDCS NV

      1000

      500

      GSBI

      GRANITE STATE BKSHS

      500

      1000

      GLBCP

      GREAT LAKES PFD A

      500

      1000

      GFCT

      GREENWICH FIN CORP

      1000

      500

      GSOF

      GROUP I SOFTWARE INC

      500

      200

      GMRK

      GULFMARK INTL INC

      500

      1000

             

      H

           

      HDRP

      H D R POWER SYS INC

      500

      200

      HHOT

      H H OIL TOOL CO INC

      200

      500

      HYALF

      H Y A L PHARM CORP

      500

      1000

      HACH

      HACH CO

      200

      500

      HVFD

      HAVERFIELD CORP

      500

      200

      HAVTA

      HAVERTY FURNITURE CL A

      200

      500

      HWKN

      HAWKINS CHEMICAL INC

      1000

      500

      HECHB

      HECHINGER CO CL B

      500

      1000

      HFBS

      HERITAGE FED BNCSHS

      500

      200

      HSBK

      HIBERNIA SAV BK THE

      200

      500

      HIFS

      HINGHAM INSTI SAV

      500

      1000

      HOENW

      HOENIG GP WTS A

      500

      200

      HFMD

      HOME FED CORP

      200

      500

      HFMO

      HOME FEDERAL BNCP MO

      500

      1000

      HPBC

      HOME PORT BNCP INC

      500

      1000

      HOFL

      HOME SAV BANK F S B

      500

      1000

      HTWN

      HOMETOWN BNCP INC

      500

      200

      HRZB

      HORIZON BANK (WA)

      500

      1000

      HOSP

      HOSPOSABLE PROD INC

      500

      1000

      HUFK

      HUFFMAN KOOS INC

      500

      1000

             

      I

           

      ICOC

      I C O INC NEW

      500

      1000

      MPAC

      IMPACT SYSTEMS INC

      500

      1000

      INDB

      INDEP BK CORP MA

      500

      1000

      INDE

      INDEPENDENT ENTMT GP

      200

      500

      IFDCA

      INDUSTRIAL FUNDING CL A

      500

      200

      IHIIZ

      INDUSTRIAL HLDG WTS B

      500

      200

      IHII

      INDUSTRIAL HLDGS INC

      500

      1000

      IITCF

      INTERA INFO TECH A

      500

      200

      ICBK

      INTERCONTINENTAL BK

      500

      1000

      INFB

      INTERFIRST BNCP INC

      200

      500

      INTP

      INTERPOINT CORP

      500

      1000

      IPPIF

      INTERPROVIN PIPE SYS

      200

      500

      ISLH

      INTL HOLDING CAP CORP

      200

      500

      IJIN

      INTL JENSEN INC

      1000

      500

      IROQ

      IROQUOIS BNCP

      200

      500

      ITHB

      ITHACA BANCORP INC

      500

      1000

             

      J

           

      JGIN

      J G INDUSTRIES INC

      500

      1000

      MAYS

      J W MAYS INC

      200

      500

      JCFSP

      JACKSON CNTY BK PFD A

      200

      500

      JCFS

      JACKSON CNTY FED FSB

      200

      500

      JAYJ

      JAY JACOBS INC

      1000

      500

      JSBK

      JOHNSTOWN SAV BK

      200

      500

             

      K

           

      KLLM

      K L L M TRANSPORT SV

      500

      1000

      KINN

      KINNARD INV INC

      500

      1000

      KLRT

      KLEINERTS INC

      500

      200

      KOPN

      KOPIN CORP

      500

      1000

      KOSS

      KOSS CORP

      500

      1000

      KRUG

      KRUG INT'L CORP

      500

      1000

             

      L

           

      LXBK

      L S B BANCSHARES NC

      500

      200

      LAKE

      LAKELAND INDS INC

      500

      1000

      LPAC

      LASER-PACIFIC MEDIA

      1000

      500

      LIBHA

      LIBERTY HOMES INC CL A

      200

      500

      LQMD

      LIFEQUEST MEDICAL

      500

      1000

      LCUT

      LIFETIME HOAN CORP

      1000

      500

      LIND

      LINDBERG CORP

      500

      1000

      LIPOZ

      LIPOSOME CO DEP SHRS

      500

      1000

      LIQB

      LIQUI BOX CORP

      500

      1000

      LFUS

      LITTELFUSE INC

      500

      1000

      LFUSW

      LITTELFUSE INC WTS

      500

      1000

      LAFCB

      LOAN AMER FIN CL B

      500

      1000

      LEIX

      LOWRANCE ELECTRONICS

      1000

      500

      LUFK

      LUFKIN INDS INC

      1000

      500

             

      M

           

      MARC

      M A R C INC

      1000

      500

      MCBX

      M B COMM INC

      500

      1000

      MMIM

      M M I MEDICAL INC

      200

      500

      MLRC

      MALLON RESOURCES CORP

      500

      1000

      MAXC

      MAXCO INC

      1000

      500

      MAYF

      MAYFLOWER GROUP INC

      500

      1000

      MOIL

      MAYNARD OIL CO

      500

      1000

      MCCL

      MCCLAIN INDUSTRIES

      200

      500

      MDIN

      MEDALIST INDS

      500

      1000

      MDEV

      MEDICAL DEVICES

      500

      1000

      MDIX

      MEDICAL DIAGNOSTICS

      500

      1000

      MSYSZ

      MEDICAL TECH WTS 96

      500

      1000

      MDRXZ

      MEDICIS PHARM WTS C

      1000

      500

      MECS

      MEDICUS SYS CORP

      500

      1000

      MEDR

      MEDRAD INC

      500

      1000

      MEGX

      MEGACARDS INC

      500

      1000

      MMTCY

      MEMTEC LTD ADR NEW

      1000

      500

      MIGI

      MERIDIAN INS GP INC

      500

      1000

      MPTBS

      MERIDIAN PT RLTY TR

      200

      500

      METS

      MET COIL SYSTEMS CORP

      500

      1000

      MFCB

      MICHIGAN FINL CORP

      500

      200

      MTST

      MICROTEST INC

      500

      1000

      MIDS

      MID SOUTH INS CO

      500

      1000

      MIDC

      MIDCONN BANK

      500

      1000

      MFRI

      MIDWESCO FILTER

      500

      1000

      MILW

      MILWAUKEE INS GROUP

      500

      200

      MYTK

      MITEK SURGICAL PRODS

      500

      1000

      MODT

      MODTECH INC

      1000

      500

      MORP

      MOORE PRODUCTS CO

      200

      500

      MOTR

      MOTOR CLUB OF AMER

      500

      1000

             

      N

           

      NABC

      N A B ASSET CORP

      500

      1000

      NSCB

      N B S C CORP

      500

      1000

      BLDG

      N C I BLDG SYSTEM

      500

      1000

      NATH

      NATHAN'S FAMOUS INC

      500

      1000

      POPS

      NAT'L BEVERAGE CORP

      1000

      500

      NCMC

      NAT'L CAP MGT CORP

      1000

      500

      NCBE

      NAT'L CITY BANCSHARES

      200

      500

      NCBM

      NAT'L CITY BNCP

      500

      1000

      NCBRP

      NAT'L COMM BK PFD B

      1000

      500

      NHHC

      NAT'L HOME HLTH CARE

      1000

      500

      NIRTS

      NAT'L INCOME RLT TRUST

      500

      1000

      NLBK

      NAT'L LOAN BK IN LIQ

      1000

      500

      MBLA

      NAT'L MERCANTILE BNCP

      500

      1000

      NAVG

      NAVIGATORS GP INC

      500

      1000

      NEOZ

      NEOZYME CP CALLABLE

      1000

      500

      NIIUF

      NEOZYME II UTS

      1000

      500

      NWTH

      NETWORTH INC

      200

      500

      NRND

      NORAND CORP

      500

      1000

      NAMC

      NORTH AMER NAT'L CORP

      500

      1000

      NUHC

      NU HORIZONS ELEC CORP

      500

      1000

      NUCM

      NUCLEAR METALS INC

      500

      1000

      NYCOP

      NYCOR INC PFD

      1000

      500

             

      O

           

      OSBF

      O S B FIN CORP

      200

      500

      OHSC

      OAK HILL SPORTSWEAR

      500

      1000

      ODFL

      OLD DOMINION FREIGHT

      1000

      500

      OMEF

      OMEGA FIN CORP

      200

      500

      OPTO

      OPTO MECHANIK INC

      500

      200

      OSBN

      OSBORN COMM CORP

      500

      200

      GOSHB

      OSHKOSH B'GOSH CL B

      200

      500

      OSHM

      OSHMANS SPORTING

      500

      1000

             

      P

           

      PDKLZ

      P D K LABS WTS B 97

      1000

      500

      PDKLM

      P D K LABS WTS C 97

      1000

      500

      PABC

      PACIFIC BNCP

      200

      500

      PDLPY

      PACIFIC DUNLOP ADR

      500

      1000

      PACO

      PACO PHARM SVCS INC

      500

      1000

      PTMLY

      PALMER TUBE MILL ADR

      500

      200

      PBCI

      PAMRAPO BNCP INC

      500

      1000

      PARC

      PARK COMM INC

      500

      200

      PARK

      PARK NAT'L CORP

      500

      200

      PVSA

      PARKVALE FIN CORP

      1000

      500

      PRLX

      PARLEX CORP

      200

      500

      PATK

      PATRICK INDS INC

      200

      500

      PMFG

      PEERLESS MFG CO

      500

      1000

      PWBC

      PENNFIRST BNCP INC

      200

      500

      PFDC

      PEOPLES BANCORP

      500

      200

      PBNB

      PEOPLES SAV FIN CORP

      1000

      500

      PCEP

      PERCEPTION TECH CORP

      500

      1000

      PLDIF

      PETERSBURG LONG DIST

      500

      1000

      PXREZ

      PHOENIX RE CORP DEP SH

      200

      500

      PHOC

      PHOTO CONTROL CORP

      500

      1000

      PICOA

      PHYSICIANS INS OH CL A

      1000

      500

      PMAN

      PIEDMONT MGMT CO INC

      500

      1000

      PKVL

      PIKEVILLE NAT'L CORP

      1000

      500

      PSBN

      PIONEER BANCORP INC

      1000

      500

      PFBC

      PIONEER FED BNCP

      500

      1000

      PSQL

      PLATINUM SOFTWARE CP

      500

      1000

      PBKC

      PREMIER BKSHS

      500

      200

      PREM

      PREMIER FIN SVCS

      200

      500

      PTRK

      PRESTON CORP

      1000

      500

      PFNC

      PROGRESS FIN CORP

      500

      1000

      PRGR

      PROGROUP INC

      500

      1000

      PCOL

      PROTOCOL SYS INC

      500

      1000

      PRBK

      PROVIDENT BNCP INC

      500

      1000

      PECN

      PUBLISHERS EQUIP CORP

      500

      1000

      PLFC

      PULASKI FURNITURE CP

      500

      1000

      PULS

      PULSE BANCORP INC

      200

      500

      PTNM

      PUTNAM TRUST CO

      200

      500

             

      Q

           

      RCORF

      QUALITY DINO ENTMT

      1000

      500

      QRST

      QUANTUM RESTAURANT

      500

      1000

      QDELW

      QUIDEL CORP WTS 2000

      500

      1000

             

      R

           

      RRMN

      RAILROADMENS FED IND

      500

      1000

      RAVN

      RAVEN INDUSTRIES INC

      500

      1000

      RDGCA

      READING CO CL A

      500

      1000

      REED

      REEDS JEWELERS INC

      200

      500

      RFTN

      REFLECTONE INC

      500

      1000

      RGEQ

      REGENCY EQUITIES CORP

      200

      500

      RESB

      RELIABLE FIN CORP

      500

      1000

      REPOW

      REPOSSESSION AUCT WTS

      1000

      500

      ARBC

      REPUBLIC BANK CAL

      200

      500

      REXI

      RESOURCE AMERICA INC

      500

      200

      REXL

      REXHALL INDS INC

      500

      1000

      RSGI

      RIVERSIDE GP INC

      200

      500

      RNRC

      RIVERSIDE NAT'L BANK

      500

      200

      RNIC

      ROBINSON NUGENT INC

      500

      1000

      RBPAA

      ROYAL BANK PENN CL A

      500

      1000

      RBCO

      RYAN BECK CO INC

      500

      1000

             

      S

           

      SCOM

      S C S COMPUTE INC

      1000

      500

      SIHS

      S I HANDLING SYS INC

      500

      1000

      SKFB

      S K FAMOUS BRANDS

      500

      1000

      SFTIF

      S O F T I M A G E

      500

      1000

      SFGD

      SAFEGUARD HEALTH ENT

      1000

      500

      SHRE

      SAHARA RESORTS

      200

      500

      SNDS

      SANDS REGENT THE

      500

      1000

      SWCB

      SANDWICH CO-OP BANK

      500

      1000

      STMI

      SATELLITE TECH MGMT

      500

      1000

      STIZ

      SCIENTIFIC TECH INC

      200

      500

      SCGN

      SCIGENICS INC CLLBLE

      1000

      500

      SCIOZ

      SCIOS NOVA INC WTS D

      1000

      500

      SHER

      SCOTTISH HERITABLE

      200

      500

      SFLD

      SEAFIELD CAPITAL CORP

      1000

      500

      FOTO

      SEATTLE FILMWORKS

      1000

      500

      SECDP

      SECOND BNCP PFD A

      500

      200

      SFBM

      SECURITY FED SAV BK

      500

      1000

      SFSL

      SECURITY FIRST CORP

      500

      200

      SNFCA

      SECURITY NAT'L FIN CL A

      200

      500

      SSVB

      SECURITY SAV FSB

      200

      500

      SENE

      SENECA FOODS CP

      500

      200

      SHMN

      SHAMAN PHARM INC

      500

      1000

      SSBC

      SHELTON BNCP INC

      200

      500

      SHOP

      SHOPSMITH INC

      500

      1000

      STBS

      SIERRA TAHOE BNCP

      500

      1000

      SFNCA

      SIMMONS 1ST NAT'L CL A

      200

      500

      FISH

      SMALL'S OILFIELD

      200

      500

      FISHW

      SMALL'S OILFIELD WTS

      200

      500

      HAMS

      SMITHFIELD CO INC

      500

      200

      SOMR

      SOMERSET GP INC THE

      200

      500

      SNSTA

      SONESTA INT'L CL A

      500

      200

      SSBB

      SOUTHINGTON SAV BK

      200

      500

      SWPA

      SOUTHWEST NAT'L CORP

      200

      500

      SWWC

      SOUTHWEST WATER CO

      1000

      500

      SPLE

      SPORTS/LEISURE INC

      500

      1000

      SBIB

      STERLING BCSHS TX

      500

      1000

      SWBC

      STERLING WEST BNCP

      500

      200

      STRB

      STROBER ORGANIZATION

      200

      500

      SUBBA

      SUBURBAN BANCP CL A

      500

      1000

      SUMI

      SUMITOMO BANK OF CA

      500

      1000

      SMMT

      SUMMIT BANCORP WA

      500

      1000

      SCSL

      SUNCOAST SAV LN FSA

      500

      1000

      SRBC

      SUNRISE BNCP CA

      500

      1000

      SYNC

      SYNALLOY CORP

      500

      1000

      SYQT

      SYQUEST TECH INC

      500

      1000

      SYRA

      SYRATECH CORP

      500

      1000

             

      T

           

      TCII

      T C I INTL INC

      500

      1000

      TSINW

      T S I CP WTS 96

      500

      200

      TSII

      T S I INC

      1000

      500

      TVXTF

      T V X GOLD INC

      500

      1000

      TAPI

      TAPISTRON INT'L INC

      500

      1000

      TAPIW

      TAPISTRON INT'L WTS

      500

      1000

      TECN

      TECHNALYSIS CORP

      500

      1000

      TCOMB

      TELE COMM INC CL B

      500

      1000

      TFLX

      TERMIFLEX CORP

      500

      200

      WATR

      TETRA TECH INC

      500

      1000

      PRET

      THE PRICE R E I T

      200

      500

      TMSTA

      THOMASTON MILLS CL A

      500

      1000

      TMBS

      TIMBERLINE SOFTWARE

      500

      1000

      TODDA

      TODD A O CORP CL A

      500

      200

      TKIOY

      TOKIO MARINE ADR

      500

      1000

      TOPS

      TOPS APPLIANCE CITY

      500

      1000

      TTRR

      TRACOR INC

      500

      1000

      TTRRW

      TRACOR INC WTS A

      500

      200

      TLII

      TRANS LEASING INT'L

      500

      1000

      WSTEW

      TRANSAMER WASTE WTS A

      200

      500

      WSTEZ

      TRANSAMER WASTE WTS B

      200

      500

      TRNS

      TRANSMATION INC

      500

      1000

      TRCO

      TRICO PRODUCTS CORP

      500

      200

      TRIB

      TRISTATE BANCORP THE

      200

      500

             

      U

           

      UNSL

      U N S L FIN CORP

      200

      500

      USPC

      U S PAGING CORP

      1000

      500

      UPCPO

      UNION PLANTERS PFD E

      500

      1000

      UNSA

      UNITED FIN CORP S C

      1000

      500

      UMSB

      UNITED MISSOURI BCSH

      500

      1000

      UNBJ

      UNITED NATL BNCP

      200

      500

      UBMT

      UNITED SAV BK F A MT

      200

      500

      UTVI

      UNITED TELEVISION

      1000

      500

      USAC

      UNIVERSAL SEISMIC

      500

      1000

             

      V

           

      VALN

      VALLEN CORP

      500

      1000

      VALY

      VALLICORP HLDGS INC

      500

      1000

      VCRE

      VARI CARE INC

      200

      500

      VRSY

      VARITRONIC SYS INC

      500

      1000

      VNTX

      VENTRITEX INC

      500

      1000

      VCNB

      VENTURA COUNTY NAT'L

      500

      1000

      VENT

      VENTURIAN CORP

      200

      500

      VIDE

      VIDEO DISPLAY CORP

      500

      1000

      VLGEA

      VILLAGE SUPER MKT CL A

      500

      200

      VTSS

      VITESSE SEMICOND

      500

      1000

      VOLT

      VOLT INFO SCIENCES

      500

      1000

      VOLVY

      VOLVO AB CL B ADR

      500

      1000

             

      W

           

      WSMP

      W S M P INC

      500

      200

      WAIN

      WAINWRIGHT BK TR CO

      500

      200

      WALS

      WALSHIRE ASSURANCE

      500

      1000

      WAMUO

      WASHING NONCUM PFD C

      500

      1000

      WBNC

      WASHINGTON BNCP NJ

      500

      1000

      WAMUN

      WASHINGTON PFD D

      200

      500

      WATFZ

      WATERFORD PLC ADR UTS

      200

      500

      WTRS

      WATERS INSTRUMENTS

      200

      500

      WEDC

      WEDCO TECHNOLOGY INC

      500

      1000

      WCBC

      WEST COAST BNCP CA

      500

      1000

      WSBK

      WESTERN BANK OREGON

      1000

      500

      WFRAF

      WHARF RESOURCES LTD

      200

      500

      WFMI

      WHOLE FOODS MARKET

      500

      1000

      WMSI

      WILLIAMS INDS INC

      500

      1000

      WINR

      WINTHROP RESOURCE CORP

      500

      1000

             

      Z

           

      ZEUS

      ZEUS COMPONENTS INC

      500

      1000

      ZIGO

      ZYGO CORP

      500

      1000

    • 93-56 Quotation and Trade-Reporting Requirements For Members Dealing in High-Yield Bonds

      SUGGESTED ROUTING

      Senior Management
      Institutional
      Legal & Compliance
      Municipal
      Operations
      Systems
      Trading

      Executive Summary

      On March 18, 1993, the Securities and Exchange Commission (SEC) approved NASD rules regarding quotation and transaction reporting requirements for members trading high-yield, fixed-income securities. The rules will become effective in the fourth quarter of this year. Members that trade high-yield bonds, especially dealers, brokers, and brokers' brokers, should contact the NASD now to find out what their new quoting and trade-reporting obligations will entail. For further information and a copy of the rules, contact Market Data Services at (301) 948-6162.

      Background and Description of Requirements

      The NASD has adopted regulatory requirements for members that participate in the high-yield, fixed-income securities market. The trade-reporting rules will require members to report transactions in all high-yield bonds traded over-the-counter to the NASD for regulatory purposes and will also require real-time trade reporting for securities included in the Fixed Income Pricing System (FIPS). The NASD has developed FIPS to facilitate the collection, processing, and dissemination of real-time, firm quotations for 30 to 50 of the most liquid bonds in the top tier of high-yield, fixed-income securities. FIPS also provides for hourly dissemination of high/low trading ranges and accumulated volume in each bond quoted in the system.

      High-yield bonds are classified as bonds that have been rated by Standard & Poor's as BB+ or lower, and FIPS will require brokers and dealers in the top 30 to 50 high-yield bonds to participate in the quotation system. The NASD has established an advisory committee to develop a list of the top-tier securities based on volume, price, name recognition of the issue, research following, and representation from diverse industry groups. A list of the bonds selected as of May 15, 1993, appears at the end of this Notice.

      The NASD will assign a unique symbol identifier to each bond quoted in FIPS and trade reported to the NASD. The identifiers will be configured as mnemonics that relate to the issuer and the specific bond series and will be available on-line to FIPS subscribers and also in hard copy from the NASD so that members may distinguish between bonds with the same or similar due dates.

      Broker and Dealer Obligations For Quoting FIPS Bonds

      Members holding themselves out regularly as brokers or dealers in high-yield bonds quoted in FIPS will be required to participate in FIPS and transmit their quotations to the system for dissemination to the public. Dealer quotes may be one- or two-sided but must be continuous and firm to all members submitting offers to trade at the quoted prices and sizes.

      Quotations submitted by members must reflect a size of 100 bonds ($100,000 par value) and be in increments of 1/8 percentage points.

      Participants may trade at prices other than those quoted, but all quotes must be reasonably related to the prices at which those executions occur.

      Registered dealers may enter quotes directly into FIPS or may use a registered broker's broker. Dealer quotations entered directly will be identified as such in FIPS; dealer quotations entered through a broker's broker will appear on the FIPS screen as the broker's quotes and the dealer's identity will remain anonymous to other participants and the public.

      However, each individual dealer will be able to use FIPS to see its own quote reflected in the broker's quote. For example, if a broker received two dealer quotes for 100 bonds each, priced at 98, FIPS would reflect a single quote of 200 bonds at 98 from the broker. Both FIPS dealers would be able to "pierce" that broker quote, however, and see that 100 bonds reflected their own quote and the other 100 bonds were from another unidentified dealer.

      Members will be able to view FIPS quotations through a FIPS terminal, and quotations will be disseminated to non-members through securities information processors or vendors, so that they will be generally available to investors. The operating hours of the quotation system have been established as 9:30 a.m. to 4 p.m., Eastern Time (ET), to mirror the equity market hours.

      Reporting Transactions In High-Yield Bonds

      Members will be required to submit trade reports on all transactions in FIPS securities (those top-tier securities quoted in FIPS) within five minutes after an execution, from 9

      a.m. to 5 p.m., ET. In addition, members will be required to report information on all transactions in high-yield bonds to the NASD for surveillance purposes. Trade reporting for non-FIPS securities may be accomplished any time during the trading day, but no later than 5 p.m., ET, of trade date.

      FIPS Functionality and Equipment

      The NASD will make FIPS quotation and summary transaction information available to investors and the public through securities information vendors. The data feeds to these vendors will include dealer and broker quotations on the FIPS bonds as well as aggregate transaction information, including hourly and daily summaries of high and low execution prices and accumulated volume in the FIPS securities.

      Brokers and dealers in FIPS securities will be required to obtain a FIPS device or terminal to input, update, and view their quotations. All members trading high-yield bonds will be required to make contact with the NASD for real-time or end-of-day reporting of trades—either through dial-up or leased-line connections, computer interface, or by using the NASD's FIPS service desk. In addition, FIPS functionality will provide specialized dealer and broker screens tailored to the high-yield market, allow members to use their existing equity computer-to-computer interface (CTCI) lines for trade reporting, and provide interfaces with member in-house trading systems.

      Questions regarding members' obligations or equipment needs may be directed to S. William Broka, Vice President, Trading and Market Services at (202) 728-8050.

      Members holding themselves out as brokers or dealers in these bonds will be required to participate in FIPS.
      FIPS Bonds
      (as of 5/15/93)

      Equity Ticker Symbol

      Issue

      Coupon

      Maturity

      ADLAC

      Adelphia Communications

      12 1/2

      5/15/02

      AST

      American Standard

      11 3/8

      5/15/04

      CVC

      Cablevision Systems

      10 3/4

      4/1/04

      CTY

      Century

      9 3/4

      2/15/02

      CQB

      Chiquita Brands

      9 5/8

      1/15/04

      C

      Chrysler

      6

      4/15/96

      CLK

      Clark

      9 1/2

      9/15//04

      COT

      Coltec Industries

      10 1/4

      4/1/02

      CMCSA

      Comcast Corp.

      10 5/8

      7/15/12

      CMCSA

      Comcast Corp.

      10

      3/5/00

      CNT

      Container Corp.

      9 3/4

      4/1/03

      DWB

      Del Webb

      9 3/4

      3/1/03

      FHP

      Fort Howard

      10

      3/15/03

      FHP

      Fort Howard

      9 1/4

      3/15/01

      BU

      Grand Union

      12 1/4

      7/15/02

      BUS

      Greyhound

      10

      7/31/01

      HTI

      Healthtrust

      10 3/4

      5/1/02

      KR

      Kroger

      10

      5/1/99

      KK

      K-III

      10 5/8

      5/1/02

      ORNDA

      OrNda Health Corp.

      12 1/4

      8/15/02

      OI

      Owens Illinois

      11

      12/1/03

      PNF

      Penn Traffic

      10 1/4

      2/15/02

      CVE

      Quantum Chemical Corp.

      13

      3/15/04

      R

      Ralph's

      9

      4/1/03

      RXR

      Revco D.S.

      9 1/8

      1/15/00

      RCMI

      Rogers Cantel Mobile

      10 3/4

      1/1/01

      SWY

      Safeway

      9.65

      1/15/04

      SLL

      Southland

      5

      12/15/03

      STO

      Stone Container

      11 7/8

      12/1/98

      E

      Transco

      9 3/8

      8/15/01

      TBSA

      Turner Broadcasting

      12

      10/1/94

      TWF

      TW Food

      11 1/4

      11/1/04

    • 93-55 SEC Amends and Clarifies Penny Stock Rules

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations
      Trading

      Executive Summary

      The Securities and Exchange Commission (SEC) has adopted amendments to certain rules under the Securities Exchange Act of 1934 (Act) that apply to transactions in low-priced securities traded in the over-the-counter market. Specifically, the SEC amended Rule 15c2-6, which makes it unlawful for a broker/dealer to sell or effect the purchase of a "designated security" with a customer in a nonexempt transaction, unless the broker/dealer has specifically approved the customer's account for transactions in designated securities and has received the customer's written agreement to the transaction. The amendments conform the definition of "designated security" in Rule 15c2-6 to the definition of "penny stock" in Rule 3a51-1. With certain exceptions, the exemptions under Rule 15g-1 replace the transactional exemptions under Rule 15c2-6. The amendments redesignate Rule 15c2-6 as Rule 15g-9. The SEC also amended Rule 15g-2 and Schedule 15G under the Act to require a broker/dealer to obtain, before effecting any transaction in a penny stock, a written acknowledgment from the customer that the customer has received the Risk Disclosure Document required by Rule 15g-2. Finally, the SEC clarified Rule 15g-3, which mandates the disclosure to customers of current quotation prices or similar market information in penny stock transactions.

      Background

      On January 1, 1990, Rule 15c2-6 became effective under the Act. The rule restricts high-pressure sales tactics by broker/dealers involving certain speculative, low-priced securities traded over the counter. In particular, Rule 15c2-6 prohibits a broker/dealer from selling to or effecting the purchase of a designated security by any person, unless the broker/dealer has approved the purchaser's account for transactions in designated securities and has received the purchaser's written agreement to the transaction. In approving an account for transactions in designated securities, a broker/dealer must obtain sufficient information from the customer to make an appropriate suitability determination, provide the customer with a written statement setting forth the basis of the determination, and obtain a signed copy of a suitability statement from the customer. (See Notice to Members 89-65, October 1989 and Notice to Members 90-18, March 19, 1990).

      Following adoption of Rule 15c2-6, Congress passed the Penny Stock Reform Act (Reform Act). The Reform Act directed the SEC to adopt rules designed to address sales-practice abuses and manipulation involving speculative, low-priced over-the-counter securities by requiring broker/dealers to provide investors with material market and other information before effecting a transaction in a penny stock. In response, the SEC adopted Rule 3a51-1 and Rules 15g-1 through 15g-6 (Disclosure Rules). Rule 3a51-1 defines the term "penny stock"; Rule 15g-1 exempts certain transactions from the disclosure rules; and Rules 15g-2 through 15g6 generally require broker/dealers effecting transactions in penny stocks to provide their customers with a Risk Disclosure Document that describes the risks of investing in penny stocks, information regarding market quotations, information on the compensation of the broker/dealer and salesperson involved in the penny stock transaction, and monthly statements disclosing the market value of penny stocks held in the customer's account. (See Notice to Members 92-38, July 1992).

      Rule 15c2-6 Amendments

      The amendments to Rule 15c2-6 conform the rule to the scope of the disclosure rules by: (1) replacing the designated security definition of Rule 15c2-6 with the Rule 3a51-1 definition of penny stock; (2) substituting with two significant exceptions the list of exempt transactions in Rule 15g-1 for the exempt transactions in Rule 15c2-6(c); and (3) redesignating Rule 15c2-6 as Rule 15g-9. Making the scope of Rule 15c2-6 consistent with the disclosure rules will simplify compliance with all of the rules directly relating to penny stocks. The amendments to Rule 15c2-6 took effect on August 11, 1993.

      Penny Stock Definition

      Although the definition of penny stock is substantially the same as the definition of designated security, amended Rule 15c2-6 does cover a slightly different universe of securities transactions. For example, the definition of penny stock in Rule 3a51-1 contains an exclusion for securities whose issuer has demonstrated net tangible assets of $2 million or more, but adds a requirement that the issuer be in operation for at least three years. Issuers that have been in operation for less than three years must have at least $5 million in net tangible assets to be excluded from the definition of penny stock. In addition to the exclusion based on issuer net tangible assets, Rule 3a51-1, unlike Rule 15c2-6, includes an alternative exclusion for the securities of an issuer with average revenues of $6 million for the past three years (i.e., revenues of at least $18 million by the end of the three-year period).

      Like the definition of designated security, the definition of penny stock excludes any security authorized, or approved for authorization on notice of issuance, for quotation in The Nasdaq Stock MarketSM. It also provides an exclusion for any security registered, or approved for registration on notice of issuance, on a national securities exchange provided the current price and volume information for transactions in that security is reported and made available to vendors under the rules of the national securities exchange. This exclusion is available for regional exchange-listed securities only if the securities actually are purchased or sold through the facilities of the regional exchange or in a distribution.

      Rule 15c2-6 still does not cover securities priced at $5 or more, but when calculating the price of a security, broker/dealers now have to exclude the amount of any commission, commission equivalent, markup, or markdown charged in the respective agency or principal transaction. Finally, securities that a registered investment company issues and put and call options that the Options Clearing Corporation issues remain excluded from the rule.

      Exempt Transactions

      With two significant exceptions relating to established customers and private offerings, the exemptions under Rule 15g-1 replace the exempt transactions of Rule 15c2-6. Specifically, although Rule 15g-1 does not exempt transactions with defined "established customers" of the broker/dealer, the SEC has retained this exemption solely for purposes of Rule 15c2-6. Also, Rule 15g-1 exempts all private offering transactions that meet the requirements of Regulation D under the Securities Act of 1933 (Securities Act), as well as transactions with an issuer not involving any public offering pursuant to section 4(2) of the Securities Act. Amended Rule 15c2-6(c)(2) does not, however, exempt transactions that meet the requirements of Rule 504. In the SEC's view, the recent expansion of the Rule 504 exemption and the removal of all of the restrictions on transferability and general solicitation require that the protections provided investors by Rule 15c2-6 should continue to apply to customers purchasing securities in a Rule 504 offering.

      Because the Rule 15g-1 exemptions have replaced the exempt transactions of Rule 15c2-6, Rule 15c2-6 no longer exempts transactions with all accredited investors. The amended rule now includes the Rule 15g-1 exemption for transactions with institutional accredited investors (defined in Rule 501) as well as transactions with the penny stock issuer and any director, officer, general partner, or beneficial owner of more than 5 percent of any class of equity security of the issuer. In addition, the rule provides the frequently referred to "de minimis exemption" for transactions by non-market makers receiving less than 5 percent of their total sales-related revenue from transactions in low-priced over-the-counter securities. Transactions not recommended by the broker/dealer remain exempt under Rule 15c2-6.

      De Minimis Broker/Dealer Revenue Exemption

      Broker/dealers relying on the de minimis exemption will be permitted to calculate their 5 percent revenue based on transactions in designated securities as originally defined in Rule 15c2-6, rather than penny stocks as defined in Rule 3a51-1, for a period of six months following publication of the SEC's adopting release in the Federal Register at 58 FR 37413.

      Penny Stock Rule Amendments

      Rule 15g-2 — Risk Disclosure Document

      Rule 15g-2 makes it unlawful for a broker/dealer to effect a transaction in a penny stock with or for a customer account unless the broker/dealer distributes a Risk Disclosure Document to the customer before effecting the customer's first transaction in a penny stock. The Risk Disclosure Document, which is set forth in Schedule 15G to the disclosure rules, defines the term penny stock, identifies certain risks associated with investing in penny stocks, describes the penny stock market, provides a brief description of a broker/dealer's obligations under the disclosure rules, and informs customers of their rights and remedies under federal and state law, among other things. (See Notice to Members 92-42, August 1992).

      To better enable broker/dealers to demonstrate, and regulators to examine for, compliance with the Rule 15g-2, the SEC adopted amendments that require a broker/dealer to obtain a signed and dated acknowledgment from its customer demonstrating that the customer has actually received the required Risk Disclosure Document before the customer's first transaction in a penny stock. Corresponding amendments to Schedule 15G, which take effect November 1, 1993, include a description of this new requirement. In this regard, the amended Rule 15g-2 requires that broker/dealers maintain a copy of the customer's written acknowledgment for at least three years (with the first two years in a readily accessible place) following the date on which the broker/dealer provided the Risk Disclosure Document to the customer.

      Rule 15g-2 does not specify precisely how to obtain the customer's signature. A broker/dealer, for example, could provide the customer with two copies of the Risk Disclosure Document, one of which the customer could sign, date, and return to the broker/dealer. Alternatively, the broker/dealer could send the customer one Risk Disclosure Document with an attached receipt that the customer could sign, date, and return to the broker/dealer. For convenience, either the Risk Disclosure Document to be signed or the receipt could accompany the Rule 15c2-6 suitability statement and written agreement that also requires the customer's signature.

      The amendments to Rule 15g-2 apply only to customers that have not received and were not required to have received the Risk Disclosure Document as of August 11, 1993. Accordingly, broker/dealers need not obtain a signature from customers that received the Risk Disclosure Document in the past year. However, broker/dealers will have to get signatures for customers entering into a penny stock transaction after August 11, 1993 (the effective date of this amendment), if they have not yet received the document from the broker/dealer effecting the transaction.

      Rule 15g-3 — Clarification of Disclosure Requirements

      By way of background, under Rule 15g-3 a broker/dealer may not effect a non-exempt transaction in a penny stock without first disclosing, and subsequently confirming in writing to the customer, current quotation prices or specified market information for the penny stock that is the subject of the transaction. For transactions effected on a non-risk-less principal basis, Rule 15g-3 requires the broker/dealer to provide the calculated inside bid and offer quotations for a penny stock as those inside quotations appear in a Qualifying Electronic Quotation System (QEQS). The Reform Act precisely defines a QEQS and the NASD's Over-the-Counter Bulletin Board® (OTCBB) service has been granted interim designation as the only QEQS. As a result, OTCBB calculated inside quotes are qualified for use in complying with Rule 15g-3 disclosure requirements.

      If QEQS inside quotation information is unavailable, the broker/dealer must then look to its own bid and offer quotes in the penny stock for disclosure to the customer. However, a broker/dealer cannot use its own quotations to satisfy Rule 15g-3 disclosure requirements unless: (1) the broker/dealer has effected at least three bona fide inter-dealer transactions consistently at its bid or offer prices over the previous five business days, (2) no less than 75 percent of these transactions have occurred consistently at such quotes, and (3) the broker/dealer reasonably believes that such quotes accurately reflect the prices at which it is prepared to trade with other dealers.1

      If the security does not have a QEQS inside quotation and the dealer cannot meet the referenced inter-dealer transactions standard, Rule 15g-3 specifies that the dealer must state to the customer that it has not traded consistently at its quotes and it must disclose the price at which it last purchased the penny stock from, or sold the penny stock to, another dealer in a bona fide transaction.

      Confusion has apparently surfaced in those situations where there is no QEQS inside quotation calculated and the inter-dealer activity effected represents only one side of the broker/dealer's quotations. Under these circumstances, the broker/dealer must disclose its own quote (bid or ask) which is properly supported by appropriate inter-dealer executions. For the side of the market not meeting the referenced inter-dealer transactions standard, the broker/dealer must state that it has not consistently effected inter-dealer purchases or sales of the penny stock at its quoted price, and disclose to the customer the price at which it last purchased the penny stock from, or sold the penny stock to, another dealer in a bona fide transaction.

      Attached to this Notice is a copy of the amended rules, as well as the additional language to Schedule 15G. For further information regarding amended Rule 15c2-6, the disclosure rules, or this Notice, contact Daniel M. Sibears, NASD, Regulation Division, at (202) 728-8221 or (202) 728-8412.


      1 Simply because inside quotations appear in the NASD's OTCBB or the dealer executes a sufficient number of inter-dealer transactions at its quoted price to permit Rule 15g-3 disclosure does not allow for automatic execution at these prices. The validation process for determining the prevailing market price for markup/mark-down purposes remains necessary (See Notice to Members 92-16, April 1, 1992).

    • 93-54 SEC Approves Quotation-Size Requirements for Market Makers in OTC Equity Securities

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Trading

      Executive Summary

      On July 1, 1993, the Securities and Exchange Commission (SEC) approved an amendment to Schedule H to the NASD By-Laws regarding quotation-size requirements for market makers in over-the-counter (OTC) equity securities. The rule change revises the minimum-size requirements applicable to market makers displaying quotations in the OTC Bulletin Board® (OTCBB) service or any comparable inter-dealer quotation system accommodating OTC equity securities. The new size requirements take effect September 8, 1993. The text of the amendment follows this Notice.

      Description of Amendment

      Until now, whenever an NASD member entered a proprietary bid/offer into the OTCBB for a domestic OTC equity security,1 the firm was required to honor that bid or offer for at least one trading unit, typically 100 shares, regardless of the price of the shares quoted. This rule change replaces the one-trading-unit requirement with a tiered structure of minimum-size requirements based on the price level of the individual bid or offer.2 Each registered market maker that publishes a firm bid or offer in a domestic OTC equity security will be required to honor its bid or offer for individual orders up to the size prescribed for the particular price range. These requirements will apply to members' quotes displayed in the OTCBB and any other inter-dealer quotation system that supports quotation updates in OTC equity securities on a real-time basis.3

      For example, a market maker enters a quote of $.45 bid and offer $.55. The firm must honor its displayed bid for up to 5,000 shares and its displayed offer for up to 2,500 shares. If the same firm updates its quotation to reflect a bid of $.40 and an offer of $.50, a size requirement of 5,000 shares attaches to both sides of the market maker's quotation. As is the case today, OTCBB market makers will retain the option of entering an unpriced indication of interest or a one-sided quotation. The unpriced indication triggers no obligation per se to trade the subject security at a particular price or size specified by the new requirements.4 However, a one-sided entry obligates the market maker to honor that bid (or offer) for the size prescribed by the new rule.

      After the NASD completes the necessary system enhancements, the OTCBB will display size for quotations, and will have a default feature to ensure display of the correct minimum size if a market maker neglects to enter that size when updating quotes.5 Meanwhile, each market maker will be responsible for determining the minimum-size requirement applicable to its bid or offer and must honor the quote for the specified size.6 The amendment takes effect September 8, 1993.

      Questions regarding this Notice may be directed to Michael J. Kulczak, Associate General Counsel, at (202) 728-8811. To obtain interpretive guidance or report potential instances of noncompliance, members should contact NASD Market Surveillance at (301) 590-6080.

      Text of New Section 5 to Schedule H to the NASD By-Laws

      (Note: New text is underlined.)

      Section 5 - Minimum Quotation Size Requirements For OTC Equity Securities

      Every member firm that functions as a market maker in OTC Equity Securities by entering firm quotations into the OTC Bulletin Board service (OTCBB) (or any other inter-dealer quotation system that permits quotation updates on a realtime basis) must honor those quotations for the minimum size defined in the table below. In this regard, it is the market maker's responsibility to determine the minimum size requirement applicable to its firm bid and/or offer in each of its registered securities (excluding OTC Equity Securities for which the OTCBB will not accept firm quotations). Depending on the price level of the bid or offer, a different minimum size can apply to each side of the market being quoted by the member firm in a given security.

      Price (Bid or Offer)

      Minimum Quote Size

      0.00 -

      0.50*

      5,000

      .51 -

      1.00

      2,500

      1.01 -

      10.00

      500

      10.01 -

      100.00

      200

      100.01 -

      200.00

      100

      200.01 +

       

      50

      For purposes of this rule, the term "OTC Equity Security" means any equity security not classified as a "designated security" for purposes of Parts XII or XIII of Schedule D to the NASD By-Laws, or as an "eligible security," for purposes of Schedule G to the NASD By-Laws. The term does not include "restricted securities," as defined by Rule 144(a)(3) under the Securities Act of 1933, nor any securities designated in the PORTALSM Market.

      *The OTCBB can accept bids/offers expressed in fractions as small as 1/256 or in decimals up to six places. In applying the price test for minimum quotation size, any increment beyond an upper limit in the right hand column will trigger application of the minimum quote size for the next tier. For example, a bid (or offer) of $.505 must be firm for a size of 2,500 shares.


      1 For purposes of this rule, the term "OTC equity security" means any equity security not classified as a "designated security" for purposes of Parts XII or XIII of Schedule D to the NASD By-Laws. The term does not include restricted securities, as defined by Rule 144(a)(3) under the Securities Act of 1933, or any securities designated in The PORTALSM Market. The new size requirement will not apply to any foreign/ADR issue in which firm quotations are not permitted to be entered into the OTCBB.

      2 SEC Release No. 34-32570 (July 1, 1993); 58 FR 36725 (July 8, 1993).

      3 At present, no electronic quotation medium other than the OTCBB accommodates real-time quotation updates in OTC equity securities.

      4 Nevertheless, a market maker displaying an unpriced indication of interest has an obligation to supply on request to another broker/dealer a bid/offer that must be firm for at least one trading unit, which is typically 100 shares.

      5 The NASD anticipates the OTCBB will have size-display capability and the minimum-size default feature by mid-1994.

      6 A table setting forth the tiered minimum size requirements will be reproduced in a newsframe accessible to OTCBB market makers on the workstations they use to enter and update their quotations.

    • 93-53 SEC Approves Amendments Relating to Close Outs of Short Sales and Bona Fide Fully Hedged or Arbitraged Positions

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations
      Systems
      Trading

      Executive Summary

      On July 14, 1993, the Securities and Exchange Commission (SEC) approved a new Section 71 of the Uniform Practice Code (UPC) requiring members to close out short sales in Nasdaq® securities that meet a certain clearing short-position threshold. In addition, the SEC approved amendments to the Interpretation of the Board of Governors relating to the Prompt Receipt and Delivery of Securities (Interpretation) setting forth examples of fully hedged and arbitraged positions relating to exemptions from the various short-sale requirements of the NASD® rules.

      The amendments take effect October 12, 1993. The text of the amendments follows this Notice.

      Background

      In July 1986, the NASD issued a report detailing a study of short-sale practices in Nasdaq securities (Pollack study). As a result of recommendations contained in the Pollack study, the NASD took a number of regulatory initiatives regarding short selling. The NASD now requires members to: (1) mark all sale transactions either "long" or "short"; (2) make an affirmative determination that they will receive delivery of a security from a customer or that they can borrow a security for a customer before accepting a short sale from a customer; (3) make an affirmative determination that they can borrow the security before effecting a short sale for their own account (certain transactions in corporate debt securities, bona fide market-making activities, and fully hedged or arbitraged positions are exempt); (4) buy-in for cash or guaranteed delivery Nasdaq securities, if the buyer is not an NASD member, on failure of a clearing corporation to effect delivery pursuant to a buy-in notice; and (5) report, as of the 15th of each month, aggregate short positions in all customer and proprietary accounts in securities listed on The Nasdaq Stock MarketSM. In addition, the NASD has proposed a rule change to prohibit short sales of Nasdaq National Market® securities at or below the current inside bid when that bid is lower than the previous inside bid.

      In addition to these changes, the Pollack study recommended that the NASD address the fail-to-deliver/fail-to-receive problem created by naked short selling.1 The Pollack study indicated that the lack of an automatic mechanism for preventing the build-up of short positions at clearing corporations carried the potential for serious problems, especially in times of market stress. As a result of Pollock study recommendations and member comment, the NASD proposed that members close out short sales in certain securities.

      Description of the Rule Change

      New Section 71 of the UPC requires the short seller's broker/dealer to close out a short sale of specific securities 10 days after the normal settlement date if delivery of securities has not occurred and the transaction is not exempt. Securities subject to the close-out requirement are those with an aggregate "clearing" short position of 10,000 shares or more that equals or exceeds one half of one percent of the total shares outstanding. The NASD will identify these securities daily based on data from the National Securities Clearing Corporation (NSCC) and will compile a "restricted list."2 Any subsequent short-sale transaction in a security on the list that is not completed by delivery of shares within the prescribed time frames will be subject to mandatory closeout if a "fail-to-deliver" situation exists 10 days after normal settlement date.

      The rule applies to customer and proprietary short sales, but exempts "bona fide" market-making activities and short sales that result in a "bona fide" fully hedged or arbitraged position.3 For example, the close-out rule applies if a broker/dealer sells a restricted security short from its proprietary account to another broker/dealer and fails to deliver the security within 10 days of normal settlement date. The rule also applies if the firm makes the same transaction for a customer.4 However, if the short sale is part of a bona fide market-making transaction or if the sale of a restricted security results in a fully hedged or fully arbitraged position, it is exempt from the mandatory close-out requirement.

      In response to certain comments submitted to the SEC about persistent open clearing positions, the NASD noted that short selling isn't the only reason certain securities have unsettled trades at clearing corporations for lengthy periods. Other reasons include a member firm's segregation requirements under SEC Rule l5c3-3, transfer delays, or some characteristic of the security that prevents delivery.5 The NASD concluded that nearly all stocks that develop large, persistent fails-to-deliver conditions at clearing corporations would be covered by the close-out rule because the rule focuses on persistent rather than temporary fail-to-deliver situations.

      In response to concerns regarding possible evasion of the rule by selling assets used to hedge an exempted short position, the NASD found that hedged positions accounted for less than 2 percent of the total shares of reported short interest in the stocks covered by its analysis. The NASD Market Surveillance Department will monitor compliance with the rule, and previous violations of short-sale rules have been subject to disciplinary action by the Market Surveillance Committee. The close-out rule will add substantially to the ability of the NASD to eliminate naked short selling as a regulatory problem and will address the few cases where unsettled trades may create regulatory or market concern.

      In response to comments concerning the restrictive warrant hedging exemptions, the NASD believes that easing the rule would create a substantial loophole. Transactions envisioned by certain commenters would enable short selling without the need to close out transactions under the rule. A warrant price near zero would permit virtually unlimited short selling, with no delivery requirement. While normally the number of shares necessary to establish a hedge could be determined by calculating a hedge ratio, only 80-90 securities will be subject to the rule on a given date and those that are subject to the rule are for the most part thinly traded, making calculation of a hedge ratio inefficient. In addition, basing the exemption on a hedge ratio would severely complicate surveillance of compliance with the rule as well as increase compliance and surveillance costs. The rule attempts to balance the need to require delivery of a certain class of securities with the desirable warrant-hedging function.

      Accordingly, Section 71 provides that short positions offset by long positions in corresponding convertible debentures, options, or warrants with a "call" feature are "bona fide fully hedged," provided the corresponding position is "in the money" (i.e., the strike/conversion price is below the current market value of the security) and exercisable or convertible within 90 days.6 Section 71 also provides that short positions offset by warrants that are "out of the money" are exempt from the close-out procedures up to the value of the warrant.7

      Conclusion

      As mentioned in the Pollack study, the fail-to-deliver/fail-to-receive problem could cause serious difficulties in a lengthy bear market. Large, unsettled trades can disrupt market mechanisms. Public customers' reasonable expectations that their securities have been delivered should be met. Additionally, naked short selling can present substantial manipulative concerns. While naked short sellers must deposit margin with either their broker/dealer or with a clearing corporation, they enjoy greater leverage than if they had to close out their short positions within a reasonable time frame. The ability of naked short sellers to employ this leverage to effect "bear raids" supports the decision to impose additional discipline on naked short selling via a close-out requirement.

      Thus, the rule change will assist in preventing manipulation of Nasdaq securities through excessive naked short selling. As originally recommended in the Pollack study, a buy in or close-out requirement will add to the stability of the marketplace by assuring that securities are available to cover short positions, especially in times of volatility. Such a requirement also will help enhance the integrity of The Nasdaq Stock Market. In addition, the close-out rule may help to prevent short-selling abuses that could harm investors and the public interest.

      Questions concerning this Notice may be directed to Dorothy L. Kennedy, Assistant Director, Nasdaq Operations, at (212) 8584030 until August 20, 1993; after August 23, 1993, call (203) 3759609.


      1 In fail-to-deliver or fail-to-receive transactions the normal clearance and settlement process is interrupted by a failure to either receive or deliver the security in question.

      2 Nasdaq Level 2 and Level 3 Workstations will see a short-sale restriction indicator ("UPC 71" will appear below the name of the company) on their bid/ask screens and a list of restricted securities will be available on line. Further, the NASD will make each day's list available on request via FAX or mail to any person calling the NASD Market Operations Department at (212) 858-4340 until August 20, 1993; after August 20, 1993, call (203) 375-9609.

      3 The new rules include guidelines for the use of the exemption from the short-sale requirements for bona fide fully hedged and arbitraged transactions provided in new Section 71 and in Section 2(b) of the Interpretation. The guidelines are for illustrative purposes and are not intended to limit the NASD's ability to determine the scope of the terms "bona fide fully hedged" and "bona fide fully arbitraged."

      4 A member firm that enters a short-sale transaction in a restricted security for a customer is obliged to inform that customer of the mandatory close-out requirement. Even if the security is subsequently dropped from the restricted list, the trade must be closed out. On the other hand, if the security is placed on the list after the trade is executed, close out would not be required.

      5 An analysis of the factors affecting fails-to-deliver to the NSCC and the fluctuations in such fails-to-deliver indicated that when fails-to-deliver develop in stocks at NSCC, the dominant reasons are high average daily volume and (inversely related) the amount of float in the security. The analysis further suggested that the existence of fails-to-deliver at NSCC confirms little or nothing about short sales, unless the fail-to-deliver condition is large and persistent.

      6 For example, as set forth in Section 71, a short position of EFGH (44 1/8) would be exempt if the investor also holds a corresponding call option with a strike price of 40 that is exercisable within 90 days.

      7 For example, as set forth in Section 71, a short position of 100 shares of IJKL (1 1/2) offset by 100 IJKL warrants (2 1/4 - 2 3/4), each exercisable into one share of IJKL at a price of 2, would receive a partial exemption up to 16 shares (25 divided by 1 1/2).


      Text of New Rule to the Uniform Practice Code

      (Note: New language is underlined.)

      Sec. 71. Mandatory Close-Out for Short Sales

      A contract involving a short sale in Nasdaq securities described in subparagraph (a) below, for the account of a customer or for a member's own account, which has not resulted in delivery by the broker-dealer representing the seller within 10 business days after the normal settlement date, must be closed by the broker-dealer representing the seller by purchasing for cash or guaranteed delivery securities of like kind and quantity.

      (a) This requirement shall apply to Nasdaq securities, as published by the Association, which have clearing short positions of 10,000 shares or more and that are equal to at least one-half (1/2) of one percent of the issue's total shares outstanding.
      (b) This mandatory close-out requirement shall not apply to bona fide market making transactions and transactions that result in bona fide fully hedged or bona fide fully arbitraged positions.

      Text of Amendment to Article III, Section 1 of the NASD Rules of Fair Practice Interpretation of the Board of Governors on Prompt Receipt and Delivery of Securities

      (5) "Bona Fide Fully Hedged" and "Bona Fide Fully Arbitraged"

      In determining the availability of the exemption provided in Section (2)(b) above and in Section 71 of the Uniform Practice Code from short sale requirements for "bona fide fully hedged" and "bona fide fully arbitraged" transactions, the following guidelines shall apply. These guidelines are for illustrative purposes and are not intended to limit the Association's ability to determine the proper scope of the terms "bona fide fully hedged" or "bona fide fully arbitraged" pursuant to this provision, on a case-by-case basis.
      (a) Bona fide fully hedged

      The following transactions shall be considered bona fide fully hedged:
      1. Short a security and long a convertible debenture, preferred or other security which has a conversion price at or in the money and is convertible within ninety days into the short security.

      Example: Long ABCD Company 9% convertible subordinated debentures due 1998. Each debenture is convertible into common at $27.90 per share of common equal to 35.842 shares of common per IM debenture.
      • With the price of the ABCD at 8 3/4 - 9 and a short position of 100 shares of ABCD the short position would not be exempt.

      • If the price of ABCD was $28 with a short position of 100 shares, 35 shares would be exempt and the remaining 65 shares would not be exempt.
      2. Short a security and long a call which has a strike price at or in the money and which is exercisable within 90 calendar days into the underlying short security.

      Example: Long 1 call of EFGH (44 1/8) with a strike price of 40 expiring within 90 calendar days.
      • With the circumstances as above 100 shares would be exempt.

      • If the strike price was 50 a short position of 100 shares would not be exempt.

      • With any strike price and the call expiring in more than 90 days any short of the common would not be exempt.
      3. Short a security and long a position in warrants or rights which are exercisable within 90 days into the short security. To the extent that the long warrants or rights are "out of the money" then the short position shall be exempt up to the market value of the long warrants or rights.

      Example: Long 100 warrants of IJKL (IJKLW: 2 1/4 - 2 3/4). Each warrant is exercisable into 1 share of common at $2. (IJKL: 4 - 4 1/2).
      • With the circumstances as above a short position of 100 shares would be exempt.

      • If the price of IJKL is $1.50 and the market value of long warrants is 1/4, a short position of 16 shares would be exempt.
      (b) Bona fide fully arbitraged

      The following transactions shall be considered bona fide fully arbitraged:
      1. Long a security purchased in one market together with a short position from an offsetting sale of the same security in a different market at as nearly the same time as practicable for the purpose of taking advantage of a difference in price in the two markets.

      Example: Purchase 100 shares of EFGH on the London Stock Exchange and simultaneously effect a short sale of 100 shares of EFGH on Nasdaq.
      • Under the above circumstances, the 100 share short position would be exempt.
      2. Long a security which is without restriction other than the payment of money exchangeable or convertible within 90 calendar days of the purchase into a second security together with a short position from an off-setting sale of the second security at or about the same time for the purpose of taking advantage of a concurrent disparity in the prices of the two securities.

      Example: Long 100 shares of MNOP (MNOP: 51 - 51 1/4) which is being acquired by ORST Corp. (ORST: 52 1/8 - 52 3/8) at the rate of 1.15 shares per MNOP share.
      • If the exchange is to take place within 90 days then a short of 115 shares of ORST would be exempt from the mandatory buy-in. Also, if the exchange was to take place at a date later than 90 days, all short positions in the above example would be subject to the mandatory buy-in.
      (c) The transaction date of the shortsale shall govern when a fully hedged or fully arbitraged position exists.

    • 93-52 Mail Vote — Proposed Amendment Exempting Money Market Mutual Funds From Disclosure Requirements;

      Last Voting Date: September 27, 1993

      SUGGESTED ROUTING

      Senior Management
      Mutual Fund
      Syndicate

      Executive Summary

      The NASD invites members to vote on a proposed amendment to Article III, Section 26(d)(4) of the Rules of Fair Practice to exempt money market mutual funds from the required disclosure under that Subsection that "long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted by [the rules]." The last voting date is September 27, 1993. The text of the proposed amendment follows this Notice.

      Background

      On July 7, 1993, new rules governing investment company sales charges took effect under Article III, Section 26(d) of the Rules of Fair Practice. The NASD has received several applications for exemption from Subsection 26(d)(4), which requires that the prospectus for an investment company with an asset-based sales charge must disclose that "longterm shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this section." The applications noted that the rule language is specific and requires the disclosure, even if the statement may not be true for a particular mutual fund.

      The applicants pointed out that in the case of a money market mutual fund, there is a high probability that the statement will be inaccurate because such funds generally have very low asset-based sales charges and an investor would have to be a shareholder for an extremely long time before the disclosure would be true. According to one applicant, a shareholder of its fund would have to remain in the fund for more than 55 years before exceeding the maximum front-end charge. The applicants suggest that since money market mutual funds are traditionally short-term investments or cash management vehicles, it is unlikely that investors will stay in such funds for lengthy periods. As a result, they believe that the disclosure may be misleading, or at least confusing, to investors in money market mutual funds.

      Request for Vote

      The Board of Governors agrees with the arguments of the applicants and, accordingly, has determined to recommend amending Subsection 26(d)(4) to exempt money market mutual funds from the disclosure requirement. The Board does not believe that requiring funds to include disclosure statements in such circumstances serves any identifiable purpose nor does it advance any recognizable regulatory interest.

      The Board considers the proposed amendment necessary and appropriate and recommends that members vote their approval. The text of the proposed new rule that requires member vote is below. 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 by no later than September 27, 1993. The amendment would not take effect until it is filed with and approved by the SEC.

      Questions regarding this Notice may be directed to R. Clark Hooper, Vice President, Investment Companies Regulation Department, (202) 728-8330, or Elliott R. Curzon, Senior Attorney, Office of General Counsel, (202) 728-8451.

      Text of Proposed Amendment to Article III, Section 26 of the Rules of Fair Practice

      (Note: New text is underlined.)

      Investment Companies

      Sec. 26

      * * *

      (d)
      (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. This subsection shall not apply to money market mutual funds.

    • 93-51 Mail Vote — Proposed Amendment to the Corporate Financing Rule Relating to Fairness and Reasonableness of Anti-Dilution Provisions in Underwriters' Warrants, Options, and Convertible Securities;

      Last Voting Date: September 27,

      SUGGESTED ROUTING

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate
      Training

      Executive Summary

      The NASD® invites members to vote on a proposed amendment to the Corporate Financing Rule under Article III, Section 44 of the Rules of Fair Practice that is intended to prohibit certain anti-dilution provisions of options, warrants, or convertible securities received as underwriting compensation. The amendment would provide that underwriters and related persons may not receive options, warrants, or convertible securities as compensation if the provisions of such securities include anti-dilution provisions with disproportionate rights, privileges, and economic benefits that are not provided to investors purchasing the issuer's securities in the public offering. The amendment would also prohibit the receipt by underwriters and related persons of options, warrants, or convertible securities containing provisions for the receipt or accrual of cash dividends before exercise or conversion of the securities.

      Background

      The NASD Corporate Financing Rule (Rule) contained in Article III, Section 44 of the Rules of Fair Practice prohibits an NASD member or associated person from participating in any manner in any public offering of securities in which the underwriting or other terms or arrangements in connection with or related to the distribution of the securities are unfair or unreasonable. Subsection (c)(6)(B) of the Rule codifies the presumption that certain arrangements are unfair and unreasonable and Subsection (c)(6)(B)(vi) sets forth unreasonable arrangements applicable to options, warrants, or convertible securities received by the underwriter and related persons as underwriting compensation.

      This latter Subsection provides that terms and arrangements contained in warrants, options, or convertible securities received as underwriting compensation are unfair and unreasonable if the security: (1) has a duration of more than five years; (2) is exercisable or convertible below the public offering price or the market price at the time of receipt; (3) is not in compliance with Subsection (c)(5)(A), i.e., is different from the security offered to the public or without a bona fide independent market; (4) has more than one demand registration right at the issuer's expense; (5) has a demand registration right lasting more than five years from the effective date of the offering; (6) has a piggyback registration right lasting more than seven years from the effective date of the offering; or (7) is convertible or exercisable, or otherwise is on terms more favorable than the terms of the securities being offered to the public.

      This last Subsection (7) is referred to as the "General Fairness Standard" of Subsection (c)(6)(B) to the Rule. In addition, Subsection (c)(6)(B)(ix) of the Rule prohibits the receipt of securities as underwriting compensation in an amount in excess of 10 percent of the securities sold to the public (Stock Numerical Limitation Rule).

      The NASD's Corporate Finance Committee (Committee) reviewed the anti-dilution provisions contained in the contracts of underwriters and related persons for warrants received as underwriting compensation. The Committee found that certain of such warrants have included anti-dilution arrangements that appear to be unfair and unreasonable under the above General Fairness Standard by providing disproportionate benefits to the underwriter and related persons that are not provided to investors in the public offering.

      As a result of the Committee's review, the NASD has identified certain arrangements considered unfair and unreasonable with respect to warrants (as well as options and convertible securities) received by underwriters and related persons and has determined to amend the Corporate Financing Rule to prohibit the receipt of such options, warrants, or convertible securities by underwriters and related persons when such securities contain disproportionate anti-dilution provisions that are not also provided to the investors in the public offering.

      In its review, the Committee also identified another arrangement related to these warrants that provided for the receipt or accrual of cash dividends before the member exercised its warrants. The NASD believes that such an arrangement is unfair and unreasonable under the Rule because it provides the underwriter and related person with economic rights, privileges, and benefits that are more favorable than the benefits received by investors in the public offering. The NASD has determined to amend the Rule to prohibit underwriters and related persons from receiving warrants, as well as options and convertible securities, that contain such a provision.

      Description of the Amendment

      Prohibition of Effecting Disproportionate Benefits

      The proposal defines as unfair and unreasonable receipt by the underwriter and related persons of any underwriting compensation consisting of any option, warrant, or convertible security containing anti-dilution provisions that provide the underwriter and related persons with disproportionate rights, privileges, and economic benefits that are not provided to the purchasers of the securities offered to the public.

      The NASD recognizes that contracts between the company and investors covering the issuance of options, warrants, and convertible securities may contain certain anti-dilution provisions designed to protect shareholders from events that dilute their economic interest in the company. The NASD has found that underwriters and related persons sometimes negotiate to receive protection from dilution in their warrant contracts through certain rights that provide them with a larger number of shares on exercise or lower exercise price than that available to shareholders of the offering when events occur that do not affect all shareholders, such as additional issuances by the company. The Committee review found different variations of how adjustments to the exercise price and number of shares occur in response to such issuances of securities. Such variations included formulas that "weight" the effect of changes in the company's capitalization and also formulas that "rachet" the adjustment without regard to the actual dilative affect of the new issuance of securities.

      The NASD believes all variations of such disproportionate anti-dilution provision are unfair and unreasonable when not also provided to investors in the public offering. The NASD also notes that the receipt of such disproportionate benefits by underwriters and related persons, when such benefits are not received by other purchasers of the public securities, would result in the underwriter and related persons receiving securities as underwriting compensation in excess of 10 percent of the securities sold to the public in the offering in violation of the Stock Numerical Limitation Rule contained in Subsection (c)(6)(B)(ix) of the Rule.

      In comparison, the NASD has identified certain anti-dilution provisions as not unfair and unreasonable under the Rule. These provisions contain proportionate benefits that provide anti-dilution adjustments to the exercise price and number of securities in response to events affecting all shareholders, such as, among others, stock dividends, combinations, reclassification, and recapitalizations. These provisions entitle the underwriter to participate in the corporate event as if it was a shareholder of the underlying security before the event. The benefits received under these provisions, therefore, only result from treating the warrants, options, and convertible securities as if exercised or converted, to determine any adjustments. In this case, regulatory issues are not raised under the Stock Numerical Limitation Rule because the increase in the number of securities issued to the underwriter and related persons in exercise of the warrant maintains the 10 percent relationship to the amount of securities sold in the offering to public investors.

      The Rule recognizes situations where the options, warrants, and convertible securities to be received by the underwriter and related persons are different from the securities being sold in the offering. Subsection (c)(5)(A) of the Rule provides that no underwriter and related person may receive a security or a warrant for a security as compensation in the distribution of a public offering that differs from the security to be offered to the public unless the security received as compensation has a bona fide independent market. To address circumstances where the security received by the underwriter and related persons is different from the security to be offered to the public, the proposed rule change provides that the rights, privileges, and economic benefits received by underwriters and related persons may be compared to the rights, privileges, and economic benefits of the public shareholders of the issuer whose shares have a bona fide independent market, in compliance with Subsection (c)(5)(A) of the Rule.

      Prohibition Affecting Cash Dividends

      The amendment would prohibit as unfair and unreasonable receipt, by the underwriter and related persons, of underwriting compensation consisting of any option, warrant, or convertible security that provides for the receipt or accrual of cash dividends before exercise or conversion of the security.

      Member Comment

      The proposed amendment, published for comment in Notice to Members 93-10 in February 1993, generated six comment letters. Of these, one favored the amendment and five were generally opposed. Although discussed in the text of the Notice, the proposed rule language did not include language prohibiting arrangements that provide for the receipt or accrual of cash dividends before exercise or conversion.

      Commenters argued that the higher level of risk experienced by underwriters compared to public investors justifies the receipt by the underwriter and related persons of warrants containing disproportionate anti-dilution provisions. These commenters believe that the amendment would significantly reduce the ability of underwriters to protect the value of warrants received as underwriting compensation, making it a riskier form of compensation. They believe that underwriters should not be in the same position as their customers after a public offering because, unlike the public purchasers in an offering, an underwriter must comply with Subsection (c)(7)(A) of the Rule subjecting warrants, options, and convertible securities acquired as compensation to a one-year holding period on resale, hypothecation, or assignment.

      However, the NASD does not believe the risk taken by underwriters and related persons justifies receipt of disproportionate anti-dilution benefits not received by purchasers of securities of the public offering. In the NASD's view, the exercise of such disproportionate anti-dilution provisions not provided to public investors may effectively allow the underwriter to obtain more than 10 percent of the offering in circumvention of the Rule's Stock Numerical Limitation Rule. The NASD also believes that the one-year holding requirement does not place the underwriters at an undue disadvantage to their customers. One of the principle purposes of the one-year prohibition is to foster a commonality of interest among the issuer, underwriters, and the investing public by encouraging the underwriter to provide post-distribution support and advice to develop the market for the issuer's shares and to allow the public market to develop for one year before the member sells securities received as underwriting compensation.

      One commenter supported the prohibition against disproportionate anti-dilution provisions that adjust the exercise price or number of securities by using a "rachet-type" formula, but opposed prohibiting weighted formulas that reflect the changes in the company's capitalization. The NASD believes provisions using weighted formulas allow an underwriter to maintain a level percentage in the total capitalization of the issuer, but, if not provided to other investors of the public offering, will result in the underwriter receiving a disproportionate benefit relative to investors in the offering. This action can result in the underwriter receiving more than 10 percent of such offering contrary to the intent of the Stock Numerical Limitation Rule.

      Commenters also stated that underwriter warrants contain "disproportionate" anti-dilution provisions to discourage the company from subsequently issuing "cheap stock" to insiders. They believe that, without the distinctive effect of the anti-dilution provisions contained in the warrants, a company would be free to issue "cheap stock" without restraint. The NASD believes the terms of the underwriter's options, warrants, or convertible securities should not be designed as a vehicle to discourage additional new issuances by the company. Such provisions, based on the commenters' argument, could make it prohibitive for an issuer to seek legitimate private or public financing and would inhibit the ability of the issuer to attract quality management through the issuance of stock option plans.

      One commenter stated that the proposed amendment was vague, overbroad, and would vest undue discretion to the NASD staff in determining where anti-dilution provisions are considered disproportionate. The commenter also expressed concern that the proposed amendment would result in unwritten and unpublished policies causing hardships in terms of time and expense required in the review of public offerings by the NASD staff. The NASD believes the proposed rule language of the amendment and the explanation contained in the Notice (and to be included in the rule filing submitted to the SEC) sufficiently identifies the terms and arrangements proposed to be prohibited as unfair and unreasonable provisions in options, warrants, and convertible securities received as compensation by underwriters and related persons. Thus, the adoption of the amendment cannot be described as an "unwritten policy." As such, the proposed amendment would vest no more discretion with NASD staff than is necessary and appropriate for the staff to identify arrangements considered unfair and unreasonable. The NASD does not believe that the proposed amendment would result in delays and additional expense in the review of public offerings by the NASD staff.

      One commenter argued that large underwriters generally do not receive underwriter warrants as part of their compensation because the gross proceeds of their underwritten offerings are substantially larger than the offerings of smaller underwriters and the risk is smaller due to the nature of the company and size of underwriter. The commenter, therefore, argues that the proposed amendment would discriminate against small underwriters and discourage them from participating in offerings of securities of small, early-stage companies.

      The NASD does not believe the amendment discriminates against small underwriters and small companies. The NASD agrees that there are risks involved in small firm-commitment underwritings, but notes that this risk is one of the reasons why the NASD's underwriting compensation guidelines permit a greater percentage of the gross proceeds as underwriting compensation for smaller firm-commitment offerings. The fact that the NASD has only recently determined that such unfair arrangements are present in underwriters' warrants should not inhibit the NASD from amending its rules to specifically prohibit such unfair arrangements.

      Two commenters argued that the amendment should be withdrawn since an underwriter's warrant is assigned a value by the NASD Corporate Financing Department and is taken in lieu of other cash compensation. Further, because this "investment" is made by giving up present compensation for potential future compensation, it should be protected through disproportionate anti-dilution arrangements. In response, the NASD believes that an underwriter's warrant, option, or convertible security, regardless of the value assigned to it in the offering review process, is adequately protected by proportionate anti-dilution rights that will continue to be permitted under the Rule. Moreover, regardless of the valuation assigned to the warrant, the NASD has traditionally prohibited a number of warrant arrangements as unfair and unreasonable.

      Notice to Members 93-10 expressed the Committee's determination regarding the unfairness and unreasonableness of allowing underwriter warrants that contain provisions that provide for the receipt or accrual of cash dividends during the term of the warrant, but did not include proposed rule language covering such situations. No comments were received regarding the Committee's determination on this issue, and the text of the amendment has been amended to clarify the prohibition of such an arrangement for options, warrants, or convertible securities.

      Request for Vote

      The NASD Board of Governors believes that it is appropriate to amend the Rule to prohibit disproportionate anti-dilution provisions and the receipt or accrual of cash dividends by the underwriter and related persons for options, warrants, and convertible securities received as underwriting compensation and recommends that members vote their approval. Before becoming effective, the amendment must be approved by the NASD membership and thereafter by the Securities and Exchange Commission.

      Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to the Corporate Trust Company. Ballots must be received postmarked no later than September 27, 1993.

      Questions concerning this Notice may be directed to Paul M. Mathews, Supervisor, NASD Corporate Financing Department, at (202) 728-8258.

      Text of Proposed Amendment to Article III, Section 44 of the Rules of Fair Practice

      (Note: Proposed language is underlined.)

      * * * * *

      (c) Underwriting Compensation and Arrangements
      (c)(1)-(c)(6)(B)(vi)(6) — no change
      (7) has anti-dilution terms designed to provide the underwriter and related persons with disproportionate rights, privileges and economic benefits which are not provided to the purchasers of the securities offered to the public (or the public shareholders, if in compliance with subsection (c)(5)(A) above);
      (8) has anti-dilution terms designed to provide for the receipt or accrual of cash dividends prior to the exercise or conversion of the security.

      Subsection (c)(6)(B)(vi)(7) of the Rule is renumbered Subsection (c)(6)(B)(vi)(9).

    • 93-50 Mail Vote — Proposed New Section to the Rules of Fair Practice Relating to the Respective Obligations And Supervisory Responsibilities of Introducing and Clearing Firms;

      Last Voting Date: September 27, 1993

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations

      Executive Summary

      The NASD invites members to vote on a proposed new section to the Rules of Fair Practice that would require members entering into clearing or carrying agreements to specify the obligations and supervisory responsibilities of both the introducing and clearing firm. The text of the proposed rule follows this Notice.

      Background and Description of Proposal

      The NASD is proposing to amend the Rules of Fair Practice to require that all clearing or carrying agreements entered into by a member specify the respective functions and responsibilities of each party to the agreement. The proposed rule clarifies the obligations and supervisory responsibilities of clearing and introducing firms. The Board of Governors believes it is important for the NASD to adopt a standard for such agreements that is similar to New York Stock Exchange (NYSE) Rule 382.

      Further, when the Securities and Exchange Commission (SEC) considered the NYSE's Rule 382, the NASD commented to the SEC that permitting certain functions to be allocated to the introducing firm may result in compliance failures and violations resulting from the inability of the introducing member to perform those functions adequately. The NASD urged that firms should not be permitted to avoid obligations or responsibilities that would otherwise be theirs under the securities laws. In approving NYSE Rule 382, the SEC recognized the NASD's concerns and stated "no contractual arrangement for the allocation of functions between an introducing and carrying organization can operate to relieve either organization from their respective responsibilities under federal securities laws and applicable SRO [self-regulatory organization] rules." The Board believes that the rule proposed herein reflects the principles previously asserted by the NASD and noted by the SEC.

      Subsection (a) of the rule as originally proposed for member comment required that all clearing or carrying agreements entered into by any member specify, at a minimum, the respective functions and responsibilities of the parties to the agreement with regard to opening and approving customer accounts, extending credit, keeping books and records, receipt and delivery of funds and securities, safeguarding funds and securities, preparing confirmations and statements, and accepting orders and executing transactions.

      Subsection (a) of the rule as currently proposed retains these seven requirements and adds two new ones. Proposed Subsection (a)(8) requires the agreement to address whether, for purposes of the Securities Investor Protection Act and the financial responsibility rules adopted under the Securities Exchange Act of 1934, customers are customers of the clearing member. If an introducing member intends to qualify for lower net capital, then the clearing or carrying agreement must clearly state that the customers are customers of the clearing member. Absent such a provision, the SEC net capital rule will treat the introducing member as a firm in possession of customer funds or securities subject to the higher net capital requirements of such a designation. Proposed Subsection (a)(9) requires the agreement to address the customer notification requirement of Subsection (d) of the proposed rule, discussed below. Finally, Subsection (a) does not apply to the content of the agreement if either party is also subject to a comparable rule of a national securities exchange.

      Subsections (b) and (c) impose filing requirements for new agreements or amendments to agreements. Subsection (b) requires any clearing member designated to the NASD for compliance oversight to file with the NASD for review and approval any new clearing or carrying agreement entered into with an introducing member and any amended clearing or carrying agreement that revises any item enumerated in Subsections (a)(1) through (a)(9).

      Subsection (c) requires any introducing member designated to the NASD for compliance oversight to file with the introducing member's local NASD district office for review only any new clearing or carrying agreement entered into with a clearing member and any amended clearing or carrying agreement, entered into with a clearing member designated to another self-regulatory organization (SRO) for oversight, that revises any item enumerated in Subsections (a)(1) through (a)(9). Unlike agreements for approval, agreements submitted for review are effective when executed.

      Subsection (d) requires members to notify each customer, whose account is introduced on a fully disclosed basis, of the existence of the clearing agreement when the account is opened.

      Member Comments

      The NASD published the proposed rule change for comment in Notice to Members 92-32 (December 1991). In response to the comments received, the Board amended the original proposal.

      Subsection (d) of the rule change as originally proposed for member comment required more specific disclosure than its analogous subsection in NYSE Rule 382(c). The Board modified Subsection (d) to make its meaning consistent with the text of NYSE Rule 382(c) to respond to commenters who argued that the disparity in disclosure requirements could lead to different disclosure standards and practices among SROs.

      Other commenters argued that the proposed rule's informational and filing requirements would create necessarily duplicative filing requirements and add administrative and compliance burdens to member firms. The Board recognized the burden and amended the rule to provide that only new clearing agreements would have to be filed with the NASD by both the introducing and clearing member if the clearing member were not designated to another SRO for oversight. However, if the clearing member is designated to another SRO for oversight, an amended agreement submitted by an introducing member to the NASD will have already been submitted by the clearing firm for review and approval by the SRO, thus obviating the need for the clearing firm to submit the same agreement to the NASD. In addition, an amended agreement that does not change any of the enumerated functions in Subsection (a) of the proposed rule need not be filed. Finally, the filing by the introducing member is a submission for review only and does not require approval by the NASD before becoming effective.

      Request for Vote

      The Board believes that it is appropriate to add a new rule of fair practice that requires members entering into clearing or carrying agreements to specify the obligations and supervisory responsibilities of both the introducing and clearing firm. In addition to creating consistency and uniformity in the regulation of clearing arrangements by all SROs on an industry-wide basis, the proposal would reduce customer confusion regarding the identity of the responsible party when questions or concerns arise. The Board considers the proposed provision necessary and appropriate and recommends that members vote their approval.

      The text of the proposed new rule that requires member vote is below. 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 by no later than September 27, 1993. If approved by the members, the amendment will not be effective until it is filed with and approved by the SEC.

      Questions regarding this Notice should be directed to Elliott R. Curzon, Senior Attorney, (202) 728-8451, and Robert J. Smith, Attorney, (202) 728-8176, at the Office of General Counsel.

      Text of Proposed Rule

      (Note: New language is underlined.)

      Clearing Agreements

      (a) All clearing or carrying agreements entered into by a member, except where any party to the agreement is also subject to a comparable rule of a national securities exchange, shall specify the respective functions and responsibilities of each party to the agreement and shall, at a minimum, specify the responsibility of each party with respect to each of the following matters:
      (1) opening, approving and monitoring customer accounts;
      (2) extension of credit;
      (3) maintenance of books and records;
      (4) receipt and delivery of funds and securities;
      (5) safeguarding of funds and securities;
      (6) confirmations and statements;
      (7) acceptance of orders and execution of transactions;
      (8) whether, for purposes of the Securities and Exchange Commission's financial responsibility rules adopted under the Securities Exchange Act of 1934, as amended, and the Securities Investor Protection Act, as amended, and regulations adopted thereunder, customers are customers of the clearing member; and
      (9) the requirement to provide customer notification under Subsection
      (d) of this Section.
      (b) Whenever a clearing member designated to the NASD for oversight pursuant to Section 17 of the Securities Exchange Act of 1934, as amended, or a rule of the Securities and Exchange Commission adopted thereunder, amends any of its clearing or carrying agreements with respect to any item enumerated in Subsections (a)(1) through (a)(9) of this Section, or enters into a new clearing or carrying agreement with an introducing member, the clearing member shall submit the agreement to the NASD for review and approval.
      (c) Whenever an introducing member designated to the NASD for oversight pursuant to Section 17 of the Securities Exchange Act of 1934, as amended, or a rule of the Securities and Exchange Commission adopted thereunder, amends its clearing or carrying agreement with a clearing member designated to another self-regulatory organization for oversight with respect to any item enumerated in Subsections (a)(1) through (a)(9) of this Section, or enters into a new clearing agreement with another clearing member, the introducing member shall submit the agreement to its local NASD district office for review.
      (d) Each customer whose account is introduced on a fully disclosed basis shall be notified in writing upon the opening of his account of the existence of the clearing or carrying agreement.

    • 93-49 Solicitation of Member Comment on Board Action to Eliminate the Disclosure Safe Harbor for Customer Limit Orders;

      Comment Period Expires August 31, 1993

      SUGGESTED ROUTING

      Senior Management
      Institutional
      Legal & Compliance
      Syndicate
      Systems
      Trading

      Executive Summary

      As part of its ongoing efforts to ensure investor protection and enhance market quality, the NASD® Board of Governors, at its July 16, 1993 meeting, approved issuance of a Notice to Members soliciting comment on its action to eliminate a "safe harbor" for those members that may trade ahead of customer limit orders. The safe harbor is available today to members that disclose to their customers that the firm may accept a limit order and then trade ahead of that customer's limit order in the firm's market-making capacity. The NASD is soliciting comment on specific issues that follow the discussion below, as well as any other concerns this action raises for members or interested parties. Comments received on or before August 31, 1993, will be considered before filing this Interpretation with the SEC. It is anticipated that the SEC will also publish this Interpretation for comment before acting on it. SEC approval of this Interpretation is required before it can become effective.

      Background

      The issue of limit-order protection in the Nasdaq® market was highlighted in 1985 when a customer alleged that a member firm had accepted his limit order, failed to execute it, and failed to discharge its fiduciary duties by trading ahead of the customer's order without notifying the customer that it was doing so. In the Manning decision, the NASD found and the SEC affirmed1 that on accepting a customer's limit order, a member undertakes a fiduciary duty and cannot trade for its own account at prices more favorable than the customer's limit order unless the member provides clear disclosure and the customer understands the priorities that will govern the order.

      Following the SEC decision and after input from a number of member firms, the Board authorized a Notice to Members that proposed a "safe harbor" disclosure approach for those members who wished to avail themselves of it.2 The language set out in that proposal put customers on notice that the firm accepting a limit order would execute that order only when the inside bid or offer on Nasdaq reached the limit price and that the member might, in its market-making capacity, trade ahead of that order. After the language was approved, the NASD filed a proposed rule with the SEC.

      The rule language has been pending action by the SEC since 1990, but some members have used similar disclosure notices in reliance on the exception identified by the NASD and the SEC in the Manning decision. The SEC has recently indicated that it views this issue to be related to topics under consideration in the Market 2000 study.

      On July 16, 1993, the NASD Board of Governors reviewed the background of the Manning safe harbor and voted to replace it with an Interpretation of Article III, Section 1 of the Rules of Fair Practice that would eliminate the "safe harbor" disclosure approach and effectively prohibit a member firm from trading ahead of a customer's limit order. In recommending this action to the Board, the Trading Committee indicated its belief that the proposed interpretation reflected the manner in which most integrated retail firms handle their customer limit orders. Because of the significance of this Interpretation and the concerns expressed to Board members and the staff by certain members of the trading community, the Board voted unanimously to solicit member comment on its action.

      The Board particularly wishes to receive comment on how the elimination of the safe harbor and adoption of rules prohibiting trading ahead of customer limit orders will impact the operation of member firms and the treatment of investors' orders. Further, the Board is sensitive to avoiding unintended effects or unacceptable consequences of any new requirements on member firms. Accordingly, the Board solicits comments on the following points, as well as any other concerns that this action raises for members or interested parties:

      • As noted above, elimination of the safe harbor would not appear to have a significant impact on the operation of integrated retail firms dealing with their own customer limit orders because the NASD understands that these firms do not trade ahead of their customer limit orders. Accordingly, members should address whether this perception is correct.

      • The language of the interpretation does not differentiate between integrated retail firms dealing with their own customer limit orders and market makers who receive orders from other NASD member firms (i.e., member-to-member transactions). Members should comment on whether this consistent treatment is appropriate.

      • Some members of the trading community have expressed concern regarding the impact of the action on market liquidity. In this connection, some have noted that application of the trading-ahead prohibition could significantly increase the risks of market makers' handling institutional orders. Members are requested to comment on any adverse impact on market liquidity that may result from the Board action. Members should also comment on whether any such impact on market liquidity outweighs the benefits to public investors provided by more complete limit-order protection.

      Request for Comments

      The Board is soliciting comments from members and interested parties so that the ramifications of the Board action may be thoroughly reviewed. Comments must be received no later than August 31, 1993, and addressed to Stephen D. Hickman, Secretary, NASD, 1735 K Street, NW, Washington DC 20006-1500. Questions regarding this Notice should be directed to Beth E. Weimer, Associate General Counsel, at (202) 728-6998.


      1 In the Matter of E.F. Hutton & Co., Release No. 34-25887 (July 6, 1988).

      2 Notice to Members 90-37 (June 1990).


      Text of Proposed Interpretation To Article III, Section 1 of the Rules of Fair Practice

      (Note: New language is underlined).

      A member firm that accepts and holds an unexecuted customer limit order in a Nasdaq security and that continues to trade the subject security for its own market-making account at prices that would satisfy the customer's limit order, under the terms and conditions by which the order was accepted by the firm, without filling that customer's limit order, shall be deemed to have acted in a manner inconsistent with just and equitable principles of trade, Article III, Section 1 of the Rules of Fair Practice. Nothing in this rule, however, compels market makers to accept limit orders from their customers or from other broker/dealers, nor does the rule curtail a market maker's ability to place terms and conditions upon the pricing or acceptance of such limit orders.

    • 93-48 Nasdaq National Market(r) Additions, Changes, And Deletions

      SUGGESTED ROUTING

      Internal Audit
      Operations
      Systems
      Trading

      As of June 22, 1993, the following 54 issues joined the Nasdaq National Market,® bringing the total number of issues to 3,145:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      FFEX

      Frozen Food Express Inds., Inc.

      5/25/93

      1000

      STCI

      Station Casinos, Inc.

      5/25/93

      500

      ZHOM

      Zaring Homes, Inc.

      5/25/93

      1000

      HFSC

      Hamilton Financial Svcs. Corp.

      5/26/93

      1000

      HYDEB

      Hyde Athletic Industries, Inc. (Cl B)

      5/26/93

      1000

      RNDM

      Random Access, Inc.

      5/26/93

      1000

      REMI

      Resource Bancshares Mtg. Grp., Inc.

      5/26/93

      1000

      CDWC

      CDW Computer Centers, Inc.

      5/27/93

      1000

      SCOC

      The Santa Cruz Operation, Inc.

      5/27/93

      1000

      HWCC

      Hollywood Casino Corp. (Cl A)

      5/28/93

      500

      STCX

      Signal Technology Corp.

      5/28/93

      1000

      ALCD

      Alcide Corporation

      6/1/93

      1000

      CREI

      Care Enterprises, Inc.

      6/1/93

      1000

      CICS

      Citizens Bancshares, Inc.

      6/1/93

      200

      ERICR

      LM Ericsson Company (6/30/93 Rts)

      6/2/93

      500

      BKUNP

      BankUnited Financial Corporation

      6/3/93

      200

      MFIN

      Metro Financial Corporation

      6/3/93

      200

      NSTR

      Northstar Health Services, Inc.

      6/3/93

      500

      OSBNR

      Osborn Communications Corp. (Rts)

      6/3/93

      500

      ZONE

      Discovery Zone, Inc.

      6/4/93

      1000

      ALDA

      Aldila, Inc.

      6/8/93

      1000

      RAZR

      American Safety Razor Company

      6/8/93

      1000

      MRNR

      Mariner Health Group, Inc.

      6/8/93

      1000

      PISC

      Pacific International Services Corp.

      6/8/93

      1000

      PZZA

      Papa John's International, Inc.

      6/8/93

      1000

      REGA

      Regional Acceptance Corporation

      6/8/93

      200

      SEAM

      Seaman Furniture Company, Inc.

      6/8/93

      500

      ELET

      Ellett Brothers, Inc.

      6/9/93

      1000

      RAYS

      Sunglass Hut International, Inc.

      6/9/93

      500

      FMBK

      F & M Bancorporation, Inc.

      6/10/93

      200

      SSPIF

      Spectrum Signal Processing Inc.

      6/10/93

      1000

      MOND

      The Robert Mondavi Corp. (Cl A)

      6/10/93

      1000

      BNHBR

      BNH Bancshares, Inc. (7/16/93 Rts)

      6/11/93

      500

      BGALY

      Banco de Galicia y Buenos Aires S.A. (ADR)

      6/11/93

      1000

      BBSI

      Barrett Business Services, Inc.

      6/11/93

      500

      IBSC

      Image Business Systems Corp.

      6/11/93

      200

      NWSW

      Northwestern Steel and Wire Co.

      6/11/93

      1000

      ASFL

      American Savings Bank of Florida, FSB

      6/15/93

      1000

      ECCS

      ECCS, Inc.

      6/15/93

      200

      BELM

      Bell Microproducts Inc.

      6/16/93

      1000

      CBNY

      Commercial Bank of New York

      6/16/93

      500

      NPPI

      Norwood Promotional Products, Inc.

      6/16/93

      500

      DNKY

      Donnkenny, Inc.

      6/17/93

      1000

      IMAK

      International Imaging Materials, Inc.

      6/17/93

      1000

      CICI

      Communication Intelligence Corporation

      6/18/93

      1000

      RXSD

      Rexall Sundown, Inc.

      6/18/93

      1000

      RHDS

      Rhodes, Inc.

      6/18/93

      500

      ALBM

      Alpha 1 Biomedicals, Inc.

      6/21/93

      1000

      ALBML

      Alpha 1 Biomedicals, Inc. (2/28/97 Wts)

      6/21/93

      500

      STFR

      St. Francis Capital Corporation

      6/21/93

      1000

      DAIG

      Daig Corporation

      6/22/93

      200

      FLIR

      FLIR Systems, Inc.

      6/22/93

      1000

      HDTC

      Healthdyne Technologies, Inc.

      6/22/93

      1000

      PRMA

      Primadonna Resorts, Inc.

      6/22/93

      500

      Nasdaq National Market Symbol and/or Name Changes

      The following changes to the list of Nasdaq National Market securities occurred since May 24, 1993:

      New/Old Symbol

      New/Old Security

      Date of Change

      HEALW/HEALW

      Healthwatch, Inc. (4/30/94 Wts)/Healthwatch, Inc. (4/30/93 Wts)

      4/26/93

      HYDEA/HYDE

      Hyde Athletic Inds, Inc. (Cl A)/Hyde Athletic Industries, Inc.

      5/26/93

      DOVT/DOVTV

      DOVatron International, Inc./DOVatron International, Inc. (WI)

      6/1/93

      RHAB/NRCT

      Rehability Corporation/National Rehabilitation Centers, Inc.

      6/1/93

      WSFS/STSS

      WSFS Financial Corp./Star States Corp.

      6/1/93

      FCMI/FCMIV

      Future Communications Inc./Future Communications Inc. (WI)

      6/3/93

      DUSA/DUSA

      DUSA Pharmaceuticals, Inc./Deprenyl USA, Inc.

      6/4/93

      VLANS/VLANS

      Banyan Strategic Realty Trust SBI/Banyan Strategic Land Trust SBI

      6/7/93

      GNSA/GNSA

      Gensia, Inc./Gensia Pharamaceuticals, Inc.

      6/9/93

      XRAY/XRAY

      Dentsply International Inc./GENDEX Corp.

      6/14/93

      TDCAZ/TDCZV

      Therapeutic Discovery Corp. (12/31/99 Uts)/Therapeutic Discovery Corp. (12/31/99 WI)

      6/14/93

      KRSC/KSRI

      Kaiser Resources Inc./Kaiser Steel Resources, Inc.

      6/15/93

      PKPSR/PKPSR

      Poughkeepsie Savings Bank FSB (6/18/93 Rts)/Poughkeepsie Savings Bank FSB (6/14/93 Rts)

      6/15/93

      FLST/TWFS

      Flagstar Companies Inc./TW Holdings Inc.

      6/17/93

      FLSTP/TWFSP

      Flagstar Companies Inc. (Pfd)/TW Holdings Inc. (Pfd)

      6/17/93

      JMCG/JMCG

      JMC Group, Inc./Spear Financial Services, Inc.

      6/18/93

      Nasdaq National Market Deletions

      Symbol

      Security

      Date

      FCIQE

      F & C International, Inc.

      5/25/93

      ISANE

      In-Store Advertising, Inc.

      5/25/93

      SHIP

      Regency Cruises Inc.

      5/26/93

      RICE

      American Rice, Inc.

      5/28/93

      MANT

      Manitowoc Co. Inc.

      5/28/93

      COLC

      Colorado National Bankshares, Inc.

      6/1/93

      NCELW

      Nationwide Cellular Service Inc. (6/1/93 Wts)

      6/2/93

      QLMD

      Qual-Med, Inc.

      6/7/93

      BOST

      Boston Digital Corporation

      6/10/93

      FINF

      Financial Federal Corporation

      6/10/93

      MSRR

      MidSouth Corp.

      6/11/93

      SPCLW

      Spectrum Information Technologies, Inc. (6/11/93 Wts)

      6/14/93

      WSTF

      Western Financial Corp.

      6/14/93

      NUCO

      Nucorp, Inc.

      6/16/93

      SWTR

      Southern California Water Company

      6/17/93

      STAG

      Security Tag Systems, Inc.

      6/18/93

      PKPSR

      Poughkeepsie Savings Bank, FSB (6/18/93 Rts)

      6/21/93

      Questions regarding this Notice should be directed to Mark A. Esposito, Supervisor, Market Listing Qualifications, at (202) 728-8002. Questions pertaining to trade-reporting rules should be directed to Bernard Thompson, Assistant Director, NASD Market Surveillance, at (301) 590-6436.

    • 93-47 SEC Permits Use of Optical Storage Technology for Records Retention

      SUGGESTED ROUTING

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations
      Systems

      Executive Summary

      On May 18, 1993, the Securities and Exchange Commission (SEC) issued a no-action letter that permits broker/dealers to use optical storage technology(OST) to comply with the records retention requirements of SEC Rules 17a-3 and 17a-4. The letter, which was issued by the SEC Division of Market Regulation, establishes certain conditions that broker/dealers must meet to use this technology.

      Background

      Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 contain specific requirements for broker/dealers to follow in making and preserving books, records, and other documents relating to their business activities. Until 1970, paper was the only medium used to comply with these requirements. Over time, the SEC granted permission for broker/dealers to use microfilm and microfiche for records retention. In May 1993, the Securities Industry Association (SIA) Ad Hoc Record Retention Committee petitioned the SEC to allow the use of optical storage technology to maintain records.

      In its letter, the SEC concurs with using OST if "broker/dealers immediately produce or reproduce records required under Rules 17a-3 and 17a-4, other than paper records made and kept current pursuant to paragraphs (a)(6) and (a)(7) of Rule 17a-3, on an optical disk, and maintain and preserve such records for the required time in that form," provided they meet certain specified conditions. Paragraphs (a)(6) and (a)(7) refer to order and trade tickets that are not eligible for optical storage.

      Conditions for Use

      Broker/dealers that use OST for recordkeeping must comply with the following conditions.

      1. The broker/dealer must notify its designated examining authority before employing OST for record-retention purposes.
      2. At all times, the broker/dealer must have facilities for immediate, easily readable projection of optical disks and for producing easily readable facsimile enlargements of such images so that the SEC and appropriate SROs may examine the broker/dealer records.
      3. The broker/dealer must arrange the records and indexes and file the optical disks in such a manner as to permit the immediate location of any particular record.
      4. The broker/dealer must be able to immediately provide at all times any facsimile enlargement that the SEC, through its examiners or other representatives, may request.
      5. The broker/dealer must store separately from the original, in an off-site location, a duplicate copy of each optical disk used to store the required records, and stores such optical disk for the period required for the information preserved on the optical disk.
      6. The broker/dealer must employ optical storage that:
      (a) preserves records exclusively in a non-rewriteable, non-erasable format;
      (b) verifies automatically the quality and accuracy of the optical storage recording process;
      (c) duplicates in a separate optical disk all information originally preserved and maintained by means of OST;
      (d) serializes original and duplicate optical disks containing records, and time-dates permanently the information placed on such optical disks; and
      (e) has the capacity to download indexes and records preserved on optical disks into paper, microfilm, or microfiche.
      7. The broker/dealer must organize and index accurately all information contained in every original and duplicate optical disk to ensure prompt access to the records.
      (a) At all times, a broker/dealer must be able to have such indexes available for examination by the staffs of the SEC and the self-regulatory organizations (SROs) to which the broker/dealer belongs.
      (b) Each index must be duplicated and the duplicate copies must be stored in an off-site location, separately from the original copy of each index.
      (c) Original and duplicate indexes must be preserved for the time required for the indexed records.
      8. The broker/dealer must have in place an audit system providing for accountability regarding all access to records maintained and preserved using OST and any changes made to every original and duplicate optical disk.
      (a) At all times, a broker/dealer must be able to have the results of such audit system available for examination by the staffs of the SEC and the SROs to which the broker/dealer belongs.
      (b) The results of such audit system must be preserved for the time required for the audited records.
      9. The broker/dealer must maintain, keep current, and surrender promptly on request by the staffs of the SEC or the SROs to which the broker/dealer belongs all information needed to download records and indexes stored on optical disks; or place in escrow and keep current a copy of the physical and logical file format of the optical disks, the field format of all different information types written on the optical disks and the source code, together with the appropriate documentation and all information needed to download records and indexes.
      10. For every broker/dealer using OST for record preservation purposes, at least one third-party who can download information from the broker/dealer's optical unit to another acceptable medium (the undersigned) shall file with the SEC or its designee the following written undertakings:
      The undersigned hereby undertakes to promptly furnish to the U. S. Securities and Exchange Commission (Commission), its designees or representatives, upon reasonable request, such information as is deemed necessary by the Commission's staff to download information kept on the broker/dealer's optical storage system to another medium acceptable to the Commission's staff.

      Furthermore, the undersigned hereby undertakes to take reasonable steps to provide access to information contained on the broker/dealer's optical storage system, including, as appropriate, arrangements for the downloading of any record, required to be maintained and preserved by the broker/dealer pursuant to Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 in a format acceptable to the Commission's staff. Such arrangements will provide specifically that in the event of a failure on the part of the broker/dealer to down load the record into a readable format, upon being provided with the appropriate optical disks, the undersigned will undertake to do so, as the Commission's staff may request.

      * * * * *

      The SEC no-action letter that follows this Notice contains details regarding how the technology works and some background information concerning its advantages. Members planning to use optical storage technology should review the letter in its entirety. Questions concerning this Notice may be directed to Derick Black, Surveillance Specialist, Financial Responsibility, Compliance Department, at (202) 728-8225.

      * * * * *

      June 18, 1993

      Michael D. Udoff, Chairman
      Ad Hoc Record Retention Committee
      Securities Industry Association, Inc.
      120 Broadway
      New York, NY 10271
      Re: Optical Storage Technology

      Dear Mr. Udoff:

      Thank you for your letter, dated May 19, 1992, on behalf of the Securities Industry Association's ("SIA") Ad Hoc Record Retention Committee ("Committee"), regarding the form by which broker-dealers may maintain records, required to be retained pursuant to Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 ("Act").1

      I. BACKGROUND
      A. Preservation requirements under Rules 17a-3 and 17a-4

      Rules 17a-3 and 17a-4 specify minimum requirements with respect to the business records which must be made by broker-dealers as well as the periods during which such records and other documents relating to the broker-dealer's business must be preserved. For the most part, records preserved pursuant to these Rules must be kept for up to six years, the first two years in an easily accessible place.2 Some records, however, must be preserved for three years,3 and records concerning the legal existence of the broker-dealer (e.g., partnership articles, minute books, stock certificate books) must be preserved during the life of the broker-dealer and its successors.4

      Until 1970, paper was the sole medium for the preservation of the records required under Rules 17a-3 and 17a-4. In 1970, Rule 17a-4 was amended to permit records to be immediately produced on microfilm for record-keeping purposes.5 This amendment allowed for the use of microfilm for record preservation purposes provided that the conditions set forth in paragraph (f) of Rule 17a-4 were met.6 In 1979, the staff of the Securities and Exchange Commission ("Commission") interpreted Rule 17a-4 to include microfiche as well as microfilm for record-keeping purposes, provided that the requirements of Rule 17a-4(f) were satisfied.7

      Your letter, dated May 19, 1992, proposes to further expand the manner in which records required under Rules 17a-3 and 17a-4 may be preserved. In particular, the Committee requests that the Division of Market Regulation ("Division") not recommend that the Commission take enforcement action under Rules 17a-3 and 17a-4 if broker-dealers maintain the required records only on optical disk storage.
      B. Optical storage technology

      Optical storage technology allows for digital data recording in a hardware controlled, non-rewriteable format, such as write once, read many ("WORM"), which provides a non-alterable, permanent record storage medium. Non-rewriteable optical storage medium records digital information by employing a laser heat source to burn a pattern on a metallic film on a disk surface that can hold billions of bytes of data ("optical disk").8 Once a laser permanently marks the optical disk to store information, that information can not be modified or removed from the optical disk without detection. This disk is removable from the hardware necessary for the optical storage function.

      When using optical disk storage in the non-rewriteable format, any record, be it computer generated (such as a computer report) or electronically digitized (such as from paper or micrographics), can be permanently recorded for long term computer based management and access.
      II. PROPOSAL

      The Committee requests that the Division not recommend that the Commission take enforcement action under Rules 17a-3 and 17a-4 if a broker-dealer preserves its records by employing optical storage technology. According to the SIA, optical storage technology will provide economic as well as timesaving advantages for broker-dealers. For example, the SIA estimates that savings for space, equipment and material expenses, resulting from a change to optical disk from microfilm, range from $250,000 a year for a medium-sized firm to more than $1.6 million a year for a large firm.

      The SIA asserts that optical storage technology offers speedier and higher quality access to records thus preserved than the current access to records preserved in microfilm, microfiche or physical format. Accordingly, the SIA asserts that the use of optical storage technology will enable broker-dealers to improve customer service. For example, according to the SIA, customers who lose account statements can be provided readily with replacement copies of equivalent quality to the original.9

      Furthermore, the SIA asserts that optical disk storage of a firm's records would increase productivity and security. With optical storage technology an individual would not require physical access to a particular record, because access to an electronic copy would be equally available to authorized persons through a computer terminal. Access to records, however, could be restricted within a firm or individual department. Individuals could have access based solely on their employment responsibilities. Accordingly, the risk that records would be lost, misfiled or damaged through use would be reduced.

      According to the SIA, optical storage technology would enhance the process of providing information more readily to the Commission. The SIA states that these benefits also would accrue to the benefit of the Commission in any record analysis done, because the Commission's staff would have the same ready, rapid access to the stored information, thus increasing the efficiency of the review process.

      The SIA recognizes, however, that industry standards for the development of optical storage technology are currently being set, and that there are audit and examination concerns. Because the technology is new, optical storage systems are not always compatible (i.e., information stored on an optical disk of one manufacturer may not be read by the technology developed by a second manufacturer). As a result of this lack of industry standards, the Commission or a self-regulatory organization ("SRO") inspecting a broker-dealer may encounter difficulty examining the information on an optical disk, because the technology owned by the inspecting SRO may not be compatible with the optical storage technology used by the broker-dealer to store the information. Accordingly, the Committee recommends that, upon compliance with conditions similar to those set forth below, broker-dealers be allowed to preserve records by employing optical storage technology.
      III. CONCLUSION

      Based on the above facts, and with regard to the issues set forth in this letter, the Division will not recommend that the Commission take enforcement action pursuant to Section 17(a)(1) of the Act10 and Rules 17a-3 and 17a-411 thereunder if, under the circumstances described below, broker-dealers immediately produce or reproduce records required under Rules 17a-3 and 17a-4, other than paper records made and kept current pursuant to paragraphs (a)(6) and (a)(7) of Rule 17a-3, on an optical disk, and maintain and preserve such records for the required time in that form.
      1. The broker-dealer must notify its designated examining authority prior to employing optical storage technology for record-retention purposes.
      2. At all times, the broker-dealer must have available for examination of its records by the staffs of the Commission and the SROs of which it is a member, facilities for immediate, easily readable projection of optical disks and for producing easily readable facsimile enlargements of such images.
      3. The broker-dealer must arrange the records and indexes, and file the optical disks in such a manner as to permit the immediate location of any particular record.
      4. The broker-dealer must be ready at all times to provide, and immediately provides, any facsimile enlargement which the Commission by its examiners or other representatives may request.
      5. The broker-dealer must store separately from the original, in an off-site location, a duplicate copy of each optical disk used to store the required records, and stores such optical disk for the period required for the information preserved in the optical disk.
      6. The broker-dealer must employ optical storage that:
      (a) preserves records exclusively in a non-rewriteable, non-erasable format;
      (b) verifies automatically the quality and accuracy of the optical storage recording process;
      (c) duplicates in a separate optical disk all information originally preserved and maintained by means of optical storage technology;
      (d) serializes original and duplicate optical disks containing records, and time-dates permanently the information placed on such optical disks, and
      (e) has the capacity to download indexes and records preserved on optical disks into paper, microfilm or microfiche.
      7. The broker-dealer must organize and index accurately all information contained in every original and duplicate optical disk to ensure prompt access to the records.
      (a) At all times, a broker-dealer must be able to have such indexes available for examination by the staffs of the Commission and the SROs of which the broker-dealer is a member.
      (b) Each index must be duplicated and the duplicate copies must be stored in an off-site location, separately from the original copy of each index.
      (c) Original and duplicate indexes must be preserved for the time required for the indexed records.
      8. The broker-dealer must have in place an audit system providing for accountability regarding all access to records maintained and preserved using optical storage technology and any changes made to every original and duplicate optical disk.
      (a) At all times, a broker-dealer must be able to have the results of such audit system available for examination by the staffs of the Commission and the SROs of which the broker-dealer is a member.
      (b) The results of such audit system must be preserved for the time required for the audited records.
      9. The broker-dealer must maintain, keep current and surrender promptly upon request by the staffs of the Commission or the SROs of which the broker-dealer is a member all information necessary to download records and indexes stored on optical disks; or place in escrow and keep current a copy of the physical and logical file format of the optical disks, the field format of all different information types written on the optical disks and the source code, together with the appropriate documentation and all information necessary to download records and indexes.
      10. For every broker-dealer using optical storage technology for record preservation purposes, at least one third party who has the ability to download information from the broker-dealer's optical unit to another acceptable medium ("the undersigned"), shall file with the Commission or its designee the following written undertakings:
      The undersigned hereby undertakes to promptly furnish to the U.S. Securities and Exchange Commission ("Commission"), its designees or representatives, upon reasonable request, such information as is deemed necessary by the Commission's staff to download information kept on the broker-dealer's optical storage system to another medium acceptable to the Commission's staff.

      Furthermore, the undersigned hereby undertakes to take reasonable steps to provide access to information contained on the broker-dealer's optical storage system, including, as appropriate, arrangements for the downloading of any record, required to be maintained and preserved by the broker-dealer pursuant to Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 in a format acceptable to the Commission's staff. Such arrangements will provide specifically that in the event of a failure on the part of the broker-dealer to download the record into a readable format, upon being provided with the appropriate optical disks, the undersigned will undertake to do so, as the Commission's staff may request.
      This is a staff position concerning enforcement action and it does not represent any legal conclusions. This position is based solely on the foregoing description and factual variations might require a different response. This position may be withdrawn or modified if the staff determines that such action is necessary in the public interest, for the protection of investors, or other wise, in furtherance of the purposes of the Federal securities laws.

      If you have any questions regarding these matters, please do not hesitate to contact Julius R. Leiman-Carbia at (202) 272-2824.

      Sincerely,

      Michael A. Macchiaroli

      Associate Director


      1 17 C.F.R. §§ 240.17a-3 & 240.17a-4.

      2 See 17 C.F.R. § 240.17a-4(a).

      3 See 17 C.F.R. § 240.17a-4(b).

      4 17 C.F.R. § 240.17a-4(d).

      5 Securities Exchange Act Release No. 8,875 (April 30, 1970), 35 Fed. Reg. 7,643 (May 16, 1970).

      6 17 C.F.R. § 240.17a-4(f).

      7 Letter to Mr. Robert F. Price, Alex.Brown & Sons, from Nelson S. Kibler, Assistant Director, Division of Market Regulation, Commission (November 3, 1979).

      8 As each bit (a bit of digital information is indicated as a 0 or 1 — designating an "on" or "off" condition, respectively) of digital information is recorded on the optical medium, the reflective surface of the medium is either permanently altered by the laser heat source to indicate the bit is "on," or not altered to indicate the bit is "off." The permanent alterations, or lack thereof, in the reflectivity of the recorded locations on the medium are then used to read back the information by means of a low powered laser light source. The laser light source detects the change in the reflectivity level of a location on the medium which signifies the "on" or "off" condition of a bit of digital information.

      9 According to the SIA, microfilm or microfiche copies are often not as clear as optical disk copies and usually take a longer time to produce.

      10 15 U.S.C. § 78q(a)(1).

      11 17 C.F.R. §§ 240.17a-3 & 240.17a-4.

    • 93-46 SEC Provides Additional Clarifications and Interpretations to Net Capital Rule Amendments

      SUGGESTED ROUTING

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations
      Systems

      Executive Summary

      In May 1993, the NASD published Notice to Members 93-30, which set forth, in question and answer format, certain guidelines for compliance with recent amendments to the Securities and Exchange Commission (SEC) Net Capital Rule, Rule 15c3-1. The SEC adopted the amendments, which became effective on a staggered schedule late last year. This Notice provides additional clarifications and interpretations of these new requirements.

      Background

      The NASD published its initial Notice concerning the amendments to the SEC's Net Capital Rule (Notice to Members 92-72) in December 1992. The Notice advised that several amendments to the rule took effect January 1 with other changes slated for July 1, 1993. As of that date, the net capital ceiling for a market maker increases to $1 million. Likewise, the changes to the minimum net capital requirements will take effect in three installments beginning July 1. The SEC is still considering additional amendments to the rule, published for comment in December.

      The amendments to the minimum net capital requirements increase the dollar amounts for many categories of broker/dealers. The increases are based on the nature of the firm's business and the extent to which a broker/dealer has contact with customer funds or securities. In several instances, the new requirements are significantly higher than the previous minimums.

      Other adopted amendments establish one standardized method of calculating haircuts for all firms; adopt the alternative method for computing concentration charges for all firms; reduce the impact on aggregate indebtedness for two items (mutual funds payable offset by fails to deliver and corresponding stock loan/stock borrow); and permit the use of an offset when computing the open contractual commitment haircut on underwritings.

      After these changes were announced in December, the NASD began to receive questions concerning the new requirements. In May 1993, the NASD issued Notice to Members 93-30, answering certain of these questions for the benefit of all members. Since then, the NASD has received additional clarifications and interpretations from the SEC staff and is publishing them in this Notice.

      Clarifications and Interpretations

      Clearing Agreements

      According to the SEC staff, it will deem an introducing firm to be a clearing firm (and required to comply with the clearing firm's greater minimum net capital), unless the firm has in place a clearing agreement, containing a statement that, for purposes of the Securities Investors Protection Act (SIPA) and the SEC's financial responsibility rules, customers are customers of the clearing firm, not the introducing firm. The following is an example of language that the SEC accepts for use in a clearing agreement.

      "For purposes of the Securities and Exchange Commission's financial responsibility rules and the Securities Investor's Protection Act, (name of introducing firm)'s customers will be considered customers of (name of clearing firm) and not customers of (name of introducing firm). Nothing herein shall cause (name of introducing firm)'s customers to be construed or interpreted as customers of (name of clearing firm) for any other purpose, or to negate the intent of any other section of this agreement, including, but not limited to, the delineation of responsibilities as set forth elsewhere in this agreement."

      This language establishes the concept that customers must look to the clearing firm, not the introducing firm, for the payment of monies and delivery of securities.

      Customer Account Statements

      The SEC staff has reconsidered its previously issued interpretation concerning customer account statements that a clearing firm must send directly to the customers of an introducing firm. In the previous interpretation, each account statement had to include the name and telephone number of a responsible clearing firm employee that a customer could contact with inquiries regarding the customer's account.

      In reviewing this position, the SEC noted that individuals may assume different responsibilities at their firms or may leave their employment altogether. Hence, requiring broker/dealers to name a specific individual on customer account statements, which are often preprinted, may lead to confusion for customers inquiring about their accounts. For this reason, the SEC staff determined that it is sufficient for broker/dealers to include just the pertinent telephone number. The following language is acceptable to the SEC for use on customer account statements.

      "(Name of clearing firm) carries your account and acts as your custodian for funds and securities deposited with us directly by you, through (name of introducing firm) or as a result of transactions we process for your account. Inquiries concerning the position and balances in your account may be directed to our Client Service Department: (telephone number). All other inquiries regarding your account or the activity therein should be directed to (name of introducing firm).

      Members should note that all customer account statements, as well as all clearing agreements, must contain language that adheres to the above interpretations on or before October 1, 1993.

      Piggyback Clearing Arrangements

      Some members have entered into a "piggyback clearing arrangement" and have questioned whether such an arrangement affects their status as introducing firms.

      Under a piggyback clearing arrangement, introducing broker/dealer "A" enters into a clearing agreement with clearing broker/dealer "B"; then, broker/ dealer "A" enters into a subagreement with one or more other broker/dealers, who introduce their business to broker/dealer "B" through broker/dealer "A." Clearing broker/dealer "B" is aware of the arrangement, but usually does not enter into a clearing agreement with these "piggybacked" firms.

      The SEC staff advised that this type of arrangement has not yet been addressed with the SEC. Until it is, "piggyback" broker/dealers are introducing broker/dealers, if they have a written agreement with the middle firm (broker/dealer "A" in the example above), and broker/ dealer "A" has a properly executed agreement with the clearing firm (broker/dealer "B" in the example above).

      Dealer Activities

      In Notice to Members 92-72, the NASD noted that any firm effecting more than 10 transactions in a calendar year for its own investment account would have to maintain minimum net capital of at least $100,000. After reconsideration, the SEC staff has advised that a firm making a single monthly investment of $1,000 or less into an established mutual fund account for the firm may exclude these transactions as dealer activities. Therefore, these transactions do not count toward the 10-transaction limit.

      Open Contractual Commitment Charge

      Notice to Members 93-30 addressed application of an open contractual commitment charge to an underwriting of a new convertible debt security immediately convertible into an existing Nasdaq National Market security for the same issuer. It noted that the haircut percentage depended on whether the security has a market value of less than par, at par, or greater than par.

      However, the firm commitment underwriting deduction for an issue with a market value at par or higher needs further clarification. While the normal haircut percentage for such security would be 15 percent under paragraph (c)(2)(vi)(j) of Rule 15c3-1, the open contractual commitment charge for such securities is 30 percent "unless the class and issue of the securities subject to the open contractual commitment deduction are listed for trading on a national securities exchange or are designated as Nasdaq National Market System Securities."

      After discussion, the SEC staff advised that for an initial public offering of a debt security immediately convertible into equity shares that trade on the Nasdaq National Market or an exchange the contractual commitment charge would be the lesser of:

      (i) The value of the debt securities adjusted for the 30 percent haircut, or
      (ii) The market value of the equity securities into which the bonds are convertible, at a 15 percent haircut rate, plus the "premium loss" (the difference between the value of the debt security compared to the value of the converted equity security). Example A $2 million offering of convertible bonds at par is immediately convertible into shares of a common stock currently traded on the Nasdaq National Market. The total market value of convertible shares is $1.95 million.

      Market value of the bonds

       

      $2 million x 30% = $600,000

       

      $1.95 million x 15% =

      $292,500

      Market value of common stock

       

      plus "premium loss"

       

      ($2 million -

       

      $1.95 million) =

      50,000

      Total

      $342,500

      The open contractual commitment charge would be $342,500 less the underwriting concession. * * * * * Questions concerning this Notice may be directed to Samuel Luque, Associate Director, Compliance, at (202) 728-8472.

    • 93-45 SEC Approves Mandatory Book-Entry Settlement of Transactions in Depository-Eligible Securities

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Operations

      Executive Summary

      On June 11, 1993, the Securities and Exchange Commission (SEC) approved a new Section 11 of the Uniform Practice Code (UPC) requiring book-entry settlement of transactions in depository-eligible securities effected between member firms and between member firms and certain of their customers.

      The amendment takes effect August 10, 1993. The text of the amendment follows this Notice.

      Background

      On June 11, 1993, the SEC approved a new Section 11 of the UPC requiring book-entry settlement of transactions in depository-eligible securities. The amendment is a key element in implementing the recommendations of the U.S. Working Committee of the Group of Thirty Clearance & Settlement Project (U.S. Working Committee) regarding book-entry settlement of securities transactions.1 The American Stock Exchange (Amex), the Boston Stock Exchange (BSE), the Midwest Stock Exchange (MSE), the New York Stock Exchange (NYSE), the Pacific Stock Exchange (PSE) and the Philadelphia (Phil) Stock Exchange (self-regulatory organizations or SROs) have each adopted a similar measure2.

      The U.S. Working Committee recommended that:

      settlements and other movements of corporate and municipal securities must be effected only by book-entry movements within a depository for transactions among financial intermediaries (brokers, dealers, and banks) and between financial intermediaries and their institutional clients.3

      The new rule implements such a book-entry settlement requirement, subject to certain exceptions discussed below, for securities eligible for deposit and transfer at a securities depository registered as a clearing agency with the SEC under Section 17A of the Act.

      The SEC's approval of new rules by the respective SROs will result in uniform book-entry settlement requirements for not only transactions in depository-eligible securities between SRO members, but also transactions in such securities between SRO members and their clients when settlement is on a delivery-versus-payment or receipt-versus-payment basis. Approval of these rules ensures book-entry settlement for the vast majority of securities transactions effected in the United States.

      Subsection 11(a) of the new rule requires members to settle all transactions in depository-eligible securities by book-entry. Subsection 11(d) defines "depository-eligible securities" as securities eligible (1) for deposit at a securities depository and (2) for book-entry transfer. Subsection 11(c) defines "securities depository" as a depository registered with the SEC as a clearing agency.

      Subsection 11(b) requires members to settle customer transactions done on a receipt-versus-payment or delivery-versus-payment basis by book-entry through a securities depository.

      Pursuant to Subsection 11(e), the rule does not apply to transactions settled outside the United States, and the rule supersedes any inconsistent provisions of the UPC.

      Subsection 11(g) of the new rule includes exceptions to book-entry settlement for (i) transactions for same-day settlement where the deliverer is unable to deposit the securities before a depository's cut-off time for same-day crediting of deposited securities and (ii) other special transactions (i.e., those involving corporate reorganizations or other extraordinary activities) where the deliverer is unable to deposit the securities before a depository-established cut-off date.

      The new rules do not apply to or affect (a) settlement of transactions with traditional retail customers, (b) settlement of transactions in securities that are not depository-eligible, or (c) transactions where settlement occurs outside the United States.

      Direct questions concerning this Notice to Dorothy L. Kennedy, Assistant Director, Uniform Practice Department, (212) 8584340, or Elliott R. Curzon, Senior Attorney, Office of General Counsel, (202) 728-8451.


      1 The Group of Thirty is an independent, nonpartisan, nonprofit organization established in 1978. In 1988, the Group of Thirty initiated a project to improve the state of risk, efficiency, and cost in the world's clearance and settlement systems. See Implementing The Group of Thirty Recommendations in the United States, I-1 (November 1990).

      2 The proposed rule was developed through the efforts of the Legal and Regulatory Subgroup of the U.S. Working Committee, which included representatives of the NASD, NYSE, Amex, Phil, MSE, PSE, BSE, the National Securities Clearing Corporation, The Depository Trust Company, the Municipal Securities Rulemaking Board, and the SEC's Division of Market Regulation.

      3 Supra, fn. 1 at I-2.


      Text of Amendment to Section 11 of the Uniform Practice Code

      * * * * *

      Delivery of Securities

      Book-entry Settlement

      Sec. 11. [RESERVED]

      (a) A member shall use the facilities of a securities depository for the book-entry settlement of all transactions in depository eligible securities with another member or a member of a national securities exchange or a registered securities association.
      (b) A member shall not effect a delivery-versus-payment or receipt-versus-payment transaction in a depository eligible security with a customer unless the transaction is settled by book-entry using the facilities of a securities depository.
      (c) For purposes of this rule, the term "securities depository" shall mean a securities depository registered as a clearing agency under Section 17A of the Securities Exchange Act of 1934.
      (d) The term "depository eligible securities" shall mean securities that (i) are part of an issue of securities that is eligible for deposit at a securities depository and (ii) with respect to a particular transaction, are eligible for book-entry transfer at the depository at the time of settlement of the transaction.
      (e) This rule shall not apply to transactions settled outside of the United States.
      (f) The requirements of this rule shall supersede any inconsistent requirements under other sections of the Code.
      (g) This rule shall not apply to any transactions where the securities to be delivered in settlement of the transaction are not on deposit at a securities depository and:
      (1) if the transaction is for same-day settlement, the deliverer is unable to deposit the securities in a securities depository prior to the cut-off time established by the depository for same-day crediting of deposited securities, or;
      (2) the deliverer is unable to deposit the securities in a depository prior to the cut-off date established by the depository for that issue of securities.

    • 93-44 SEC Approves Increase In Non-Cash Sales Incentive Compensation

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance
      Training

      Executive Summary

      On June 23, 1993, the Securities and Exchange Commission (SEC) approved an amendment to Section 5(e)(1) of Appendix F to Article III, Section 34 of the Rules of Fair Practice. The amendment raises from $50 to $100 the yearly limit on aggregate non-cash sales incentive compensation that a sponsor or affiliate of a sponsor of a public direct participation program (DPP) may pay to an associated person of a member. The rule change makes the standard in Appendix F consistent with other existing limitations on the receipt of non-cash compensation.

      Background and Description of The Amendment

      On December 28, 1992, the SEC approved an amendment to Article III, Section 10(a) of the Rules of Fair Practice that raised from $50 to $100 the maximum value of gratuities or gifts a member or associated person may provide to another person annually.

      The NASD® Direct Participation Programs Committee subsequently recommended to the Board of Governors a corresponding change to Section 5(e) of Appendix F to Article III, Section 34 of the Rules of Fair Practice. The change was to raise from $50 to $100 per year the value of non-cash sales incentive compensation that may be accepted by each associated person of a member participating in the distribution of a public DPP. Such compensation typically involves small souvenir-type items that program sponsors provide associated persons of a member after executing a selling agreement with them. The Board concurred with raising the yearly limit to $100 to conform to existing standards and the SEC approved the change on June 23, 1993.

      The rule change is also consistent with the New York Stock Exchange's (NYSE) recently approved Rule 350(a), which raised from $50 to $100 the amount of a gratuity that one NYSE member may give to another without obtaining prior written consent of the recipient's employer. This rule change simplifies compliance by NASD/NYSE member firms.

      Questions concerning this Notice may be directed to Eugene Buchanan or Paul M. Mathews, Supervisors, NASD Corporate Financing Department, at (202) 728-8258.

      Text of Amendment to Appendix F To Article III, Section 34 of the Rules of Fair Practice

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

      Sec. 5. Organization and Offering Expenses

      (e) . . . Further, this section shall not prohibit a person associated with a member from accepting any noncash sales incentive item offered directly to that person by a sponsor, affiliate of sponsor or program where:
      (1) the aggregate value of all such items paid by any sponsor or affiliate of a sponsor to each associated person during any year does not exceed [$50.00] $100.

    • 93-43 SEC Approves Modified Excess Spread Parameters for Market Makers

      SUGGESTED ROUTING

      Legal & Compliance
      Operations
      Systems
      Trading

      Executive Summary

      On June 4, 1993, the Securities and Exchange Commission (SEC) approved amendments to Part VI, Section 2 of Schedule D to the NASD®. By-Laws to reduce excess spread parameters for Nasdaq and Consolidated Quotation Service (CQS) securities. The rule change establishes new excess spread parameters for Nasdaq® and CQS securities, limiting a dealer's spread in a security to 125 percent of the average of the narrowest three dealer spreads in that security. The NASD believes that reducing excess spread parameters may reduce dealer spreads overall, which would result in a more competitive market. The amendments take effect July 26, 1993. The text of the amendments follows the discussion below.

      Background and Description of Amendments

      This rule change amends Schedule D to the NASD By-Laws1 by reducing excess spread parameters for securities quoted in Nasdaq. The NASD is concerned that its current excess spread parameters are too wide, in some instances permitting spreads of 200 percent of the average dealer spread.2 Nasdaq market makers are required to maintain continuous, two-sided quotations that are reasonably related to the transactions they are effecting. The current system of excess spread parameters, which uses all market-maker spreads in the calculation of average dealer spread, gives undue weight to spreads that may reflect one-sided buying or selling interest on the part of a few market makers. After a study of the impact on members of reducing spread parameters, the NASD determined that an average of the three best dealer spreads was an appropriate benchmark for calculating maximum allowable spreads.3

      The rule change simplifies the current cumbersome and unwieldy system of excess spread parameters. Currently, the maximum allowable spread in a security varies, depending on the average dealer spread at that time. These excess spread parameters — set out in a chart in Part VI, Section 2 of Schedule D — vary between 125 percent and 200 percent of the average dealer spread in a security, depending on the size of the prevailing average dealer spread. The rule change eliminates the chart in Schedule D and applies a uniform standard for calculating maximum permissible spreads — 125 percent of the average of the narrowest three dealer spreads in a security. However, in no event, will a dealer be required to quote less than a 1/4 point spread.

      The amendments take effect July 26, 1993. Questions regarding this Notice may be directed to Richard Coster, Manager, Market Surveillance, at (301) 590-6442 and Beth E. Weimer, Associate General Counsel, Office of General Counsel, at (202) 728-6998.


      1 SEC Release No. 34-32419 (June 4, 1993).

      2 Excess spread parameters establish the maximum allowable bid/ask spreads that individual dealers may quote in a market.

      3 The NASD will conduct a study of dealer spreads in the Nasdaq National Market® before and after the effective date of the rule change to determine the effect of new parameters.


      Text of Amendments to Part VI, Section 2 of Schedule D to the NASD By-Laws

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

      Part VI

      Sec. 2. Character of Quotations

      * * * * *

      (d) Excess Spreads. A marketmaker shall not enter quotations in[to the NASDAQ System] Nasdaq or Consolidated Quotation Service (CQS) securities that exceed the parameters for maximum allowable spreads as approved by the NASD Board of Governors and that may be published from time to time by the Association. [*] The maximum allowable spreads shall be 125 percent of the average of the three (3) narrowest market maker spreads in each security (if there are fewer than three (3) market makers in a security, the maximum allowable spread will be 125% of the average spread); provided however, that the maximum allowable spread shall never be less than 1/4 point.

      [*The following are the current maximum allowable spreads approved by the NASD Board of Governors.

      Maximum Allowable Spreads

      Average Spread

      Maximum Allowable Spread

      1/8 or less

      1/4

      1/4

      1/2

      3/8

      3/4

      1/2

      1

      5/8

      1

      3/4

      1 1/2

      7/8

      1 1/2

      1

      1 1/2

      1 1/8

      1 5/8

      1 1/4

      1 3/4

      1 3/8

      1 7/8

      1 1/2

      2

      1 5/8

      2

      1 3/4

      3

      1 7/8

      3

      2

      3

      2 1/8

      3

      2 1/4

      3

      2 3/8

      3

      2 1/2

      3

      2 5/8

      4

      2 3/4

      4

      2 7/8

      4

      For an average spread of 3 or more, the maximum allowable spread is 125 percent of the average spread rounded to the next highest whole number.]

      * * * * *

    • 93-42 SEC Approves NASD's Minor Rule Violations Plan

      SUGGESTED ROUTING

      Senior Management
      Legal & Compliance

      Executive Summary

      On May 28, 1993, the Securities and Exchange Commission (SEC) approved amendments to Article II, Section 10 of the NASD® Code of Procedure (Code) to provide for a Minor Rule Violations Plan (Plan). The Plan will permit the NASD to dispose of certain minor rule violations expeditiously and to report the violations disposed of under the Plan in summary reports submitted periodically to the SEC.

      The amendments take effect October 1, 1993. The text of the amendments follows this Notice.

      Description of Amendments

      On May 28, 1993, the SEC approved amendments to Article II, Section 10 of the Code to provide for a Plan pursuant to SEC Rule 19d-1. The Plan allows the NASD to process and report disciplinary actions involving fines that do not exceed $2,500 and a censure in a manner that will relieve many of the administrative burdens normally associated with formal disciplinary actions.1

      The amendments adopted by the NASD to implement the Plan are set forth in Subsections 10(b)(1) through 10(b)(4) of the Code. The Summary Complaint Procedure is being renumbered as Subsection 10(c). New subsection 10(b)(1) provides general authority to the District Business Conduct Committees and the Market Surveillance Committee (the Committee, or, together, the Committees) and the National Business Conduct Committee (NBCC) to impose a fine (not to exceed $2,500) and/or censure on any member or associated person for the rule violations set forth in the Appendix to Section 10 (the violations included in the Appendix are described separately below). The Appendix lists violations that, pursuant to Rule 19d-1, under certain factual circumstances, are appropriate for disposition under the Plan and carry a fine of $2,500 or less, and/or a censure, according to the NASD's Sanction Guidelines.2 Under Rule 19d-1, the NASD may amend the Appendix to add or delete violations from the Plan. Any such amendments must be filed with the SEC for approval.

      Even though a violation would qualify for Plan treatment, if the Committee reviewing a potential disciplinary action determines that the nature of the violation is too indeterminate or serious to dispose of under the Plan, the Committee will authorize formal disciplinary action. Serious violations will not be treated as "technical" or trivial infractions even if a fine of less than $2,500 might be called for and any violation that would justify a fine of more than $2,500 will not be disposed of under the Plan.

      New Subsection 10(b)(2) provides that any disciplinary action taken by the NASD under the Plan shall be accomplished through the submission of a written Minor Rule Violation Letter (Letter) to the NASD by the member or associated person specifying the nature of the violation; stating the rule, regulation, or statute violated; and consenting to the sanction for the violation. New Subsection 10(b)(2) also specifies that the Letter shall include an agreement by the member or associated person to waive the member or person's rights to a hearing or to appeal to the NBCC, the SEC, or the courts.

      Subsection 10(b)(3) provides that the Letter must be submitted to and accepted by the Committee and the NBCC and, if accepted, will be reported to the SEC pursuant to the Plan. The NASD undertakes, as part of the Plan, to report minor violations to the SEC quarterly. If the Letter is rejected by the Committee or the NBCC, Subsection 10(b)(3) authorizes the Committee or NBCC to take any other appropriate disciplinary action on the violation or violations. Submission and acceptance of a Letter will constitute a "finding" of the violation(s) described in the Letter for purposes of an individual's disciplinary history3.

      Subsection 10(b)(4) provides that the submission of a Letter shall have no effect on the determination of any issues raised in a subsequent disciplinary proceeding against the same party on the same facts, matter, or transaction. This provision parallels the rule of evidence (usually codified) against using settlement offers or their equivalent as evidence to prove fault against the offering party in any subsequent proceedings on the same matter. This provision does not, however, prevent the NASD from using a Letter that has been accepted as evidence of disciplinary history for sanctions purposes in subsequent unrelated proceedings or as pattern evidence to demonstrate the occurrence of acts or omissions consistent with the pattern.

      Description of Plan Violations

      Following is a discussion of the violations included in the Appendix to the Plan and the limitations on the eligibility of such violations for disposition under the Plan.

      • Excess Spread Violations —

      Under Schedule D, Part VI, Section 2(d) Nasdaq market makers may not enter quotations that exceed the maximum allowable spreads published in Section 2(d). The NASD established these maximum allowable spreads after evaluating average spreads and determining the appropriate maximum allowable spread in relation to the average spread. Each day that a market maker has an excess spread is counted as one violation. The first violation in any 12-month period will generally result in a Letter of Caution and the second or third violations may warrant fines of $1,000 and $2,000, respectively, each appropriate for disposition under the Plan. Subsequent violations would warrant a formal complaint.

      Advertising Violations — The NASD Advertising Rules require members to submit certain classes of communications with the public to the NASD for review and approval and to maintain records of their internal review and approval. Specifically, Article III, Sections 35(b) and 35A(b) of the Rules of Fair Practice and Section 8(b) of the Government Securities Rules require a principal of the member to approve each item of advertising or sales literature before use and require members to maintain separate files on such advertising and sales literature for three years. Article III, Sections 35(c) and 35A(c), and Section 8(c) of the Government Securities Rules require members to file advertising and sales literature with the NASD before or immediately after use, depending on the subject matter and the member's experience, status, and disciplinary history.

      Failure to comply with the internal review and recordkeeping requirements of the advertising rule are treated in a manner similar to the recordkeeping violations discussed below. The number, egregiousness, and history of violations will determine whether they warrant fines of less than $2,500 and, therefore, may be disposed of under the plan. For the filing requirements, the first two late filings within the previous 12 months will result in a Warning Letter and a Letter of Caution, respectively. The third, fourth, and fifth late filings will warrant progressively higher fines and will exceed $2,500 for the fifth late filing. For those violations which would warrant a fine of $2,500 or less, disposition under the Plan would be appropriate; for all others, a formal complaint would be warranted.

      Schedule H Reports — Schedule H, Section 2 to the NASD By-Laws requires member firms to submit price and volume reports concerning principal transactions in Non-Nasdaq securities to the Non-Nasdaq Reporting System between 4 and 6:30 p.m. on the trade date or between 7:30 and 9:30 a.m. on the day after the trade date. Failure to either make the report or to make it within the required time for securities priced at $5 per share or more results in a Warning Letter and a Letter of Caution for the first two violations, with the third, fourth, and fifth violations resulting in fines of $250, $500, and $1,000, respectively. For securities priced at less than $5, the first violation results in a Letter of Caution, with the second, third, and fourth violations resulting in fines of $500, $1,000, and $2,000, respectively. Continuing violations would warrant a formal complaint.

      • Late Short-Sale Filings — Article III, Section 41 of the Rules of Fair Practice requires members to report total short positions to the NASD on Form NS-1 by the second business day following the "reporting settlement date," which is the 15th of each month, or the preceding settlement date if the 15th is not a settlement date. The first late filing violation will result in a Letter of Caution. The second late filing within the previous 12 months will result in a $1,000 fine, and the third will result in a $2,500 fine. For cases where a fine of less than $2,500 is justified, disposition under the Plan is warranted; otherwise, the NASD will institute formal disciplinary proceedings.

      Violations of Trade- and Volume-Reporting Rules.

      1. Schedule D to the By-Laws, Part VI, Sections 4 and 5, requires members to submit information and trade data in automated format to the NASD and to the Automated Confirmation Transaction (ACTSM) System within specified deadlines.
      2. Schedule D to the By-Laws, Part XII, Section 2, requires members making a market in Nasdaq National Market® securities to, among other things, report transactions within 90 seconds.
      3. Schedule D to the By-Laws, Part XIII, Section 2, requires members making a market in Nasdaq SmallCap MarketSM securities to, among other things, report transactions within 90 seconds.
      4. Schedule G to the By-Laws, Section 2, requires members to report over-the-counter transactions in listed securities through the Nasdaq Transaction Reporting System within 90 seconds.

      Violations of the above-referenced requirements, particularly for volume reports and trade data, will generally result in a Warning Letter or Letter of Caution for the first two violations in any 12-month period. Third, fourth, and fifth violations in any 12-month period will result in $250, $500, and $1,000 fines, respectively. Failure to report trades, as opposed to failure to report volume or certain trade data, is generally regarded as a more serious violation and may warrant a higher fine. Further, in egregious cases of failing to report volume, trade data, or transactions, a formal complaint may be warranted.

      Recordkeeping Violations — Article III, Section 21 of the NASD Rules of Fair Practice requires members to keep and preserve various books, accounts, records, memoranda, and correspondence. Minor or isolated failures to make, keep, or preserve books and records as required will generally result in a Warning Letter or Letter of Caution for the first and second violations. Subsequent or more serious first violations, especially where a pattern of careless or inadequate attention to the recordkeeping requirements is present, will result in fines starting at $500 and may result in a formal complaint.

      The amendments are effective October 1, 1993. Questions concerning this notice may be directed to Elliott R. Curzon, Senior Attorney, Office of General Counsel, (202) 728-8451.


      1 Under its Code of Procedure, the NASD may initiate disciplinary proceedings by issuing a formal complaint or by offering the respondent the opportunity to waive a hearing and accept a Summary Complaint proceeding. Before issuing a formal complaint, the NASD may conclude a disciplinary matter with a Letter of Acceptance, Waiver and Consent. These proceedings are generally referred to as "formal disciplinary actions" and are reported to the SEC by the NASD individually as "final disciplinary actions" pursuant to SEC Rule 19d-1. Disciplinary actions taken under the Plan will not be considered "final" pursuant to SEC Rule 19d-1(c)(2) and may be reported to the SEC by the NASD in quarterly or periodic summary reports.

      2 The NASD included a copy of the Sanction Guidelines in the May 1993 edition of Notices to Members.

      3 Recent amendments to the Form BD exempt members from reporting disciplinary actions disposed of through a Minor Rule Violation Plan; however, an associated person disposing of a matter through a Minor Rule Violation Plan will be required to answer "Yes" to question 22F on Form U-4 and/or questions 13, 14, and 15 on Form U-5, as appropriate.


      Text of Amendments to Article II, Section 10 of the Code of Procedure

      (Note: New language is underlined.)

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

      * * * * *

      Acceptance, Waiver and Consent, Minor Rule Violations, and Summary Complaint Procedures

      * * * * *

      Sec. 10.

      * * * * *

      Minor Rule Violations Procedure

      (b)
      (1) Notwithstanding Article II, Sections 1 and 2 of the Code of Procedure, any Committee or the National Business Conduct Committee may, subject to the requirements set forth herein and in Rule 19d-1(c)(2) adopted under the Securities Exchange Act of 1934, as amended, impose a fine (not to exceed $2,500) and/or a censure on any member or person associated with a member with respect to any rule violation listed in the Appendix to this Section.
      (2) If the Committee has reason to believe a violation has occurred, the Committee may suggest that the member or associated person submit a Minor Rule Violation Letter specifying in reasonable detail the nature of the violation or violations, including the rule, regulation or statutory provision violated, and consenting to the imposition of a specific sanction or sanctions for the violation or violations, and agreeing to waive such member or person's right to a hearing before a hearing panel, and all rights of appeal to the National Business Conduct Committee, the Securities and Exchange Commission, and the courts or to otherwise challenge the validity of the Letter if the Letter is accepted.
      (3) The Letter shall be submitted to the Committee and, if accepted, the Letter shall then be submitted to the National Business Conduct Committee. If the National Business Conduct Committee accepts the Letter, the Corporation will report the violation to the Securities and Exchange Commission as required by the Commission pursuant to a plan approved under Rule 19d-1(c)(2) adopted under the Securities Exchange Act of 1934, as amended. If the Committee or National Business Conduct Committee rejects the Letter, the Committee or National Business Conduct Committee may take any other appropriate disciplinary action with respect to the violation or violations.
      (4) If it becomes necessary for the Committee having jurisdiction to file a complaint against the member or person associated with a member under Article II, Section 2 of this Code, the member or person associated with a member shall not be prejudiced in any way by the submission of a Minor Rule Violation Letter under paragraph (2) of this Subsection (b) and the Letter shall have no effect and be given no consideration in any determination of the issues involved in any such complaint.

      Summary Complaint Procedure

      Subsection (b) is renumbered Subsection (c).

      Appendix

      Violations Appropriate For Disposition Under The Minor Rule Violations Plan

      • Schedule D, Part VI, Section 2(d) to the NASD By-Laws — Failure to comply with the limitations on maximum allowable spreads for securities in which the member makes a market.

      • Article III, Subsections 35(b) and (c) and 35A(b) and (c) of the Rules of Fair Practice and Subsections 8(b) and (c) of the Government Securities Rules — Failure to have advertisements and sales literature approved by a principal prior to use, failure to maintain separate files of advertisements and sales literature containing required information, and failure to file advertisements with the Association within the required time limits.

      • Schedule H to the NASD By-Laws — Failure to file, or filing inaccurate, price and volume reports required to be filed under Schedule H with respect to Non-Nasdaq securities.

      • Article III, Section 41 of the Rules of Fair Practice — Failure to timely file reports of short positions on Form NS-1.

      • Schedule D, Part VI, Sections 4 and 5, Part XII, Section 2, and Part XIII, Section 2, to the NASD By-Laws; Schedule G, Section 2 to the NASD By-Laws — Failure to timely submit required reports and other trade and volume data to the NA